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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 20-F**

 

**(Mark One)**

 

| **o**      | **REGISTRATION STATEMENT PURSUANT   TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934**                                     |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                              |
| **OR**     |
| ** ** | ** **                                                                                                                                              |
| **x**      | **ANNUAL REPORT PURSUANT TO   SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   For the fiscal year ended December 31, 2011** |
| ** ** | ** **                                                                                                                                              |
| **OR**     |
| ** ** | ** **                                                                                                                                              |
| **o**      | **TRANSITION REPORT PURSUANT TO   SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                |
| ** ** | ** **                                                                                                                                              |
| **OR**     |
| ** ** | ** **                                                                                                                                              |
| **o**      | **SHELL COMPANY REPORT PURSUANT   TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                             |

 

Date of event requiring this shell company report: N/A

 

**For the transition period from                       to                        **

 

Commission file number: 1-32229

 
| **Desarrolladora Homex, S.A.B. de C.V.**                                                                                                                                            |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (Exact name of Registrant as specified in its charter)                                                                                                                              |
|                                                                                                                                                                                |
| **Homex Development Corp.**                                                                                                                                                         |
| (Translation of Registrant’s name into English)                                                                                                                                |
|                                                                                                                                                                                |
| **United Mexican States**                                                                                                                                                           |
| (Jurisdiction of incorporation or organization)                                                                                                                                     |
|                                                                                                                                                                                |
| **Boulevard Alfonso Zaragoza M. 2204 Fracc.   Bonanza**

**80020 Culiacán, Sinaloa, Mexico**

**Telephone: (52667) 758-5800**                                                  |
| (Address of principal executive offices)                                                                                                                                            |
|                                                                                                                                                                                |
| **Vania Fueyo Zarain**

**Boulevard Alfonso Zaragoza M. 2204 Fracc.   Bonanza**

**80020 Culiacán, Sinaloa, Mexico**

**Telephone: (52667) 758-5800**

**vfueyo@homex.com.mx** |
| (Name, Telephone, E-mail and/or Facsimile number and Address of   Company Contact Person)                                                                                           |

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

| Title of each   class                                                                  |   | Name of each   exchange on which registered |
|----------------------------------------------------------------------------------------|--------|---------------------------------------------|
| Common Shares, without par value                                                       |   | New York Stock Exchange                     |
| American Depositary Shares, each 

representing six common shares, without par value * |   | New York Stock Exchange                     |

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

 

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Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 
| **7.50% Senior Guaranteed Exchange Notes due   September 28, 2015** |
|---------------------------------------------------------------------|
| (Title of Class)                                                    |

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
|   | 334,856,530   common shares, without par value |
|--------|------------------------------------------------|

 

Indicate by check mark if the registrant is a well-known, seasoned issuer as defined in Rule 405 of the Securities Act:

x Yes   o No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:

o Yes   x No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

x Yes   o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

o Yes   o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer x |   | Accelerated filer o |   | Non-accelerated filer o |
|---------------------------|--------|---------------------|--------|-------------------------|

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

| U.S. GAAP o |   | IFRS o |   | Other x |
|-------------|--------|--------|--------|---------|

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:

o Item 17   x Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

o Yes   x No

 

*Not for trading but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.

 

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| **PART I**   |                                                                           |   |
|-------------------|--------------------------------------------------------------------------------|--------|
|              |                                                                           |   |
| ITEM 1.           | IDENTITY   OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS                        | 5      |
|              |                                                                           |   |
| ITEM 2.           | OFFER   STATISTICS AND EXPECTED TIMETABLE                                      | 5      |
|              |                                                                           |   |
| ITEM 3.           | KEY INFORMATION                                                                | 5      |
|              |                                                                           |   |
| ITEM 4.           | INFORMATION ON   THE COMPANY                                                   | 21     |
|              |                                                                           |   |
| ITEM 4A.          | UNRESOLVED   STAFF COMMENTS                                                    | 48     |
|              |                                                                           |   |
| ITEM 5.           | OPERATING   AND FINANCIAL REVIEW AND PROSPECTS                                 | 49     |
|              |                                                                           |   |
| ITEM 6.           | DIRECTORS,   SENIOR MANAGEMENT AND EMPLOYEES                                   | 71     |
|              |                                                                           |   |
| ITEM 7.           | MAJOR   SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            | 78     |
|              |                                                                           |   |
| ITEM 8.           | FINANCIAL   INFORMATION                                                        | 79     |
|              |                                                                           |   |
| ITEM   9.         | THE   OFFER AND LISTING                                                        | 79     |
|              |                                                                           |   |
| ITEM 10.          | ADDITIONAL   INFORMATION                                                       | 83     |
|              |                                                                           |   |
| ITEM 11.          | QUANTITATIVE   AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 99     |
|              |                                                                           |   |
| ITEM 12.          | DESCRIPTION   OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 101    |
|              |                                                                           |   |
| **PART II**  |                                                                           |   |
|              |                                                                           |   |
| ITEM 13.          | DEFAULTS,   DIVIDEND ARREARAGES AND DELINQUENCIES                              | 101    |
|              |                                                                           |   |
| ITEM 14.          | MATERIAL   MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 102    |
|              |                                                                           |   |
| ITEM 15.          | CONTROLS AND   PROCEDURES                                                      | 102    |
|              |                                                                           |   |
| ITEM 16A.         | AUDIT   COMMITTEE FINANCIAL EXPERT                                             | 104    |
|              |                                                                           |   |
| ITEM   16B.       | CODE   OF ETHICS                                                               | 104    |
|              |                                                                           |   |
| ITEM 16C.         | PRINCIPAL   ACCOUNTANT FEES AND SERVICES                                       | 104    |
|              |                                                                           |   |
| ITEM 16D.         | EXEMPTIONS   FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   | 105    |
|              |                                                                           |   |
| ITEM 16E.         | PURCHASES OF   EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       | 105    |
|              |                                                                           |   |
| ITEM 16F.         | CHANGE IN   REGISTRANT’S CERTIFYING ACCOUNTANT                            | 105    |
|              |                                                                           |   |
| ITEM 16G.         | CORPORATE   GOVERNANCE                                                         | 105    |
|              |                                                                           |   |
| ITEM 16H.         | MINE SAFETY   DISCLOSURE                                                       | 106    |
|              |                                                                           |   |
| **PART III** |                                                                           |   |
|              |                                                                           |   |
| ITEM 17.          | FINANCIAL   STATEMENTS                                                         | 106    |
|              |                                                                           |   |
| ITEM 18.          | FINANCIAL   STATEMENTS                                                         | 106    |
|              |                                                                           |   |
| ITEM 19.          | EXHIBITS                                                                       | 106    |

 

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**PRESENTATION OF FINANCIAL INFORMATION**

 

Throughout this annual report, unless the context otherwise requires, the terms “we,” “us,” “our,” “the Company” and “Homex” refer to Desarrolladora Homex, S.A.B. de C.V. and its subsidiaries.

 

**Financial Information**

 

This annual report includes our audited consolidated financial statements as of December 31, 2010 and 2011 and for each of the three years ended December 31, 2009, 2010 and 2011.  Our consolidated financial statements and other financial information included in this annual report, unless otherwise specified, are stated in Mexican pesos.

 

As described in Note 3a) to our audited consolidated financial statements, during the year ended December 31, 2011, we adopted certain new MFRS.  As required by MFRS, these adoptions were applied retrospectively into the December 31, 2010 consolidated balance sheet presented for comparability purposes in the audited financial statements, representing reclassifications within the current asset category of the balance sheet and within operating cash flow categories in the statement of cash flow.

 

We prepare our financial statements in pesos and in accordance with Mexican Financial Reporting Standards (*Normas de Información Financiera* ), referred to as “MFRS”, as issued by the Mexican Financial Information Standards Board (*Consejo Mexicano de Normas de Información Financiera*), referred to as “CINIF”, which differ in certain significant respects from accounting principles generally accepted in the United States, referred to as US GAAP.  See Notes 28 through 30 to our audited consolidated financial statements for information relating to the nature and effect of such differences and for a quantitative reconciliation of our total net income and total equity according to MFRS to consolidated net income, and consolidated equity according to US GAAP.

 

Effective January 1, 2008 we adopted MFRS B-10, *Effects of Inflation*.  Based on this Standard, we did not recognize the effects of inflation in our consolidated financial statements for the years ended December 31, 2009, 2010 and 2011.

 

According to the provisions of MFRS B-10, an inflationary environment is present when cumulative inflation for the three preceding years is 26% or more, in which case, the effects of inflation must be recognized in the financial statements.  Based on this standard, the economic environment in Mexico in 2011, 2010 and 2009 is considered non-inflationary because inflation over 2009, 2010 and 2011 was less than 26%.  Accordingly, our financial information for 2011, 2010 and 2009 was prepared without recognizing the effects of inflation. The three-year cumulative inflation in both of our foreign locations (Brazil and India) is also less than 26% through December 31, 2011. Accordingly, the financial statements as of December 31, 2011, 2010 and 2009 have been presented based on nominal pesos without including the effects of inflation.

 

Pursuant to MFRS, prior to January 1, 2010, we recognized revenues from the sale of homes based on the percentage-of-completion method of accounting, which required us to recognize revenues measured by the percentage of actual costs incurred to total estimated costs for each development and each project.

 

In December 2008, Interpretation of Mexican Financial Reporting Standards (“IMFRS”) 14 was issued by the CINIF to complement Bulletin D-7, *Construction Agreements and Manufacturing of Certain Capital Assets*.  This Interpretation is applicable to the recognition of revenues, costs and expenses for all entities that undertake the construction of capital assets directly or through sub-contractors.

 

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Due to the application of this Interpretation, effective January 1, 2010, we stopped recognizing revenues, costs and expenses based on the percentage-of-completion method and instead implemented the accounting methods required by this Interpretation.  Revenue and cost recognition more closely approximate what is often referred to as a “completed contract method” (or the “deposit accounting method”) in which revenues, costs and expenses should be recognized when all of the following conditions are fulfilled:

 

·                                          we have transferred the control to the homebuyer, in other words, the significant risks and benefits due to the property or the assets ownership;

 

·                                          we do not retain any continued participation of the actual management of the sold assets, in the usual grade associated with the property, nor do we retain the effective control of the sold assets;

 

·                                          the revenues amount can be estimated reliably;

 

·                                          it is probable that we will receive the economic benefits associated with the transaction; and

 

·                                          the costs and expenses incurred or to be incurred related to the transaction can be estimated reliably.

 

The above conditions are typically met upon the completion of construction, and signing by us, the customer and (if applicable) the lender the legal contracts and deeds of ownership (*escritura*) over the property.  At that time, the customer would have the legal right to take possession of the home.

 

This Interpretation was adopted as of January 1, 2010, with retrospective application to prior accounting periods with the presentation of 2010 consolidated financial statements as required by MFRS B-1 *Accounting Changes and Error Corrections*.

 

Additionally, pursuant to Article 78 of the General Provisions Applicable to Securities Issuers and Other Participants in the Securities Market (*Disposiciones de Carácter General Aplicables a las Emisoras de Valores y a Otros Participantes del Mercado de Valores*), beginning in 2012, Mexican companies with securities listed on a Mexican securities exchange, including Homex, must report their financial information in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).  We will adopt IFRS as of December 31, 2012, with a Transition Date to IFRS of January 1, 2011. Accordingly, as of January 1, 2011, we adopted IFRS 1, “*First time Adoption of International Financial Reporting Standards*”. Consequently the last financial statements prepared under MFRS are the ones as of December 31, 2011 presented herein. A summary of the principal accounting policies changes and estimated effects of IFRS on our financial statements is described in the Note 27 to our audited consolidated financial statements.  As disclosed in Note 27, those IFRS figures are preliminary in nature, and subject to change.

 

Our consolidated financial information for the year ended December 31, 2011 will be restated in IFRS as part of the requirements of IFRS 1 to present comparative periods to the first IFRS annual financial statements.

 

**Currency Information**

 

Unless otherwise specified, references to “US$,” “U.S. dollars” and “dollars” are to the lawful currency of the United States.  References to Brazilian “Reals” or “BR$” are to the lawful currency of Brazil.  References to “Ps.” and “pesos” are to the lawful currency of Mexico.  References to “UDI” and “UDIs” are to *Unidades de Inversión*, units of account whose value in pesos is indexed to inflation on a daily basis by *Banco de México* (Mexico’s central bank) and published periodically.

 

This annual report contains translations of various peso amounts into U.S. dollars at specified rates solely for the convenience of the reader.  You should not understand these translations as representations that the peso amounts actually represent these U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated.  

 

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Unless otherwise indicated, we have translated U.S. dollar amounts in this annual report at the exchange rate of Ps.13.9787 to US$1.00, which was the buying rate published by *Banco de México*, expressed in pesos per U.S. dollar, on December 31, 2011.  On April 27, 2012, the noon buying rate for pesos published by the Federation Official Gazette (*Diario Oficial de la Federación*) was Ps.13.1667 to US$1.00.  See “Item 3. Key Information—Exchange Rate Information.”

 

Unless otherwise indicated, references to UDIs are to UDIs at *Banco de México*’s**UDI conversion rate of Ps.4.691316 per UDI on December 31, 2011.  On April 27, 2012, the UDI conversion rate was 4.761698 per UDI.

 

**Industry and Market Data**

 

Market data and other statistical information used throughout this annual report are based on independent industry publications, government publications, reports by market research firms or other published independent sources.  Some data are also based on our estimates, which are derived from our review of internal surveys, as well as independent sources.  Although we believe these sources are reliable, we have not independently verified the information and cannot guarantee its accuracy or completeness.

 

**MARKET SHARE AND OTHER INFORMATION**

 

***Other Information Presented***

 

The standard measure of area in the real estate market in Mexico is the square meter (m2).  Unless otherwise specified, all units of area shown in this annual report are expressed in terms of square meters, acres or hectares.  One square meter is equal to approximately 10.764 square feet.  Approximately 4,047 square meters (or 43,562 square feet) are equal to one acre and one hectare is equal to 10,000 square meters (or approximately 2.5 acres).

 

**FORWARD-LOOKING STATEMENTS**

 

This annual report and the documents incorporated by reference into this annual report contain forward-looking statements.  We may from time to time make forward-looking statements in our periodic reports to the U.S. Securities and Exchange Commission, or SEC, on Form 6-K, in our annual report to shareholders, in prospectuses, press releases and other written materials and in oral statements made by our officers, directors or employees to analysts, institutional investors, representatives of the media and others.  Words such as “believe,” “anticipate,” “plan,” “expect,” “intend,” “target,” “estimate,” “project,” “predict,” “forecast,” “guideline,” “should” and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying these statements.  Examples of these forward-looking statements include:

 

·                                          projections of revenues, net income (loss), earnings per share, capital expenditures, dividends, capital structure or other financial items or ratios;

 

·                                          statements of our plans, objectives or goals, including those relating to anticipated trends, competition, regulation, government housing policy and rates;

 

·                                          statements about our future economic performance or that of Mexico or elsewhere where we operate or plan to operate; and

 

·                                          statements of assumptions underlying these statements.

 

You should not place undue reliance on forward-looking statements, which are based on current expectations.  Forward-looking statements are not guarantees of performance.  They involve risks, uncertainties and assumptions.  Our future results may differ materially from those expressed in forward-looking statements.  Many of the factors that will determine these results and values are beyond our ability to control or predict.  All forward -looking statements and risk factors included in this annual report are made as of the date on the front cover

 

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of this annual report, based on information available to us as of such date, and we assume no obligation to update any forward-looking statement or risk factor.

 

**PART I**

 

**ITEM 1.****Identity of Directors, Senior Management and Advisors.**

 

Not applicable.

 

**ITEM 2.****Offer Statistics and Expected Timetable.**

 

Not applicable.

 

**ITEM 3.****Key Information.**

 

**RECENT DEVELOPMENTS**

 

On January 31, 2012, the first drawdowns were made under the Morelos Loan and the Chiapas Loan.  The drawdowns were made in the aggregate principal amount of approximately Ps.422.7 million under the Morelos Loan and approximately Ps.480.0 million under the Chiapas Loan.  See “Item 4. Information on the Company—Business Overview— Infrastructure Division.” and “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Prison Project Financing Loans.”

 

On February 2, 2012, we issued US$400 million of Senior Guaranteed Notes due 2020 with a coupon rate of 9.750%, payable semiannually.  The proceeds from the issuance of the notes were used to prepay in full the Deutsche Bank Credit Agreement on February 17, 2012 and the Credit Suisse Credit Agreement on February 16, 2012, respectively.

 

As of February 16, 2012, we entered into a principal-only swap in order to hedge the foreign exchange risk associated with the principal amount of our US$400 million of Senior Guaranteed Notes due 2020 at a rate of Ps.12.88 per U.S dollar through 2020 and at an average weighted cost of 3.79%.

 

On March 21, 2012, we and Arendal amended the Makobil shareholders’ agreement. That amendment includes an agreement whereby we will ultimately purchase Arendal’s 76% ownership interest in Makobil for a total of Ps. 1,106,508. Execution of this purchase, payment of the purchase price, and transfer of share ownership will occur after completion of construction of the prison complex.  At that time, the purchase price may also be deferred up to another 30 months, along with interest at 12% per annum with ultimate share ownership occurring when payments have been made.

 

The agreement also calls for the transfer of day-to-day operational control of Makobil to us from March 21, 2012. We anticipate consolidating Makobil in 2012. At the date that we begin consolidating Makobil, we will derecognize our equity method investment, recording a gain between the then fair value of the equity method investment and its carrying value.  We will also apply purchase accounting to the net assets consolidated. We have yet to estimate the impact of such accounting. See “Item 4. Information on the Company—Business Overview— Infrastructure Division.” and Notes 7 and 26 to our audited consolidated financial statements.

 

As of March 23, 2012, we entered into three capped forwards in order to hedge the first three interest payments for the US$400 million of Senior Guaranteed Notes due 2020. These instruments have a strike price of Ps. 13.22 per U.S. dollar, with a cap of Ps. 17.00 per U.S. dollar. These are zero cost instruments. The settlement dates of these instruments are September 25, 2012, March 25, 2013, and September 25, 2013.

 

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** **

**SELECTED FINANCIAL DATA**

 

The following tables present our selected consolidated financial information as of and for the periods indicated.  Information as of December 31, 2010 and 2011 and for each of the three years ended December 31, 2009, 2010 and 2011 is derived from and should be read together with our audited consolidated financial statements provided in this annual report beginning on page F-1.  Our consolidated financial statements and other financial information included in this annual report, unless otherwise specified, are stated in pesos.

 

The information in the following tables should also be read together with “Item 5.  Operating and Financial Review and Prospects.”

 

Our consolidated financial statements are prepared in accordance with MFRS, which differ in certain significant respects from US GAAP.  Notes 28 through 30 to our audited consolidated financial statements provide information relating to the nature and effect of such differences as they relate to us, and provide a reconciliation to US GAAP of consolidated net income and consolidated equity.

 

As described in Note 3a) to our audited consolidated financial statements, during the year ended December 31, 2011, we adopted certain new MFRS.  As required by MFRS, these adoptions were applied retrospectively into the December 31, 2010 consolidated balance sheet presented for comparability purposes in the audited financial statements, representing reclassifications within the current asset category of the balance sheet and within operating cash flow categories in the statement of cash flow.

 

Pursuant to MFRS, and the adoption of IMFRS 14, as of January 1, 2010, we use what is often referred to as “completed contract method” (or the “deposit accounting method”) of accounting for revenues and costs.  For more information on the completed contract method of accounting and how it differs from U.S. GAAP, see “Presentation of Financial Information.”   IMFRS 14 has been retrospectively adopted from January 1, 2008 in the MFRS consolidated financial statements. Because we are not required to re-file our 2007 MFRS consolidated financial statements with our local Mexican regulator with the inclusion of IMFRS 14, and because we believe that it would entail unreasonable effort and expense to compile MFRS selected financial data for 2007, such amounts have been excluded from presentation below.  However, as we have previously reconciled our MFRS financial information to US GAAP for all periods, we continue to report US GAAP selected financial data for all periods presented below.

 

Pursuant to US GAAP, we apply Accounting Standards Codification (“ASC”) No. 360.20 (formerly FAS 66 *Accounting for Sales of Real Estate*) for the substantial majority of our revenues.   Revenues under US GAAP’s ASC 360.20 are recognized when all the following events occur: a) a sale is consummated; b) a significant initial down payment is received (when applicable); and c) the earnings process is complete and the collection of any remaining receivables is reasonably assured.  Revenue recognition under IMFRS 14 and US GAAP are much more closely aligned than previous MFRS, although certain differences still exist.  The principal remaining differences between ASC 360.20 and IMFRS 14 relate to revenues from the National Housing Institute, or INVI (*Instituto Nacional de Vivienda*), other financial institutions and unsecured homebuyers, which are included for MFRS purposes but not for US GAAP.  For a further discussion of revenue recognition policies under US GAAP and how they differ from MFRS, refer to Notes 28 through and 30 to our consolidated financial statements.

 

Except for ratios, percentages, and per share, per American Depositary Share, or ADS, and operating data, all amounts are presented in thousands of pesos.

 

For additional information regarding financial information presented in this annual report, see “Presentation of Financial Information.”

 

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**Homex Selected Consolidated Financial Information**

 
| ** **                                                                    | ** ** | **Years Ended December 31,**                                                              | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2011**                                                                                                 | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                    | ** ** | **(In thousands of Mexican Ps., except as otherwise specified)** | ** ** |
| Statement of   Operations Data:                                               |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| **Mexican   Financial Reporting Standards:**                                  |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Revenues (1)                                                                  |       | 21,853,279                                                                                               |       | 19,652,309 |   | 17,476,489 |   | 14,725,828 |   | * |   |
| Cost of sales (5)                                                             |       | 16,165,752                                                                                               |       | 13,727,484 |   | 12,285,836 |   | 10,356,329 |   | * |   |
| Gross profit                                                                  |       | 5,687,527                                                                                                |       | 5,924,825 |   | 5,190,653 |   | 4,369,499 |   | * |   |
| Selling and   administrative expenses                                         |       | 2,767,974                                                                                                |       | 2,980,379 |   | 2,471,680 |   | 2,303,402 |   | * |   |
| Income from   operations                                                      |       | 2,919,553                                                                                                |       | 2,944,446 |   | 2,718,973 |   | 2,066,097 |   | * |   |
| Other (expenses)   income, net (4)                                            |       | (344,867                                                                                                 | )          | (142,765 | ) | 5,320 |   | (140,238 | ) | * |   |
| Net comprehensive   financing cost (2) (5)                               |       | 394,804                                                                                                  |       | 314,742 |   | 148,511 |   | 508,673 |   | * |   |
| Income before   income taxes                                                  |       | 2,179,882                                                                                                |       | 2,486,939 |   | 2,575,782 |   | 1,417,186 |   | * |   |
| Income tax expense                                                            |       | 865,940                                                                                                  |       | 906,997 |   | 994,389 |   | 456,256 |   | * |   |
| Consolidated net   income                                                     |       | 1,313,942                                                                                                |       | 1,579,942 |   | 1,581,393 |   | 960,930 |   | * |   |
| Net income of   controlling interest                                          |       | 1,304,414                                                                                                |       | 1,511,763 |   | 1,565,869 |   | 926,635 |   | * |   |
| Net income of   non-controlling interest                                      |       | 9,528                                                                                                    |       | 68,179 |   | 15,524 |   | 34,295 |   | * |   |
| Weighted average   shares outstanding (in thousands)                          |       | 334,700                                                                                                  |       | 334,748 |   | 334,830 |   | 334,870 |   | * |   |
| Basic and diluted   controlling interest earnings per share (in pesos)        |       | 3.90                                                                                                     |       | 4.52 |   | 4.68 |   | 2.77 |   | * |   |
| Basic and diluted   controlling interest earnings per ADS (3) (in pesos) |       | 23.40                                                                                                    |       | 27.12 |   | 28.08 |   | 16.62 |   | * |   |
| **US   GAAP**:                                                                |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Revenues (1)                                                                  |       | 21,760,926                                                                                               |       | 19,628,540 |   | 17,615,888 |   | 14,884,701 |   | 13,849,728 |   |
| Cost of sales                                                                 |       | 15,884,983                                                                                               |       | 13,754,383 |   | 12,658,080 |   | 10,398,464 |   | 9,814,725 |   |
| Gross profit                                                                  |       | 5,875,943                                                                                                |       | 5,874,157 |   | 4,957,808 |   | 4,486,237 |   | 4,035,003 |   |
| Income from   operations (4)                                                  |       | 3,070,596                                                                                                |       | 2,955,455 |   | 2,527,445 |   | 2,108,793 |   | 2,116,650 |   |
| Consolidated net   income                                                     |       | 942,116                                                                                                  |       | 2,045,616 |   | 1,500,006 |   | 605,913 |   | 1,604,144 |   |
| Net income (loss)   of non-controlling interests                              |       | 9,528                                                                                                    |       | 68,179 |   | (11,351 | ) | 38,131 |   | 128,612 |   |
| Net income of   controlling interests                                         |       | 932,588                                                                                                  |       | 1,977,437 |   | 1,511,357 |   | 567,782 |   | 1,475,532 |   |
| Weighted average   shares outstanding (in thousands)                          |       | 334,700                                                                                                  |       | 334,748 |   | 334,830 |   | 334,870 |   | 335,688 |   |
| Basic and diluted   controlling interest earnings per share (in pesos)        |       | 2.79                                                                                                     |       | 5.91 |   | 4.51 |   | 1.70 |   | 4.40 |   |
| Basic and diluted   controlling interest earnings per ADS (3) (in pesos) |       | 16.74                                                                                                    |       | 35.46 |   | 27.06 |   | 10.20 |   | 26.40 |   |

 

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| ** **                                                     | ** ** | **As of and for the Years Ended December 31,**                   | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2011**                                                                                                 | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                     | ** ** | **(In thousands of Mexican Ps., except as otherwise specified)** | ** ** |
| Balance Sheet   Data:                                          |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| **Mexican   Financial Reporting Standards:**                   |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Cash and cash   equivalents                                    |       | 3,992,653                                                                                                |       | 3,435,222 |   | 3,251,416 |   | 1,268,185 |   | * |   |
| Trade accounts   receivable, net                               |       | 1,993,023                                                                                                |       | 1,975,203 |   | 519,474 |   | 1,275,486 |   | * |   |
| Total current   assets                                         |       | 25,572,682                                                                                               |       | 23,274,473 |   | 16,645,875 |   | 15,755,207 |   | * |   |
| Land held for   future development and construction-in-process |       | 12,859,328                                                                                               |       | 10,591,499 |   | 11,765,197 |   | 9,254,469 |   | * |   |
| Property and   equipment, net                                  |       | 786,137                                                                                                  |       | 1,002,572 |   | 1,110,582 |   | 1,402,928 |   | * |   |
| Total assets                                                   |       | 41,372,301                                                                                               |       | 36,641,484 |   | 31,221,548 |   | 27,941,432 |   | * |   |
| Current debt and   current portion of long-term debt           |       | 3,662,357                                                                                                |       | 1,728,513 |   | 270,595 |   | 1,417,404 |   |   |   |
| Current portion of   long-term capital leases                  |       | 188,937                                                                                                  |       | 169,604 |   | 108,437 |   | 89,255 |   | * |   |
| Total current   liabilities                                    |       | 11,584,101                                                                                               |       | 8,280,762 |   | 6,349,619 |   | 8,742,417 |   | * |   |
| Long-term debt                                                 |       | 11,357,909                                                                                               |       | 10,787,601 |   | 9,460,163 |   | 5,990,119 |   | * |   |
| Financial   derivative instruments                             |       | 12,226                                                                                                   |       | 508,160 |   | 119,084 |   | — |   | * |   |
| Long-term capital   leases                                     |       | 154,933                                                                                                  |       | 235,430 |   | 254,679 |   | 314,639 |   | * |   |
| Long-term land   suppliers                                     |       | —                                                                                                   |       | 41,441 |   | 74,569 |   | 405,426 |   | * |   |
| Total long-term   liabilities                                  |       | 16,100,722                                                                                               |       | 16,040,211 |   | 13,966,117 |   | 9,750,374 |   | * |   |
| Total liabilities                                              |       | 27,684,823                                                                                               |       | 24,320,973 |   | 20,315,736 |   | 18,492,791 |   | * |   |
| Common stock                                                   |       | 528,011                                                                                                  |       | 528,011 |   | 528,011 |   | 528,011 |   | * |   |
| Total equity                                                   |       | 13,687,478                                                                                               |       | 12,320,511 |   | 10,905,812 |   | 9,448,641 |   | * |   |
| Total liabilities   and equity                                 |       | 41,372,301                                                                                               |       | 36,641,484 |   | 31,221,548 |   | 27,941,432 |   | * |   |

 
| ** **                                                     | ** ** | **As of and for the Years Ended December 31,**                   | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2011**                                                                                                 | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                     | ** ** | **(In thousands of Mexican Ps., except as otherwise specified)** | ** ** |
| **US   GAAP:**                                                 |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Cash and cash   equivalents                                    |       | 3,860,350                                                                                                |       | 3,307,692 |   | 3,122,074 |   | 1,140,140 |   | 2,206,834 |   |
| Restricted cash                                                |       | 132,303                                                                                                  |       | 127,530 |   | 129,342 |   | 128,045 |   | 156,090 |   |
| Trade accounts   receivable, net                               |       | 1,816,065                                                                                                |       | 1,759,944 |   | 321,736 |   | 1,016,172 |   | 600,655 |   |
| Total current   assets                                         |       | 25,148,134                                                                                               |       | 23,496,997 |   | 17,751,648 |   | 17,414,199 |   | 13,850,381 |   |
| Land held for   future development and construction-in-process |       | 12,859,328                                                                                               |       | 10,591,499 |   | 10,912,389 |   | 9,254,469 |   | 7,091,074 |   |
| Property and   equipment, net                                  |       | 1,160,215                                                                                                |       | 1,376,650 |   | 1,110,582 |   | 1,402,928 |   | 1,155,729 |   |
| Total assets                                                   |       | 41,716,603                                                                                               |       | 37,428,778 |   | 30,975,025 |   | 30,136,052 |   | 23,941,142 |   |
| Total current   liabilities                                    |       | 15,881,987                                                                                               |       | 12,875,279 |   | 10,625,255 |   | 14,274,158 |   | 11,054,629 |   |
| Long-term   liabilities                                        |       | 12,528,210                                                                                               |       | 12,249,288 |   | 9,925,107 |   | 6,827,855 |   | 4,510,319 |   |
| Total equity                                                   |       | 13,306,406                                                                                               |       | 12,304,211 |   | 10,424,663 |   | 9,034,039 |   | 8,376,194 |   |
| Other Financial   Data:                                        |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| **Mexican   Financial Reporting Standards:**                   |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Depreciation                                                   |       | 352,666                                                                                                  |       | 362,351 |   | 371,402 |   | 323,727 |   | * |   |
| Gross margin (6)                                               |       | 26.0                                                                                                     | %          | 30.1 | % | 29.7 | % | 29.7 | % | * |   |
| Operating margin   (7)                                         |       | 13.4                                                                                                     | %          | 15.0 | % | 15.6 | % | 14.0 | % | * |   |
| Net margin (8)                                                 |       | 6.0                                                                                                      | %          | 8.0 | % | 9.0 | % | 6.5 | % | * |   |
| Other Financial   Data:                                        |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Adjusted EBITDA   (9)                                          |       | 4,721,623                                                                                                |       | 4,104,084 |   | 3,768,335 |   | 3,103,800 |   | * |   |
| Net debt (10)                                                  |       | 11,259,861                                                                                               |       | 9,375,623 |   | 6,755,935 |   | 6,468,708 |   | * |   |
| Ratio of total   debt to total equity                          |       | 111.4                                                                                                    | %          | 104.0 | % | 91.8 | % | 81.9 | % | * |   |
| Ratio of total   debt to total assets                          |       | 36.9                                                                                                     | %          | 35.0 | % | 32.1 | % | 27.7 | % | * |   |
| **US   GAAP:**                                                 |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Gross margin (6)                                               |       | 27.0                                                                                                     | %          | 29.9 | % | 28.1 | % | 30.1 | % | 29.1 | % |
| Operating margin   (7)                                         |       | 14.1                                                                                                     | %          | 15.1 | % | 14.3 | % | 14.2 | % | 15.2 | % |
| Net margin (8)                                                 |       | 4.3                                                                                                      | %          | 10.4 | % | 8.5 | % | 4.1 | % | 11.6 | % |
| Other Financial   Data:                                        |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Adjusted EBITDA (9)                                            |       | 2,300,744                                                                                                |       | 3,649,371 |   | 3,196,530 |   | 1,357,188 |   | 2,855,834 |   |

 

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(*) Because we were not required to re-file our 2007 MFRS consolidated financial statements with our local Mexican regulator with the inclusion of IMFRS 14, and because we believe that it would entail unreasonable effort and expense to compile MFRS selected financial data for 2007, such amounts have been excluded from the selected financial data presentation.

 

(1)                                The majority of sales are recognized using a completed contract method (or the “deposit accounting method”), which means when title passes to the homebuyer and the homebuyer has the legal right to occupy the home.

 

(2)                                Represents interest income, interest expense, valuation effects of financial derivative instruments and foreign exchange gains and losses.

 

(3)                                Assumes all common shares are represented by ADSs.  Each ADS represents six common shares.  Any discrepancies between per share and per ADS amounts in the tables are due to rounding.

 

(4)                                Employee statutory profit-sharing expense is classified as an operating expense under US GAAP, and as other income (expenses), net under MFRS.

 

(5)                                Interest capitalized as part of the cost of inventories is included in cost of sales under US GAAP and MFRS.  Due to the application of MFRS D-6 during 2011, 2010 and 2009, the net comprehensive financing cost capitalized (CFC) related to qualified assets for the same periods was Ps. 2,289,540, Ps. 965,008 and Ps.563,154, respectively, of which Ps. 1,363,295 (of which Ps. 968,759 is related to the current year CFC and Ps. 394,536 is related to prior years). Ps.758,332 (of which Ps.432,819 is related to the current year CFC and Ps.325,513 is related to prior years) and Ps.537,431 (of which Ps.239,597 is related to the current year CFC and Ps.297,834 is related to prior years) related to inventories sold and subsequently were applied to cost of sales of the same periods, respectively.  The average period for the amortization of the capitalized comprehensive financing cost is 15 months.  The annual capitalization rates are 15.75%, 8.50% and 6.50%, respectively.

 

(6)                                Represents gross profit divided by total revenues.

 

(7)                                Represents operating income divided by total revenues.

 

(8)                                Represents net income divided by total revenues.

 

(9)                                Adjusted EBITDA is not a financial measure computed under Mexican or US GAAP.  Adjusted EBITDA derived from our MFRS financial information means MFRS net income excluding (i) depreciation and amortization; (ii) CFC (which are composed of net interest expense (income), foreign exchange gain or loss and valuation effects of derivative instruments including CFC capitalized to inventory that is subsequently charged to cost of sales); (iii) other expenses related to provision for tax surcharges; and (iv) income taxes and employee statutory profit-sharing.

 

Adjusted EBITDA derived from our U.S. GAAP financial information means US GAAP net income excluding (i) depreciation and amortization; (ii) interest expense and inflation effect; and (iii) income taxes.  Adjusted EBITDA does not exclude interest income (Ps. 79,319 in 2011, Ps. 57,088 in 2010, and Ps. 52,203 in 2009).

 

Adjusted EBITDA under MFRS excludes the effect of CFC capitalized to inventory that is subsequently charged to cost of sales.  Our computation of Adjusted EBITDA under US GAAP includes such expense in the computation of Adjusted EBITDA for all periods.

 

Accordingly, Adjusted EBITDA under MFRS and US GAAP are computed using different inputs and are not comparable.

 

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We believe that Adjusted EBITDA can be useful to facilitate comparisons of operating performance between periods and with other companies in our industry because it excludes the effect of (i) depreciation and amortization, which represent a non-cash charge to earnings; (ii) certain financing costs, which are significantly affected by external factors, including interest rates and foreign currency exchange rates, which have little or no bearing on our operating performance; and (iii) income tax expense and, for Adjusted EBITDA derived from our MFRS financial information, employee statutory profit-sharing expense.

 

Adjusted EBITDA is also a useful basis for comparing our results with those of other companies because it presents operating results on a basis unaffected by capital structure.  You should review Adjusted EBITDA, along with net income and cash flow from operating activities, investing activities and financing activities, when trying to understand our operating performance.  While Adjusted EBITDA may provide a useful basis for comparison, our computation of Adjusted EBITDA is not necessarily comparable to Adjusted EBITDA as reported by other companies, as each is calculated in its own way and must be read in conjunction with the explanations that accompany it.  While Adjusted EBITDA is a relevant and widely used measure of operating performance, it does not represent cash generated from operating activities in accordance with MFRS or US GAAP and should not be considered as an alternative to net income, determined in accordance with MFRS or US GAAP, as an indication of our financial performance, or to cash flow from operating activities, determined in accordance with MFRS or US GAAP, as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs.

 

Adjusted EBITDA has certain material limitations: (i) it does not include interest expense, which, because we have borrowed money to finance some of our operations, is a necessary and ongoing part of our costs and assisted us in generating revenue; (ii) it does not include taxes, which are a necessary and ongoing part of our operations; and (iii) it does not include depreciation, which, because we must utilize property and equipment in order to generate revenues in our operations, is a necessary and ongoing part of our costs.  Therefore, any measure that excludes any or all of interest expense, taxes and depreciation and amortization has material limitations.

 

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***Reconciliation of Consolidated Net Income to Adjusted EBITDA Computed from Our MFRS Financial Information***

 
| ** **                                                                        | ** ** | **Years Ended December 31,**                                                              | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2011**                                                                                                 | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                        | ** ** | **(In thousands of Mexican Ps., except as otherwise specified)** | ** ** |
| Consolidated net income                                                           |       | 1,313,942                                                                                                |       | 1,579,942 |   | 1,581,393 |   | 960,930 |   | * |   |
| Depreciation and amortization                                                     |       | 432,237                                                                                                  |       | 362,351 |   | 371,402 |   | 323,727 |   | * |   |
| Net comprehensive financing cost                                                  |       | 394,804                                                                                                  |       | 314,742 |   | 148,511 |   | 508,673 |   | * |   |
| Other expenses                                                                    |       | 285,525                                                                                                  |       | 136,193 |   | 44,155 |   | 30,312 |   | * |   |
| Amortization of Beta trademark                                                    |       | —                                                                                                   |       | 45,527 |   | 91,054 |   | 91,054 |   | * |   |
| Employee statutory profit-sharing                                                 |       | 65,880                                                                                                   |       | — |   | — |   | 70,768 |   | * |   |
| Comprehensive financing cost capitalized and   subsequently charged cost of sales |       | 1,363,295                                                                                                |       | 758,332 |   | 537,431 |   | 662,080 |   | * |   |
| Income taxes                                                                      |       | 865,940                                                                                                  |       | 906,997 |   | 994,389 |   | 456,256 |   | * |   |
| Adjusted EBITDA                                                                   |       | 4,721,623                                                                                                |       | 4,104,084 |   | 3,768,335 |   | 3,103,800 |   | * |   |

 

***Reconciliation of Consolidated Net Income to Adjusted EBITDA Computed from Our US GAAP Financial Information***

 
| ** **                                            | ** ** | **Years Ended December 31,**                                                              | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2011**                                                                                                 | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                            | ** ** | **(In thousands of Mexican Ps., except as otherwise specified)** | ** ** |
| Net income attributable to the controlling   interest |       | 932,588                                                                                                  |       | 1,977,437 |   | 1,511,357 |   | 567,782 |   | 1,475,532 |   |
| Depreciation and amortization                         |       | 432,237                                                                                                  |       | 362,351 |   | 371,402 |   | 323,727 |   | 196,307 |   |
| Interest expense and inflation effect                 |       | 216,512                                                                                                  |       | 176,996 |   | 188,173 |   | 85,926 |   | 439,971 |   |
| Amortization of backlog (intangible)                  |       | —                                                                                                   |       | — |   | — |   | — |   | 16,747 |   |
| Amortization of Beta trademark                        |       | —                                                                                                   |       | 45,527 |   | 91,054 |   | 91,054 |   | 92,958 |   |
| Income taxes                                          |       | 719,407                                                                                                  |       | 1,087,060 |   | 1,034,544 |   | 288,699 |   | 634,319 |   |
| Adjusted EBITDA                                       |       | 2,300,744                                                                                                |       | 3,649,371 |   | 3,196,530 |   | 1,357,188 |   | 2,855,834 |   |

 

(10)                            Net debt is not a financial measure computed under MFRS.  We compute net debt as the sum of all debt  and capital leases (not including interest payable) less cash and cash equivalents, each of which is computed in accordance with MFRS. We use net debt as a measure of our total amount of leverage, as it gives effect to cash accumulated on our balance sheets.  We believe net debt provides useful information to investors because it reflects our actual debt as well as our available cash and cash equivalents that could be used to reduce this debt.  Net debt has certain material limitations in that it assumes the use of our cash and cash equivalents to repay debt that is actually still outstanding and not to fund operating activities or for investment.

 

***Reconciliation of Total Debt to Net Debt Derived from Our MFRS Financial Information***

 
| ** **                                  | ** ** | **As of December 31,**                                                                    | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **2011**                                                                                                 | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                  | ** ** | **(In thousands of Mexican Ps., except as otherwise specified)** | ** ** |
| Current portion of long-term debt           |       | 3,550,735                                                                                                |       | 1,618,210 |   | 184,072 |   |
| Current portion of long-term leases         |       | 188,937                                                                                                  |       | 169,604 |   | 108,437 |   |
| Long-term debt and long-term capital leases |       | 11,512,842                                                                                               |       | 11,023,031 |   | 9,714,842 |   |
| Total debt                                  |       | 15,252,514                                                                                               |       | 12,810,845 |   | 10,007,351 |   |
| Cash and cash equivalents                   |       | 3,992,653                                                                                                |       | 3,435,222 |   | 3,251,416 |   |
| Net debt                                    |       | 11,259,861                                                                                               |       | 9,375,623 |   | 6,755,935 |   |

 

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** **

**DIVIDENDS**

 

A vote by the majority of our shareholders present at a shareholders’ meeting determines the declaration, amount, and payment of dividends.  Under Mexican law, dividends may only be paid from retained earnings and if losses for prior fiscal years have been recovered.

 

We have not paid dividends since we were formed in 1989 and we do not currently expect to pay dividends.  We intend to devote a substantial portion of our future cash flow to funding working capital requirements and purchasing land following a conservative replacement strategy for land bank acquisitions.  We may consider adopting a dividend policy in the future based on a number of factors, including our results of operations, financial condition, cash requirements, tax consideration, future prospects, and other factors that our board of directors and our shareholders may deem relevant, including the terms and conditions of future debt instruments that may limit our ability to pay dividends.

 

**EXCHANGE RATE INFORMATION**

 

The following table sets forth, for the periods indicated, the period-end, average, high and low exchange rate between the peso and U.S. dollar.  The average annual rates presented in the following table were calculated by using the average of the exchange rates on the last day of each month during the relevant period.  The data provided in this table is based on the exchange rates published by *Banco de México*.  All amounts are stated in pesos, and we have not restated the rates in constant currency units.  We make no representation that the Mexican peso amounts referred to in this annual report could have been or could be converted into U.S. dollars at any particular rate or at all.

 
| ** **                                  | ** ** | **Noon Buying Rate (Ps. per US$)** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------------|------------|
| **Years Ended December 31,** | ** ** | **Low (1)**                                            | ** ** | **High (1)** | ** ** | **Average (2)** | ** ** | **Period - End** | ** ** |
| 2009                                        |       | 12.60                                                       |       | 15.37 |   | 13.50 |   | 13.06 |   |
| 2010                                        |       | 12.16                                                       |       | 13.18 |   | 12.63 |   | 12.35 |   |
| 2011                                        |       | 11.50                                                       |       | 13.99 |   | 12.42 |   | 13.98 |   |

 
| **Month Ended**                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| December 31, 2011                      |       | 13.48      |       | 13.99      |       | 13.75      |       | 13.98      |       |
| January 31, 2012                       |       | 12.93      |       | 13.95      |       | 13.46      |       | 13.01      |       |
| February 29, 2012                      |       | 12.65      |       | 13.01      |       | 12.79      |       | 12.86      |       |
| March 31, 2012                         |       | 12.63      |       | 12.98      |       | 12.76      |       | 12.85      |       |
| April 30, 2012 (through April 29) |       | 12.73      |       | 13.23      |       | 13.06      |       | 13.21      |       |

 

----

(1)                                  Rates shown are the actual low and high, on a day-by-day basis for each period.

(2)                                  Average of daily rates.

 

On April 29, 2012, Banco de México’s UDI conversion rate was Ps. 4.759047 per UDI.

 

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**Industry and Market Data**

 

Except during a liquidity crisis lasting from September through December 1982, *Banco de México* has consistently made foreign currency available to Mexican private sector entities (such as us) to meet their foreign currency obligations.  Nevertheless, in the event of renewed shortages of foreign currency, it is possible that foreign currency will not continue to be available to private sector companies or that foreign currency that we may need to service foreign currency obligations or to import goods will not be available for purchase in the open market without substantial additional cost.

 

**RISK FACTORS**

 

**Risk Factors Related to Our Business**

 

***Decreases in the amount of mortgage financing provided by Mexican housing funds on which we depend, or disbursement delays, could result in a decrease in our sales and revenues***

 

The home building industry in Mexico has been characterized by a significant shortage of mortgage financing.  Historically, the limited availability of financing has restricted home building and contributed to the current shortage of affordable entry-level housing.  Substantially all financing for affordable entry-level housing in Mexico is provided by government housing-dedicated entities established for this purpose (“Mexican Housing Funds”) such as:

 

·                  the Mexican National Workers’ Housing Fund Institute, or “Infonavit” (*Instituto del Fondo Nacional de la Vivienda para los Trabajadores)*, which is financed primarily through mandatory contributions from the gross wages of private sector workers, and securitization of mortgages in the capital markets;

 

·                  the Mexican Social Security and Services Institute of the Public-Sector Workers’ Housing Fund, or “Fovissste” (*Fondo de la Vivienda del Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado*), which is financed primarily through mandatory contributions from the gross wages of public sector workers; and

 

·                  public mortgage providers such as the Mexican Federal Mortgage Bank, or “SHF” (*Sociedad Hipotecaria Federal, S.N.C., Institución de Banca de Desarrollo*), which is financed through its own funds as well as funds provided by the World Bank and a trust managed by *Banco de México*.

 

See “Item 4. Information on the Company—Business Overview—The Mexican Housing Market.”

 

The amount of funding available and the level of mortgage financing from these sources is limited and may vary from year to year.

 

These Mexican Housing Funds have significant discretion in terms of the allocation and timing of disbursement of mortgage funds.  We depend on the availability of mortgage financing provided by these Mexican Housing Funds for substantially all of our sales of affordable entry-level housing, which represented 77.6% of our revenues for 2011 and 67.6% of our revenues for 2010.

 

Accordingly, our financial results are affected by policies and administrative procedures of Infonavit, Fovissste, SHF, and a federal housing subsidy program administered by CONAVI, as well as by the Mexican federal government’s housing policy.  Infonavit and Fovissste have continued to be the main source of financing for affordable entry-level clients in past years.  The future Mexican government housing finance policy may limit or delay the availability of mortgage financing provided by these agencies or otherwise institute changes, including changes in the methods by which these agencies grant mortgages and, in the case of Infonavit, the geographic allocation of mortgage financing, that could result in a decrease in revenues.  We cannot assure you that the Mexican government housing policies will not change as a result of Mexican federal elections in 2012.

 

Disruptions in the operations of these Mexican Housing Funds, which could occur for any reason, may 

 

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occur and result in a decrease in our sales and revenues.  During 2011, disruptions included a delay in the disbursement of Mexican federal government subsidies in certain cities delaying the timing by which Infonavit commits to closing a transaction, and a slowdown in the collection process through Fovissste, as a result of administrative changes at the fund.

 

Decreases or delays in the amount of funds available from Infonavit, Fovissste, SHF or other sources, or substantially increased competition for these funds, could result in a decrease in our sales and revenues.  These funds may not continue to be allocated at their current levels or in regions in which we have or can quickly establish a significant presence.

 

The current administration of President Felipe Calderón initiated a National Housing Program (*Programa Nacional de Vivienda*) 2007-2012, through which the Mexican federal government expects that Mexican Housing Funds will provide six million mortgages by 2012, mainly to low-income families.  As of the year ended December 31, 2011, 1,009,650 mortgages were granted pursuant to various housing programs, including subsidies and mortgages granted by commercial banks and others, from the Mexican federal government’s target of granting 1.1 million mortgages during 2011.

 

Our infrastructure division faces risks related to financing the projects, performance requirements and completion schedules, which could adversely affect us.  The subsidiaries participating in the correctional facility construction and servicing have been designated as “unrestricted.”  See “Item 4. Information on the Company—Business Overview— Infrastructure Division.”

 

We are responsible for the contribution of equity to and financing of the construction of our correctional facility project and have guaranteed its completion by a scheduled acceptance date or achievement of certain acceptance and performance testing levels.  However, adherence to these schedules may not be possible.  The failure to meet any schedule or performance requirements for any reason could result in costs that exceed projected profit margins.  We cannot assure you that the financial penalties stemming from our failure to meet guaranteed acceptance dates or achievement of acceptance and performance testing levels would not have an adverse effect on our financial condition and results of operations.

 

The performance of our infrastructure division is also tied to Mexican public sector spending on infrastructure facilities and to our ability to bid successfully for additional contracts.  Mexican public sector spending, in turn, generally has been dependent on the state of the Mexican economy.  A decrease in public sector spending as a result of a deterioration of the Mexican economy, changes in Mexican governmental policy, including as a result of the 2012 federal election, or for other reasons may have an adverse effect on our financial condition and results of operations.  See “—Political Events in Mexico May Result in Disruptions to Our Business Operations and Decreases in Our Sales and Revenues.”

 

***A slowdown in the Mexican economy could limit the availability of private-sector financing in Mexico, on which we depend for our sales of middle-income housing, which could result in a decrease in our sales and revenues***

 

One of our continued strategies is to maintain an exposure of our operations in the middle-income and residential markets while maintaining our margins and without adversely affecting our financial condition.  Our expansion and exposure into these markets depends on private sector lenders, such as commercial banks and Limited Purpose Financing Companies and Multiple Purpose Financing Companies (*Sociedades Financieras de Objeto Limitado y Sociedades Financieras de Objeto Múltiple*,  or “Sofoles” and “Sofomes”), which provide a substantial majority of mortgage financing for the middle-income market.  The availability of private sector mortgage financing in Mexico has been severely constrained in the past as a result of volatile economic conditions in Mexico, the level of liquidity and stability of the Mexican banking system, and the resulting adoption of more stringent lending criteria and bank regulations.  From 1995 through 2001, commercial bank mortgage lending was generally unavailable in Mexico.  However, during the same period a number of Sofoles were formed, serving the mostly middle-income market.  Since 2002, private sector lenders have gradually increased their mortgage financing activities as a result of improved economic conditions and increasing consumer demand.  However, unfavorable general economic conditions, such as the recession and economic slowdown during 2009 in the United States have negatively affected the Mexican economy and the availability of private sector mortgage financing.  As a result,commercial lenders tightened their criteria for mortgage origination.  Additionally, Sofoles and Sofomes faced 

 

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liquidity constraints due to increased exposure to non-performing loans.  As a result, since 2009, we decreased our exposure to the middle-income market as Sofoles and Sofomes have continued to face liquidity constraints.  During 2011, mortgages for the middle-income market continued to be constrained, as commercial banks and Sofoles continued to be the main source of financing to the middle-income market.  As of December 31, 2011, financing for this segment of the market continued to be supported by co-financing products through Infonavit and Fovissste.  During 2011, Infonavit co-financed products represented 10.0% of total mortgages placed or 50,129 mortgages compared to 19.7% or 93,727 mortgages during 2010.  A prolonged economic slowdown in Europe, the United States and Mexico could result in reduced profitability and negatively affect our financial performance.

 

***Our strategy for expansion in the tourism/resort housing market may be affected by a slowdown in U.S. general economic conditions, which could adversely affect our business or our financial results***

 

The tourism/resort homebuilding industry is sensitive to changes in economic conditions and other factors, such as the level of employment, consumer confidence, consumer income, availability of financing, and interest rate levels.  Adverse changes in any of these conditions, or in the markets where our targeted clients operate, could decrease demand and pricing for new homes in these areas or result in customer cancellations of pending contracts, which could adversely affect the number of home deliveries we make or reduce the prices we can charge for homes in the tourism/resort housing markets, either of which could result in a decrease in our revenues and earnings and would adversely affect our financial condition.  However, we believe that our targeted customers consist of an exclusive sector of senior U.S. and Canadian residents, for whom the availability of financing is not a key requisite for purchasing a second home.  Nonetheless, we anticipate a continued softer demand from our targeted customers as a result of the economic slowdown that began in 2008.

 

***We experience significant seasonality in our results of operations***

 

The Mexican affordable entry-level housing industry experiences significant seasonality during the year, principally due to the operational and lending cycles of Infonavit and Fovissste.  Payment by these lenders for home deliveries is typically slow at the beginning of the year and increases gradually through the second and third quarters with a rapid acceleration in the fourth quarter.  We build and deliver affordable entry-level homes based on the seasonality of this cycle because we do not begin construction of these homes until a mortgage provider commits mortgage financing to a qualified homebuyer in a particular development.  Accordingly, we tend to recognize significantly higher levels of revenue in the third and fourth quarters and our debt levels tend to be highest in the first and second quarters.  We anticipate that our quarterly results of operations and our level of indebtedness will continue to experience variability from quarter to quarter in the future.

 

***We may experience difficulty in finding desirable land tracts or increases in the price of land may increase our cost of sales and decrease our earnings***

 

Our continued growth depends in large part on our ability to continue to be able to acquire land and to do so at a reasonable cost.  If more developers enter or expand their operations in the Mexican home building industry, land prices could rise significantly and suitable land could become scarce due to increased demand or decreased supply.  A resulting rise in land prices may increase our cost of sales and decrease our earnings.  We may not be able to continue to acquire suitable land at reasonable prices in the future.

 

***Increases in the price of raw materials may increase our cost of sales and reduce our net earnings***

 

The basic raw materials used in the construction of our homes include concrete, concrete block, steel, windows, doors, roof tiles and plumbing fixtures.  Increases in the price of raw materials, including increases that may occur as a result of shortages, duties, restrictions, or fluctuations in exchange rates, could increase our cost of sales and reduce our net earnings to the extent we are unable to increase our sale prices.  It is possible that the prices of our raw materials will increase in the future.

 

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***Loss of the services of our key management personnel could result in disruptions to our business operations***

 

Our management and operations are dependent in large part upon the contributions of a small number of key senior management personnel, including Eustaquio Tomás de Nicolás Gutiérrez, our Chairman, and Gerardo de Nicolás Gutiérrez, our Chief Executive Officer.  We do not have employment or non-compete agreements with or maintain key-man life insurance in respect of either of these individuals.  Because of their knowledge of the industry and our operations and their experience with us, we believe that our future results will depend upon their efforts, and the loss of the services of either of these individuals for any reason could adversely affect our business operations.

 

***Competition from other home builders could result in a decrease in our sales and revenues***

 

The home building industry in Mexico is highly competitive.  Our principal competitors include public companies like Corporación GEO, S.A.B. de C.V., Consorcio ARA, S.A.B. de C.V., URBI Desarrollos Urbanos, S.A.B. de C.V. and SARE, S.A.B. de C.V.  Our ability to maintain existing levels of home sales depends to some extent on competitive conditions, including price competition, competition for available mortgage financing, and competition for available land.  Competition is likely to continue to decrease as some smaller and medium-sized homebuilding companies in Mexico are experiencing limited growth opportunities due to:   (1) their dependence on bridge loans and short-term credit lines; (2) increases in these companies’ interest rates for short-term credit lines; and (3) tighter lending restrictions from commercial banks to renew existing credit lines.  We may experience pressure to reduce our prices in certain regions if some of our competitors are forced to sell their inventory in distressed sales upon exiting the market.  In addition, competitive conditions may prevent us from achieving our goal of increasing our sales volume, or result in a decrease in our sales and revenues.

 

***Adverse economic conditions in Mexico or in other emerging markets could adversely affect us***

 

We currently maintain operations in Mexico and to a lesser extent in other emerging markets, such as Brazil.  We expect that in the future we will have additional operations in the countries where we currently operate or in other countries with similar political and economic conditions.  These emerging markets have a history of economic instability.  Our operations may be adversely affected by trade barriers, currency fluctuations and exchange controls, high levels of inflation and increases in duties, taxes and governmental royalties, as well as changes in local laws and policies of the countries in which we conduct business.  The governments of countries in which we operate, or may operate in the future, could take actions that materially adversely affect us.  Accordingly, our results of operations and financial condition depend upon the overall level of economic activity and political stability in these emerging markets.  Should economic conditions deteriorate in these countries or in emerging markets generally, our results of operations and financial condition may be adversely affected.

 

In addition, we cannot provide any assurance that international markets will provide similar demand for housing as Mexico, that we will have similar success selling the houses that we may develop in international markets, or that the necessary financing from private and public sources will enable the public in these international markets to purchase the supply of housing that we may develop in these markets, or that the necessary financing from private and public sources will enable the public in these international markets to purchase the supply of housing that we may develop.  As a result of our expansion into international markets, our profitability could be reduced and our financial performance could be negatively affected.

 

***Changes in building and zoning regulations to which we are subject could cause delays in construction and result in increased costs***

 

The Mexican housing industry is subject to extensive building and zoning regulation by various federal, state and municipal authorities.  These authorities oversee land acquisition, development and construction activities, and certain dealings with customers.  The costs associated with obtaining building and zoning permits, paying purchase or development fees and taxes, securing utility service rights and titling new homes are substantially higher in Mexico than in other countries and vary significantly from region to region in Mexico.  We are required to obtainthe approval of numerous federal, state and local governmental authorities for our development activities.  Changes 

 

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in local circumstances or applicable law or regulations of such entities may require modifying or applying for additional approvals or changing our processes and procedures to comply with them.  It is possible that these factors could cause delays in construction and result in increased costs.

 

***Changes to environmental laws and regulations to which we are subject could cause delays in construction and result in increased costs***

 

Our operations are subject to Mexican federal, state and municipal environmental laws and regulations.  Changes to such environmental laws and regulations, or stricter interpretation or enforcement of such existing laws or regulations, could cause delays in construction and result in increased costs.

 

According to recent amendments to the General Environmental Protection Law (Ley General del Equilibrio Ecológico y la Protrección al Medio Ambiente) among other Federal laws, effective as of March 1, 2012 class actions may now be brought in federal courts in connection with civil actions on environmental matters.

 

***Our uninsured housing developments under construction could suffer unforeseen casualties, which could result in significant losses to us***

 

We do not generally obtain liability insurance to cover housing developments under construction unless it is required by providers of construction financing.  In the event that our uninsured housing developments suffer unforeseen casualties, we may experience significant losses.

 

***A reduction in distributions from our operating subsidiaries could limit our ability to pay dividends and service our debt obligations***

 

We are a holding company with no substantial operations and no significant assets other than the common shares of our majority-owned subsidiaries.  We depend on receiving sufficient funds from our subsidiaries for virtually all our internal cash flow, including cash flow to pay dividends and service our debt obligations.  As a result, our cash flow will be affected if we do not receive dividends and other income from our subsidiaries.  The ability of our subsidiaries to pay dividends and make other transfers to us is limited by requirements that need to be satisfied under Mexican law.  This ability may also be limited by credit agreements entered into by our subsidiaries.

 

***We cannot predict the impact that changing climate conditions, including legal, regulatory and social responses thereto, may have on our business***

 

Various scientists, environmentalists, international organizations, regulators and other commentators believe that global climate change has added, and will continue to add, to the unpredictability, frequency and severity of natural disasters (including, but not limited to, hurricanes, tornadoes, freezes, other storms and fires) in certain parts of the world.  A number of legal and regulatory measures as well as social initiatives have been introduced in an effort to reduce greenhouse gas and other carbon emissions which some believe may be chief contributors to global climate change.  We cannot predict the impact that changing climate conditions, if any, will have on our results of operations or our financial condition.  Moreover, we cannot predict how legal, regulatory and social responses to concerns about global climate change will impact our business.

 

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**Risk Factors Related to Mexico**

 

***Adverse economic conditions in Mexico may result in a decrease in our sales and revenues***

 

We are a Mexican company with substantially all of our assets located in Mexico and substantially all of our revenues derived from operations in Mexico.  As such, our business may be significantly affected by the general conditions of the Mexican economy.

 

Historically, Mexico has experienced high real and nominal interest rates.  As a result of the recession and economic slowdown in Mexico during 2009, *Banco de México* lowered its benchmark interest rate (“TIIE”) to 4.50% in an effort to encourage lending and stimulate the economy.  As a result, the interest rates on 28-day Mexican government treasury securities (*Certificados de la Tesoreria de la Federación*) decreased to 4.31% during 2011.  In the short-term, it is not expected that *Banco de México* will increase its benchmark interest rate prior to early 2013.  Accordingly, if we incur peso-denominated debt in the future, it could be at high interest rates.

 

As a consequence of the global recession and economic slowdown during 2008, the Mexican economy entered into a recession.  In Mexico, GDP contracted 6.5% in 2009.  However during 2010, the Mexican economy recovered and grew 5.4%.  During 2011, the Mexican economy grew by 3.9%, and is expected to grow between 3.3% and 3.5% during 2012. Consumer confidence has improved to 90.8 as of December 31, 2011, as compared to an average of 86.3 during 2010.  The unemployment rate decreased to 4.51% as of December 31, 2011, compared to an average of 5.37% during 2010.  As of December 31, 2011, twelve month accumulated inflation had decreased to 3.82% as compared to 4.40% during the same period in 2010.  However, there can be no assurance that the positive trends witnessed in recent months will continue.  The Mexican economy’s inability to continue its nascent recovery from the recession could affect our operations to the extent that we are unable to reduce our costs and expenses in response to falling demand.  These factors could result in a decrease in our sales and revenues.

 

***Fluctuations in interest rates could adversely affect our financial condition and results of operations***

 

The mortgages for affordable entry-level and low middle-income housing are mostly provided by government housing dedicated agencies like Infonavit or Fovissste.  These institutions provide mortgages that have interest rates that are indexed to minimum wage growth.  In the case of lower-income workers, the interest rate on mortgages are subsidized.  However, the availability of mortgages to the high middle-income and upper-income housing markets depends upon fluctuations in interest rates and conditions of private mortgage providers.  Historically, when interest rates are high, fewer mortgages become available in Mexico in these housing markets as the mortgages become expensive, and the demand for bank, Sofoles and Sofomes mortgages falls.

 

As a result of the continued global financial crisis, the interest rates for mortgages from these institutions may increase significantly, causing demand for our products from these income segments to decrease.

 

In addition, fluctuations in interest rates affect our interest expense.  As of December 31, 2011, Ps.7,652 million, or 50% of our total indebtedness, accrued interest at variable rates, at an average spread rate over TIIE and Selic of 3.30% and 6.50%, respectively.  We may also incur indebtedness in the future that accrues interest at higher rates or we may be required to refinance our debt at variable rates.  Increases in interest rates could adversely affect our results of operations.

 

***Fluctuations of the peso relative to the U.S. dollar could result in an increase in our cost of financing and limit our ability to make timely payments on foreign currency-denominated debt***

 

Because substantially all of our revenues are and will continue to be denominated in pesos, if the value of the peso decreases against the U.S. dollar, our cost of financing will increase.  Severe depreciation of the peso may also result in disruption of the international foreign exchange markets.  This may limit our ability to transfer or convert pesos into U.S. dollars and other currencies for the purpose of making timely payments of interest and principal on our securities and any U.S. dollar-denominated debt that we may incur in the future.  While the Mexican government has not restricted the right or ability of Mexican or foreign individuals to convert pesos into U.S. dollars or to transfer other currencies out of Mexico since 1982, the Mexican government could instituterestrictive exchange rate policies in the future.

 

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***Political events in Mexico may result in disruptions to our business operations and decreases in our sales and revenues***

 

The Mexican government exercises significant influence over many aspects of the Mexican economy.  In addition, we depend on Mexican government housing policy, especially with regard to the operation of the Mexican Housing Funds, for a large portion of our business.  As a result, the actions of the Mexican government concerning the economy and regulating certain industries could have a significant effect on Mexican private sector entities, including us, and on market conditions, prices of and returns on Mexican securities.

 

Mexico’s next president to be elected in July 2012 may implement significant changes in laws, public policy and/or regulations that could affect Mexico’s political and economic situation, which could adversely affect our business.  Social and political instability in Mexico or other adverse social or political developments in or affecting Mexico could affect us and our ability to obtain financing.  It is also possible that political uncertainty may adversely affect Mexican financial markets.

 

Political events in Mexico, including events related to Mexico’s 2012 federal elections to elect a new President and Congress, may significantly affect Mexican economic policy and, consequently, our operations.  Political disagreements between the executive and the legislative branches could result in deadlock and prevent the timely implementation of political and economic reforms, which in turn could have a material adverse effect on Mexican economic policy, including with respect to housing.  The political uncertainty involving Mexico’s 2012 federal elections or otherwise, could have a negative effect on the Mexican economy and the Mexican housing industry, which in turn could result in an adverse effect on our business.  We cannot provide any assurance that future political developments in Mexico, over which we have no control, will not have an unfavorable impact on our financial position or results of operations.

 

***Developments in other countries may result in decreases in the price of our securities***

 

The market value of securities of Mexican companies is, to varying degrees, affected by economic and market conditions in other emerging market countries.  Although economic conditions in these countries may differ significantly from economic conditions in Mexico, investors’ reactions to developments in any of these other countries may have an adverse effect on the market value of securities of Mexican issuers.  In recent years, for example, prices of both Mexican debt securities and Mexican equity securities dropped substantially as a result of the levels of public debt, weakness of the economies, and other developments in the United States, Russia, India, Brazil, Greece, Italy, Portugal and Spain, among others.

 

In addition, the direct correlation between economic conditions in Mexico and the United States has sharpened in recent years as a result of the North American Free Trade Agreement (NAFTA) and increased economic activity between the two countries.  As a result of the slowing economy in the United States and the uncertainty it could have on the general economic conditions in Mexico and the United States, our financial condition and results of operations could be adversely affected.  In addition, due to recent developments in the international credit markets, capital availability and cost could be significantly affected and could restrict our ability to obtain financing or refinance our existing indebtedness on favorable terms, if at all.

 

***We are subject to different corporate disclosure and accounting standards than U.S. companies***

 

A principal objective of the securities laws of the United States, Mexico and other countries is to promote full and fair disclosure of all material corporate information.  However, there may be less or different publicly available information about foreign issuers of securities than is regularly published by or about U.S. issuers of listed securities.

 

In addition, accounting standards and disclosure requirements in Mexico differ from those of the United States.  In particular, our consolidated financial statements are prepared in accordance with MFRS, which differ from U.S. GAAP (where we only provide on an annual basis a reconciliation of our financial statements under U.S. GAAP) and accounting principles adopted in other countries in a number of respects.  Items on the financial statements of a company prepared in accordance with MFRS may not reflect its financial position or results ofoperations in the way they would be reflected had such financial statements been prepared in accordance with other accounting principles.  We will begin to prepare and present our financial information under IFRS effective January

 

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1, 2012, which also differs from U.S. GAAP in a number of respects.  We are still in the conversion process and we cannot assure you that once completed, our consolidated financial information under IFRS will not differ materially from that reported under MFRS; we are unable to provide a reliable estimate of the effects of adoption of IFRS on our consolidated financial statements.

 

***Mexico has experienced a period of increasing criminal activity and such activities could affect our operations***

 

Mexico has experienced periods of criminal activity, primarily due to activities of drug cartels.  In response, the Mexican government has implemented several security measures but despite efforts, drug related crimes continue to exist in Mexico.  The state of Sinaloa, where our corporate offices are located and we conduct a portion of our business, likewise has been affected by an increase in crime and violence.  These activities, their possible escalation and the violence associated with them may have a negative impact on the business environment in which we operate, and therefore on our financial condition and results of operations.

 

**Risk Factors Related to Our Common Shares and ADSs**

 

***Future Issuances of Shares May Result in a Decrease in the Prices of Our ADSs and Common Shares***

 

In the future, we may issue additional equity securities for financing and other general corporate purposes, although there is no present intention to do so.  Any such sales or the prospect of any such sales could result in a decrease in the prices of our ADSs and common shares.

 

***Future Sales of Our Shares by Our Principal Shareholders May Result in a Decrease in the Prices of Our Securities***

 

Our principal shareholder, the de Nicolás family, holds 34.1% of our outstanding share capital.  Actions by these shareholders with respect to the disposition of the shares they beneficially own, or the perception that such actions might occur, may decrease the trading price of our shares on the Mexican Stock Exchange and the price of the ADSs on the New York Stock Exchange.  Our principal shareholders are not subject to any contractual restrictions that limit their right to dispose of their common shares.

 

***Pre-emptive Rights May be Unavailable to Holders of Our ADSs, Which May Result in a Dilution of ADS Holders’ Equity Interest in Our Company***

 

Under Mexican law, if we issue new shares for cash as part of a capital increase, we must grant pre-emptive rights to our shareholders, giving them the right to purchase a sufficient number of shares to maintain their pro rata interest unless we issue shares in a public offering.  However, we may not be legally permitted to offer ADS holders in the United States the right to exercise pre-emptive rights in any future issuances of shares unless we file a registration statement with the SEC with respect to that future issuance of shares, or the issuance qualifies for an exemption from the registration requirements of the U.S. Securities Act of 1933, or the “Securities Act”.  At the time of any future capital increase, other than through a public offering, we will evaluate the costs and potential liabilities associated with filing a registration statement with the SEC, the benefits of enabling U.S. holders of ADSs to exercise pre-emptive rights, and any other factors that we consider important in determining whether to file a registration statement to permit the exercise of mandatory pre-emptive rights.  It is possible that we will not file such a registration statement.  As a result, the equity interests of ADS holders would be diluted to the extent that ADS holders cannot participate in a future capital increase.

 

Under the terms of the ADSs, you may instruct the depositary, Citibank, N.A., to vote the ordinary shares underlying the ADSs, but only if we request the depositary to ask for your instructions.  Otherwise, you will not be able to exercise your right to vote unless you withdraw the common shares underlying the ADSs and vote such common shares.  However, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw your common shares to allow you to cast your vote with respect to any specific matter.  In addition, the depositary and its agents may not be able to send out or receive your voting instructions on time or carry them out in the manner you have instructed.  As a result, you may not be able to exercise your right to vote.

 

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In addition, Mexican law and our bylaws require shareholders to provide evidence of their status as shareholders through INDEVAL’s depositors’ list in order to attend shareholders’ meetings.  ADS holders will not be able to meet this requirement and are therefore not entitled to attend shareholders’ meetings.  ADS holders will also not be permitted to vote the common shares underlying the ADSs directly at a shareholders’ meeting or to appoint a proxy to do so without withdrawing the common shares.

 

***Minority Shareholders Have Different Rights Against Us, Our Directors, or Our Controlling Shareholders in Mexico***

 

Under Mexican law, the protections afforded to minority shareholders are different from those afforded to minority shareholders in the United States.  The grounds for shareholder derivative actions under Mexican law are extremely limited, which effectively bars most of these kinds of lawsuits in Mexico, therefore it may be more difficult for minority shareholders to enforce their rights against us, our directors or our controlling shareholders than it would be for minority shareholders of a U.S. company.

 

***It May be Difficult to Enforce Civil Liabilities Against Us or Our Directors, Executive Officers and Controlling Persons***

 

We are organized under the laws of Mexico.  A majority of our directors, executive officers and controlling persons reside outside the U.S.; all or a significant portion of the assets of our directors, executive officers and controlling persons, and substantially all of our assets, are located outside the U.S.; and certain of the experts named in this annual report also reside outside the U.S.  As a result, it may be difficult for you to effect service of process within the U.S. upon these persons or to enforce against them or us in U.S. courts judgments predicated upon the civil liability provisions of the federal securities laws of the U.S.  We have been advised by our Mexican counsel, González Calvillo, S.C., that there is doubt as to the enforceability, in original actions in Mexican courts, of liabilities predicated solely on U.S. federal securities laws and as to the enforceability in Mexican courts of judgments of U.S. courts obtained in actions predicated upon the civil liability provisions of U.S. federal securities laws.

 

**ITEM 4.****Information on the Company.**

 

**BUSINESS OVERVIEW**

 

**HISTORY AND DEVELOPMENT**

 

Desarrolladora Homex, S.A.B. de C.V. is a corporation (*sociedad anónima bursátil de capital variable*) registered in Culiacán, Sinaloa, Mexico under the Mexican Companies Law (*Ley General de Sociedades Mercantiles*) on March 30, 1998 with an indefinite corporate existence.  Our full legal name is Desarrolladora Homex, S.A.B. de C.V.  Our principal executive offices are located at Boulevard Alfonso Zaragoza Maytorena 2204 Norte, Fraccionamiento Bonanza, 80020 Culiacán, Sinaloa, Mexico.  Our telephone number is +52 (667) 758-5800.  Our legal domicile is Boulevard Alfonso Zaragoza Maytorena 2204 Norte, Fraccionamiento Bonanza, 80020 Culiacán, Sinaloa, Mexico.

 

Our Company traces its origins to 1989 and established its current legal structure in 1998.  Beginning in 1999, various strategic investors and, in 2002, Equity International Properties, Ltd., or EIP, an entity affiliated with Equity Group Investments, L.L.C., made equity investments in our Company.  These strategic investors assisted us to develop and refine our operating and financial strategies.  On June 29, 2004 we obtained financing through a public equity offering and dual listing on the Bolsa Mexicana de Valores and the New York Stock Exchange.  Since our initial public offering, our annual revenues have grown 266%, and we have expanded our operations into four states and five cities in México, as well as two countries internationally.

 

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** **

**Capital Expenditures**

 

Our operations do not require substantial capital expenditures, as we lease, on a short term basis, most of the construction equipment we use and subcontract a substantial portion of the services necessary to build the infrastructure of our developments.  In the 2011, we spent Ps.38.55 million on capital expenditures, primarily to purchase construction equipment. In 2010 and 2009, we spent Ps.279.64 million and Ps.89 million, respectively, on capital expenditures, primarily to purchase construction equipment, support growth and partially fund our corporate headquarters. Our purchases of land are treated as additions to inventory and not as capital expenditures.

 

**Our Company**

 

We are a vertically integrated home development company engaged in the development, construction and sale of affordable entry-level, middle-income and tourism housing in Mexico and affordable entry-level housing in Brazil.  During 2011, units closed were 52,486 homes, an increase of 18.4% compared to 2010. During 2010 units closed were 44,347 homes, a decrease of 3.6% over 2009.  93.2% of our homes sold in 2011 and 89.2% of our homes sold in 2010 were in the affordable entry-level segment (including our operations in Brazil).

 

As of December 31, 2011, we had total land reserves under title of approximately 79.3 million square meters primarily in Mexico and including approximately 2.3 million square meters of land reserves for our operations in Brazil.  We estimate we could build approximately 407,064 affordable entry-level homes, approximately 29,924 middle-income homes and approximately 2,222 tourism homes on our land reserves.

 

We believe our geographic diversity is one of the strongest among home builders in Mexico, reflected by our operations in 142 developments under construction and in 35 cities located in 22 Mexican states, as well as three developments under construction in three cities located in two Brazilian states, as of December 31, 2011.  Furthermore, we believe our sales are not as concentrated in a limited number of areas as compared to our competitors.  For the year ended December 31, 2011, 30.09% of our revenues were derived from the Mexico City Metropolitan Area, 13.84% from the state of Jalisco and 9.60% from the state of Baja California Sur .

 

Our revenues under MFRS for the year ended December 31, 2011 and 2010 were Ps. 21,853.3 million (US$1,563.3 million) and Ps.19,652.3 million (US$1,405.9 million), respectively.  Our Adjusted EBITDA from our MFRS financial information for the year ended December 31, 2011 and 2010 were Ps. 4,721.6 million (US$337.8 million) and Ps.4,104.0 million (US$293.6 million), respectively.

 

In 2009, we commenced the development of a new infrastructure division after being invited by the Mexican federal government to participate in the construction process of certain federal correctional facilities through: (i) contracts with the government, (ii) construction sub-contracts with other companies who have been awarded government contracts, and (iii)  numerous other infrastructure projects for which we will act as a sub-contractor for federal and state governments.  We believe this division of our business is complementary to our homebuilding activities and will allow us to use our experience as a homebuilder to expand into other areas of construction and provide a new source of revenue.  See “Item 4. Information on the Company—Business Overview— Infrastructure Division.”

 

**Our Products**

 

Mexico’s developer built housing industry is divided into four tiers according to cost:  affordable entry-level, middle-income, residential and tourism.  We consider affordable entry-level homes to range in price between Ps.195,000 and Ps.540,000 (US$13,950 and US$38,630); middle-income homes to range in price between Ps.541,000 and Ps.1,885,000 (US$38,702 and US$134,848); and residential homes to have a price above Ps.1,885,000 (US$134,848).  We currently focus on providing affordable entry-level and middle-income housing for our customers.  In 2008, we launched a new market focused on houses in tourist and resort areas.  This housing ranges in price between US$300,000 and US$950,000.

 

Our affordable entry-level developments range in size from 500 to 20,000 homes and are developed in stages typically comprising 300 homes each.  During 2011 our affordable entry-level homes had an average sale 

 

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price of approximately Ps.346,384 (US$24,779).  A typical affordable entry-level home consists of a kitchen, living, dining area, one to three bedrooms, and one bathroom.  We are able to deliver a completed horizontal affordable entry-level home in approximately seven to ten weeks or a completed vertical building of three to four levels in approximately 14 to 20 weeks, respectively, in each case, from the time a homebuyer obtains mortgage approval.  Currently, our largest affordable entry-level housing developments are located in the states of México, Jalisco, Baja California Sur, Baja California, Quintana Roo and Nuevo León.

 

Our middle-income developments range in size from 400 to 2,000 homes and are developed in stages typically comprising 200 homes each.  During 2011, our middle-income homes had an average sale price of approximately Ps.917,797 (US$65,657) as compared to Ps.1,086,000 (US$77,690) for the same period in 2010.  A typical middle-income home consists of a kitchen, dining room, living room, two or three bedrooms, and two bathrooms.  We are able to deliver a completed middle-income home in approximately 12 to 16 weeks from the time a homebuyer obtains mortgage approval.  For the year ended December 31, 2011, 14.9% of our revenues were attributable to sales of middle-income housing compared to 26.3% in the same period in 2010.

 

In early 2008, we commenced the development of the first stage of the new tourism/resort division called “Las Villas de Mexico.”  As part of our entry into the development of housing targeting the tourist market, our developments were initially located in the three major tourism centers in Mexico, namely Los Cabos, Puerto Vallarta and Cancun.  On July 20, 2010 our Tourism Division acquired 100% of the common stock of CT Commercial Properties, S. de R.L. de C.V. and CT Prop, S. de R.L. de C.V., and on December 31, 2010 acquired 100% of the common stock of CT Loreto, S. de R.L. de C.V., three companies that held real estate assets in the town of Loreto, State of Baja California Sur, Mexico.  The assets acquired by us include The Inn at Loreto Bay Hotel, The Loreto Bay Golf Course and approximately 32.6 hectares of land suitable for the construction of approximately 1,100 apartment and townhouse units.  Developments in each of the four markets will have three different housing styles:  residential villas of up to 2,150 square feet in typical lots of 3,230 square feet, townhouses of up to 1,725 square feet in typical lots of 2,690 square feet and apartments or condominiums of up to 1,500 square feet in buildings of up to six floors.  Each style has been developed to maximize space but provide privacy and avoid the perception of high density.  The developments in each area will feature architectural and landscaping elements unique to the geographical region.  Owners will have the opportunity to choose from among the different layouts and a wide variety of architectural and landscaping designs, as well as to tailor a property to their individual tastes.  Each development will feature either a private beach or country club (with priority golf club access), as well as a day spa, state of the art fitness facilities, full time concierge services, and space for exclusive commercial and service areas.

 

In targeting the new tourism/resort division to foreign investors who will not live at their residences full time, we have included a number of important amenities.  All of the developments will feature double gates, year round, 24 hour security, and a choice of two branded property services:  Casa Care and Opendoor.  Casa Care will handle the maintenance and bill payments for the property while residents are away.  The services include payment of monthly expenses, property management, and individually customized packages tailored to residents’ specific needs.  Opendoor will allow residents to share or rent their home within the Las Villas private property partnership.  Owners will be able to travel throughout Mexico to stay at the different Las Villas developments, use the amenities, and pay the same amount they would for their own residence.

 

We have pursued a conservative strategy for our tourism/resort division by launching the first phase of our development in Los Cabos.  To improve our profitability and product offering in our tourism division, we reduced the size of the initial phases, increased the density of the projects and retained a leading U.S. based firm that specializes in high end properties in Mexico to undertake all sales efforts.  Overall, we retain a positive outlook for this division, as Mexico becomes a top destination for Americans living outside the U.S.

 

**Land Reserves**

 

We have developed specific procedures to identify land that is suitable for our needs and perform ongoing market research to determine regional demand for housing.  Suitable land must be located near areas with sufficient demand, generally in areas where at least 500 homes can be built, and must be topographically amenable to housing development.  We also consider the feasibility of obtaining required governmental licenses, permits, authorizations, and adding necessary improvements and infrastructure, including sewage, roads and electricity in keeping with a 

 

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purchase price that will maximize margins within the limits of available mortgage financing.  We conduct engineering and environmental assessments, and in some cases urbanization and land composition studies, of land we consider for purchase in order to determine whether it is suitable for construction.  We budget the majority of our land purchases for the second half of the year to coincide with peak cash flow.  Historically, our total land reserves fluctuated between 36 to 42 months of future home deliveries depending upon the time of year.  As of December 31, 2011, we had land inventory for six years of future home deliveries.

 

We had total land reserves under title of approximately 79.3 million square meters, as of December 31, 2011, including primarily land reserves in Mexico and including approximately 2.3 million square meters of land reserves for our operations in Brazil.  Our land reserves include both titled land and land in the process of being titled.  We estimate we could build approximately 407,064 affordable entry-level homes, approximately 29,924 middle-income homes and approximately 2,222 tourism homes on our land reserves.  For 2012, we anticipate minimizing investments by continuing to follow a conservative replacement strategy for land bank acquisitions.

 

For our Mexican operations, we acquire land and plan the development of the homes we build through Proyectos Inmobiliarios de Culiacán, S.A. de C.V., or “PICSA”, Casas Beta del Centro, S. de R.L. de C.V., Casas Beta del Norte, S. de R.L. de C.V. and Casas Beta del Noroeste, S. de R.L. de C.V.  Desarrolladora de Casas del Noroeste, S.A. de C.V. or “DECANO” builds the developments that PICSA and Beta plan and promote.  We also receive executive and administrative services from Administradora PICSA, S.A. de C.V. and Altos Mandos de Negocios, S.A. de C.V.  Homex Atizapán, S.A. de C.V., which we operate and control with strategic partners in the region, owns one of our middle-income developments in the Mexico City area and Hogares del Noroeste, S.A. de C.V. owns middle-income developments in Hermosillo, Sonora.  Through AAA Homex Trust, a Mexican trust, we establish factoring facilities for the settlement of trade payables to many of our suppliers.  For our Brazilian operations, we acquire land and plan the development of the homes we build through Homex Brasil Participacoes Limitada’s subsidiaries.

 

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** **

**International Expansion**

 

***Brazil, Sao Jose dos Campos, Marilia and Campo Grande Affordable Entry- Level Projects***

 

During the first quarter of 2009, we initiated operations in Brazil with the construction of a 1,300 unit affordable entry-level development in the city of Sao Jose dos Campos, located northeast of Sao Paulo.  As of December 31, 2011 we had three projects under construction equivalent to approximately 5,820 homes in the cities of Sao Jose dos Campos, Marilia and Campo Grande.

 

For the years ended December 31, 2011 and 2010 we recognized revenues from our Brazilian operations of Ps.598.7 million and Ps. 173.3 million, respectively, which represented 2.76% and 0.88% of the consolidated revenues, respectively.  We generated a pre-tax loss of Ps. 711,389 in 2010 and Ps. 79,005 in 2009 from our Brazilian operations, in its first two years as a start-up. Even though we believe most international start-ups, including but not limited to housing-related businesses, take between three to four years to mature, we also believe our operations in Brazil have taken a longer than anticipated learning curve to adapt the Homex model to the Brazilian market. We also believe that our Brazilian operation is now leveraging on our previously-acquired know-how and coupled with the fundamentals of the affordable-housing market, makes the opportunity for us to do business in Brazil very attractive.   The pre-tax loss included an adjustment to decrease our Brazilian inventories to the lower of cost or net realizable value by Ps. 131,079 as of December 31, 2011.   As of December 31, 2011, our Brazilian inventories were Ps. 994,539, and are expected to be recovered over the coming two years.   Because our Brazilian operations have not realized a profit to date, our net operating loss carry-forwards for Brazilian tax purposes have been fully reserved for as of December 31, 2011 and 2010.

 

***Indian Joint Venture***

 

On December 15, 2010 we, through our subsidiary Homex India Private Limited, entered into an investment agreement with Kotak Real State Fund — I.  Pursuant to such investment agreement, and subject to conditions precedent related to obtaining all required permits for the construction of a real estate development of 2,000 middle-income housing in the city of Chennai, India, we will acquire all equity shares of KS Realty Constructions Private Limited (“KS Realty”), the company that owns the land on which the project will be developed.  The initial term for Kotak Real Estate Fund — I to comply with said conditions precedent was extended to June 30, 2012. As of December 31, 2011, the conditions precedent to be achieved in order to acquire all equity shares of KS Realty had not yet been realized.

 

**Infrastructure Division**

 

In 2009, we commenced the development of a new infrastructure division after being invited by the Mexican federal government to participate in the construction process of certain federal correctional facilities through contracts with the government as well as numerous other infrastructure projects for which we will act as a sub-contractor for federal and state governments.  We believe this division of our business is complementary to our homebuilding activities and will allow us to use our experience as a homebuilder to expand into other areas of construction and provide a new source of revenue.

 

In 2010, a government contract was awarded to our subsidiary CRS Morelos for the construction and service of a federal correctional facility in Morelos, Mexico, following a direct assignment process (*procedimiento de asignación directa*) pursuant to Article 41 paragraph IV of the Mexican Acquisitions, Leases and Public Sector Services Law (*Ley de Adquisiciones Arrendamientos y Servicios del Sector Público*) (the “Morelos Correctional Facility Contract”).  Furthermore, in 2011 we acquired as a strategic partner (*Empresa Clave*) through a participation of 24% common stock of Makobil, S. de R.L. de C.V. (“Makobil”)  a company that, in 2010, was also awarded a government contract for the construction and service of a federal correctional facility in Chiapas, Mexico, following a direct assignment process (the “Chiapas Correctional Facility Contract”, and together with the Morelos Correctional Facility Contract, the “Correctional Facility Contracts”).    We account for our 24% interest in Makobil using the equity method of accounting in our consolidated financial statements.

 

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On December 27, 2010, the Correctional Facility Contracts were entered into separately by Homex and Makobil with the Mexican Secretary of Public Security through its division of Prevention and Social Readjustment of the Mexican Secretary of Public Security (*Prevención y Readaptación Social de la Secretaría de Seguridad Pública*) to construct and operate, over a 20 year period, the previously described federal correctional facilities.  The construction phase of the Morelos Correctional Facility Contract has an estimated cost of Ps. 3.9 billion and the construction phase of the Chiapas Correctional Facility Contract has an estimated cost of Ps. 3.8 billion.  Pursuant to the Correctional Facility Contracts, CRS Morelos and Makobil will develop and provide ongoing services to both correctional facilities following the completion of construction, such as laundry, food services, landscaping, infrastructure up-keep and similar services.  These services will be provided by our newly created infrastructure division and will commence in 2013 after the delivery of the correctional facilities, which is expected to be in late-2012.  Certain of these services will be provided through subcontracts with third parties, as previously approved by the Mexican Secretary of Public Security.  Certain standard penalties can be assessed by the Mexican government if construction is not completed in a timely manner, although as of the date of this annual report, we believe the projects will be completed as scheduled. For the services provided by CRS Morelos and Makobil such entities will receive monthly payments from the Mexican Secretary of Public Security over a 20 year period starting in 2013.  These monthly payments will cover both the eventual amortization of the construction fee, plus fees for ongoing services rendered.

 

During the construction period, revenue related to the construction service of these projects is recorded using the percentage of completion method of accounting by both us and by Makobil.  Once the projects have begun operations, which are expected to commence in 2013, service revenues recognized by us and Makobil will be recognized on a monthly basis.  The entities will initially recognize an accounts receivable measured at its fair value related to prison services revenues, and subsequently this account receivable will be measured at its amortized cost recognizing service revenue and a portion of interests during the 20 year period , in accordance with IMFRS 17, *Service Contract Awards*.  The infrastructure division is expected to be a steady and non-cyclical source of revenues, and we believe it will be profitable on a long term basis.  As of December 31, 2011, we recorded revenues of Ps. 129,672 and cost of Ps. 98,141 in connection to the Morelos project.

 

To finance the construction of the two federal correctional facilities, CRS Morelos and Makobil obtained two separate financings from Banobras and other lenders.  On September 30, 2011, CRS Morelos and Makobil signed two project financing credit agreements in an aggregate principal amount of approximately Ps.3.9 and Ps. 3.8 billion, respectively, to initiate the construction process.   Both project financing loans are non-recourse to us, so we believe that our cash flow from our other divisions and projects will not be affected by the funding of the two federal correctional facilities and the Morelos loan will be treated as separate project financing line items in our Financial Statements when the drawdowns are made.  “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Prison Project Financing Loans.”  In addition, on December 31, 2011, our unrestricted subsidiary, Homex Infraestructura Concesiones, S.A. de C.V. (“Infraestructura Concesiones”), entered into a credit agreement with Ficade, S.A. de C.V., SOFOM, E.N.R., in an aggregate principal amount of Ps.400 million, bearing interest at a fixed annual rate of 15% and maturing on December 30, 2015.  Proceeds from this credit agreement will be used by Infraestructura Concesiones to finance, on behalf of CRS Morelos, certain capital investments and working capital, among other things.

 

Starting in 2013, principal and interest payments on those project financing loans will be serviced through the monthly payments that CRS Morelos and Makobil will separately receive from the Mexican federal government from the operation of the two federal correctional facilities.  The payments will total approximately Ps.1.08 billion for CRS Morelos and Ps. 1.07 billion for Makobil, respectively, on an annual basis for both correctional facilities.

 

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During 2011 and 2010, the infrastructure division contributed Ps. 856,535 and Ps.1,040,786, respectively, to our consolidated revenues.  As of December 2, 2011, our subsidiaries participating in the correctional facility construction and servicing have been designated by us as “unrestricted” for the purpose of our indentures and our dollar-denominated credit facilities, and we made a similar designation under certain other debt instruments.  The effect of this designation will be to generally eliminate the results of operations and financial position of these subsidiaries in computing compliance with many of the covenants contained in our debt instruments and to exempt such subsidiaries from certain other covenants and events of default.

 

**Collection Improvements**

 

We have implemented an electronic file capture system with Infonavit which enables us to upload customer information to Infonavit’s webpage directly from our sales offices.  Through this system, we are able to directly upload customers’ mortgage files to create a more expedited mortgage authorization process for our clients.  We believe we will also realize significant process efficiencies including a faster collection process from Infonavit.

 

During the third quarter of 2009, Fovissste implemented a factoring program with NAFIN, a Mexican National Development Bank (*Nacional Financiera, S.N.C.*) which provided Fovissste with a funding source to complement its housing programs.  Pursuant to this program, we are able to collect payments directly from NAFIN at an average 4% discount rather than following the regular payment process from Fovissste.  We are among the first home developers in Mexico to benefit from participation in this program.  We will continue to work closely with Fovissste in connection with this program, which we believe will help us to realize important efficiencies in the collection process with this entity.

 

**Business Strengths**

 

***Standardized Business Processes***

 

We have developed and refined scalable and standardized business processes that allow us to enter new markets rapidly and efficiently.  We have designed proprietary information technology systems that are intended to integrate and monitor our operations, including land acquisition, construction, payroll, purchasing, sales, quality control, financing, delivery, and maintenance.  Our systems connect every one of our branch locations and help us monitor and control the home building process, administer our customer relations, and oversee the financing process for our customers.  This standardized model drives our growth, geographic diversification, and profitability, and is an integral component of our culture.  During 2009, our proprietary information technology systems were successfully implemented at our pilot project at Sao Jose dos Campos, Brazil.  The replication of our business model is strongly supported by our integrated and proprietary IT system, which strategically supports sales and construction and monitors both in real time, helping us to attain more efficient and timely working capital management.  Our proprietary IT platform is used in and adapted to each of our divisions and projects.

 

***Efficient Working Capital Management***

 

Our standardized processes allow us to time the construction and delivery of our homes and payment to our suppliers efficiently, which has allowed us to reduce our borrowing needs and minimize working capital requirements.  We do not commence construction on a development stage until prospective buyers representing at least 10% of the planned number of homes in that stage have qualified to receive mortgage financing.  We seek to maintain a construction period of less than ten weeks for horizontal affordable entry-level housing, less than 16 weeks for horizontal middle-income housing and less than 20 weeks for vertical affordable entry-level housing by using our systems to maximize the efficiency of our standardized methods.  This process allows us to maximize our working capital by minimizing overhead costs and coordinating payables with receivables, which reduce our borrowing needs, minimizing our costs.

 

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***Geographic Diversification***

 

We believe that we are one of the most geographically diversified housing development companies in Mexico.  As of December 31, 2011, our operations included 142 developments in 35 cities located in 22 Mexican states, which represent 77.0% of Mexico’s population, according to the Mexican Institute of Statistics, Geography and Computer Sciences, or “INEGI” (*Instituto Nacional de Estadistica, Geografia e Informática*).  Many of our developments are located in markets where none of our major competitors currently operate.  In 2011, 30.1% of our revenues originated in Mexico City, the largest city in Mexico, 13.8% in the state of Jalisco and 9.6% in Baja California Sur.  The remaining revenues originated in 29 other cities.  We believe that this geographic diversification reduces our risk profile as compared to our less diversified competitors.  In addition, we have started to expand our business outside of Mexico, through the initiation of operations in Brazil.  See “Item 4. Information on the Company—Business Overview—International Expansion.”

 

***Experienced and Committed Management Team***

 

Eustaquio Tomás de Nicolás Gutiérrez, our Chairman, co-founded our predecessor in 1989, and Gerardo de Nicolás Gutiérrez, our CEO, joined us in 1993.  Our senior management team is comprised of executives with an average of 18 years of experience in their respective areas of responsibility.  Senior management owns an aggregate of approximately 23.11% of our common shares.  Consistent with our standardized business processes and geographic diversification, we delegate significant managerial responsibility to our seasoned team of branch managers.  Upon completion of a development, we typically relocate our branch managers to another development in order to capitalize on their significant experience.

 

***Focus on the Affordable Entry-Level Segment***

 

Our affordable entry-level segment continues to succeed primarily due to the availability of mortgage financing provided by the main mortgage suppliers in Mexico.  In 2011, Infonavit and Fovissste provided mortgage financing for 501,292 and 75,163 mortgages throughout Mexico, respectively.   Additionally, we continue to experience high demand for affordable entry-level homes in Mexico due to the large deficit of housing stock, a growing young population, high rates of urban growth, new household formation, and a decreasing number of occupants per home.  In Mexico, approximately 84.4% of the population earns a monthly income of approximately Ps.5,000 and we believe that an entry-level home valued at an average of Ps.346,000 is an affordable option for this population.  We believe our focus and expertise in the affordable entry-level segment has enabled us to increase our market share.  As of December 31, 2011, our market share in the affordable entry-level segment had remained relatively stable at 35.3% compared to 31.3% during the previous year.  In addition, 77.6% of revenues during 2011 were in the affordable entry-level segment.

 

**Business Strategies**

 

***Maintain a Conservative Financial Position***

 

We operate our business with the goal of reducing our exposure to interest rate and financing risk, thereby maintaining a conservative financial position.  We begin construction only when an approved homebuyer has qualified for a mortgage and, if applicable, made a down payment, thereby reducing our working capital needs.  We believe the resulting financial flexibility enhances our ability to respond quickly to market opportunities and lessens any negative effects that might result from a downturn in the economy.

 

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***Strategic Growth in Tourism Housing***

 

On February 7, 2008, we announced plans to strengthen our position in the tourism market.  We plan to achieve this goal by developing communities in key tourist destinations within Mexico targeted to potential customers in the United States and Canada.  See “Item 4. Information on the Company—Business Overview—Our Products.”

 

The first stage of development includes launching sales of two “Las Villas de Mexico” developments in the cities of Cancún and Los Cabos.  These private communities, with superior product and service offerings, will reflect the architecture and culture of Mexico adapted to the customs and living traditions of our target markets.  The developments will include residential villas, townhouses, and apartments.

 

Initially, we decided to curtail development of our tourism division due to the impact of the economic slowdown in the United States and Canada during 2008 and 2009.  During the latter part of 2009, Mexico became more attractive to foreigners and demand in the tourism market increased slightly as a result in part of the sharp decline in the value of the Peso compared to the U.S. Dollar, Canadian Dollar and Euro during the final quarter of 2008.  During 2010, demand in the tourism market showed improvements as a result of a sustained although slow recovery in both the United States and Mexican economies.  In 2010, Homex acquired real estate in Loreto, Baja California Sur, which we intend to develop as either apartments or townhouses.  For the year ended December 31, 2011 and the year ended December 31, 2010, we recognized revenues from our tourism operations of Ps.55,557 and Ps. 64,931, respectively, which represented 0.3% and 0.3% of the consolidated revenues, respectively.

 

***Maintain Appropriate and Balanced Land Reserves***

 

We believe our ability to identify, acquire and improve land is critical to our success.  Because the success of our operations depends, among other things, on managing our land reserves efficiently, we continually review our portfolio and seek new development opportunities.  By pursuing land investment opportunities, as of December 31, 2011, we had land inventory for 6 years of future home deliveries.  For 2012, we anticipate minimizing investments by following a conservative replacement strategy for land bank acquisitions.  In addition, investments have been minimized due to an increased focus on the development of vertical housing.  We target having an average land inventory equal to 6 years of future home deliveries.

 

We generally purchase large parcels of land in order to amortize our acquisition and infrastructure costs over a large number of homes, minimize competition, and take advantage of economies of scale.  As of December 31, 2011, we had total land reserves under title of approximately 79.3 million square meters, primarily in Mexico and including approximately 2.3 million square meters of land reserves in Brazil.  We estimate we could build approximately 407,064 affordable entry-level homes, approximately 29,924 middle-income homes and approximately 2,222 tourism homes on our land reserves.

 

***Continue to Build and Contribute to Successful Communities***

 

We seek to foster brand loyalty by enhancing the quality and value of our communities through building spaces for schools, day care facilities, parks and churches, and by providing other social services to residents of the housing we develop.  We are committed to fulfilling our customers’ needs by responding to and meeting their demands.  In 2008, we responded to our clients’ needs by launching a customization program that allows our clients to choose from a full array of custom options, adding a personal touch to clients’ homes.  At the same time, we seek to become the best employer to our employees through training and educational opportunities.  We seek to hire and retain talented employees and invest in training our workforce at all levels by offering programs such as middle school equivalency courses for our construction laborers.  We are committed to becoming the best customer to our suppliers by offering various payment alternatives and opportunities for cooperative growth, and through our

 

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factoring structure and other initiatives, including electronic ordering and payment systems.  We believe that these factors make us a preferred home builder, employer and customer and ultimately enhance our overall business.

 

During 2010 and 2011, we continued to expand our “Homex Community” concept initially launched in 2008.  The Homex Community is an initiative designed to improve the urban planning of our communities to offer our customers integrated communities attractive to a younger population.  We believe a younger demographic prefers to live closer to the city, in an environment where families can enjoy a living experience that promotes social interaction and shopping, and where services and entertainment are convenient.  The Homex Community is a concept for constructing cities which applies modern urban development models, as well as innovative techniques for social development.  Through Homex Communities, we are primarily focused on improving the quality of life as well as enhancing the appraised value of both home and projects.  Homex Communities include commercial areas, special and general services and recreational spaces that facilitate social interaction.

 

In addition, Homex Communities participate in Conavi and Infonavit initiatives designed to promote green homes and orderly urban planning through increased project density resulting from vertical construction.  Some of these benefits include access to more and larger subsidies for customers; exclusive budget of subsidies and higher priority to mortgage applications linked to vertical housing and permanent registration with Infonavit for mortgage applications connected to vertical housing.  During 2011, we introduced vertical prototypes of three to four levels in our affordable entry-level projects.  This was accomplished through the use of our cutting edge aluminum mold construction technology.  As of December 31, 2011, vertical prototypes represented approximately 40% of total Homex homes under construction, as compared to less than 30% over the same period in 2010.  We believe we are one of the first developers to actively implement vertical prototypes in many Mexican cities, which we believe has helped us drive sales.

 

***Mold Construction System***

 

We employ cutting edge construction technology based on aluminum molds that we use in some, but not all, of our projects.  This technology has improved the efficiency of the construction process.  Among the advantages of the molds are:

 

·                                          shorter construction time;

 

·                                          better quality and reduced reprocessing;

 

·                                          the ability to re-use the same mold for several prototypes of homes, with an estimated life of 2,000 usages per mold;

 

·                                          versatility, because it permits construction ranging from simple floors to apartment buildings using the same system;

 

·                                          labor savings;

 

·                                          compatibility among international suppliers;

 

·                                          eco friendliness because, unlike traditional construction methods, mold construction does not utilize timber and therefore reduces our carbon footprint and the impact of our operations on deforestation; and

 

·                                          durability, due to the use of concrete.

 

During the year ended December 31, 2011 we used this technology in 83% of our home construction.  We intend to continue using this technology in the future.

 

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***Our Markets***

 

We operate in geographically diverse markets throughout Mexico, from Tijuana in the north to Tapachula in the south, including 142 developments in 35 cities and 22 states as of December 31, 2011, which states represent 77% of Mexico’s population, according to INEGI.  For the year ended December 31, 2011, 30.1% of our revenues originated in the Mexico Ciry Metropolitan Area, the largest city in Mexico, 13.8% in the state of Jalisco and 9.6% in Baja California Sur.  The remaining revenues originated in other cities.  As a diversified homebuilder our national footprint covers:  (i) capital cities, where we benefit from a stable demand from government employees; (ii) industrial cities, including Puebla, Monterrey, Guanajuato, Saltillo and Chihuahua, where we benefit from Mexico’s export oriented economy; and (iii) tourism and service oriented cities.  As of December 31, 2011, México’s service activities accounted for 27% of the country’s GDP, and this type of industry employed approximately 32% of the active population subscribed at the social security service.  We believe our geographic diversity within Mexico has enabled to mitigate our risk exposure to any one region.

 

We seek to continue operations in markets where we have a strong presence and to expand into underserved markets where demand for housing is high.

 

***Total Homes Sold***

 

The following table sets forth information on our historical sales by country and state.  During 2009, 92.4% and 7.6% of the homes we closed were affordable entry-level and middle-income, respectively, during 2010, 89.2% and 10.8%of the homes closed were affordable entry-level and middle-income, respectively, and during 2011, 93.2% and 6.8% of the homes closed were affordable entry-level and middle-income, respectively.

 

In 2011 and 2010, we recognized revenues outside Mexico in connection with 1,065 and 282 affordable entry-level homes, respectively, in the cities of Sao Jose dos Campos, Marilia and Campo Grande, Brazil.

 

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Presented below is a summary of homes closed:

 
| ** **            | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|
| ** **            | ** ** | **2011**                                   | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
| **State**             | ** ** | **Affordable entry-level**            | ** ** | **Middle-   income** | ** ** | **Affordable   entry-level** | ** ** | **Middle-   income** | ** ** | **Affordable   entry-level** | ** ** | **Middle-   income** | ** ** | **Affordable   entry-level** | ** ** | **Middle-   income** | ** ** |
| México           |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Baja California       |       | 4,005                                      |       | 518 |   | 2,797 |   | 419 |   | 3,648 |   | 206 |   | 1,081 |   | 235 |   |
| Baja California Sur   |       | 4,430                                      |       | 16 |   | 2,899 |   | 71 |   | 1,168 |   | 131 |   | 2,030 |   | 193 |   |
| Chiapas               |       | —                                     |       | — |   | 974 |   | 104 |   | 1,427 |   | 232 |   | 2,305 |   | 249 |   |
| Chihuahua             |       | 941                                        |       | — |   | 650 |   | 36 |   | 98 |   | 58 |   | 365 |   | 105 |   |
| Coahuila              |       | 720                                        |       | — |   | 2,295 |   | — |   | 1,490 |   | 30 |   | 8 |   | — |   |
| Durango               |       | 752                                        |       | — |   | 746 |   | — |   | 1,318 |   | — |   | — |   | — |   |
| Guanajuato            |       | 80                                         |       | 257 |   | 235 |   | 287 |   | 1 |   | 134 |   | 535 |   | 97 |   |
| Estado de México |       | 14,798                                     |       | 1,060 |   | 7,926 |   | 722 |   | 13,919 |   | 898 |   | 10,237 |   | 978 |   |
| Guerrero              |       | —                                     |       | — |   | 23 |   | 413 |   | 333 |   | 72 |   | 1,364 |   | 210 |   |
| Hidalgo               |       | 366                                        |       | 55 |   | 48 |   | 252 |   | — |   | 1 |   | — |   | 99 |   |
| Jalisco               |       | 6,905                                      |       | 292 |   | 5,680 |   | 323 |   | 4,608 |   | 526 |   | 5,797 |   | 440 |   |
| Michoacán        |       | 994                                        |       | 42 |   | 768 |   | 136 |   | 811 |   | 15 |   | 854 |   | 272 |   |
| Morelos               |       | 982                                        |       | — |   | 839 |   | 312 |   | 936 |   | 164 |   | — |   | — |   |
| Nuevo León       |       | 3,056                                      |       | 197 |   | 4,354 |   | 616 |   | 5,205 |   | 255 |   | 4,790 |   | 63 |   |
| Oaxaca                |       | —                                     |       | 597 |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Puebla                |       | 494                                        |       | — |   | 1,427 |   | — |   | 1,945 |   | — |   | 1,104 |   | 7 |   |
| Querétaro        |       | 1,277                                      |       | — |   | 1,109 |   | — |   | 1,125 |   | — |   | 1,226 |   | — |   |
| Quintana Roo          |       | 3,862                                      |       | 301 |   | 1 |   | 584 |   | 81 |   | 265 |   | 339 |   | — |   |
| Sinaloa               |       | 298                                        |       | 135 |   | 913 |   | 135 |   | 1,114 |   | 62 |   | 1,621 |   | 130 |   |
| Sonora                |       | 328                                        |       | 74 |   | 1,057 |   | 116 |   | 97 |   | 227 |   | 718 |   | 64 |   |
| Tamaulipas            |       | 99                                         |       | — |   | 330 |   | 147 |   | 61 |   | 56 |   | 763 |   | 50 |   |
| Veracruz              |       | 3,482                                      |       | 8 |   | 4,226 |   | 95 |   | 3,135 |   | 151 |   | 3,288 |   | 383 |   |
| Subtotal              |       | 47,869                                     |       | 3,552 |   | 39,297 |   | 4,768 |   | 42,520 |   | 3,483 |   | 38,425 |   | 3,575 |   |
| Brazil                |       | 1,065                                      |       | — |   | 282 |   | — |   | 13 |   | — |   | — |   | — |   |
| Total                 |       | 48,934                                     |       | 3,552 |   | 39,579 |   | 4,768 |   | 42,533 |   | 3,483 |   | 38,425 |   | 3.575 |   |

 

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**THE MEXICAN HOUSING MARKET**

 

We have obtained the following information from public sources, including publications and materials from the Mexican Ministry of Social Development, or “SEDESOL” (*Secretaría de Desarrollo Social*), the Mexican Population Council, or CONAPO (*Consejo Nacional de Población*), INEGI, Infonavit, SHF, the Mexican Chamber of Industrial Housing Promoters and Development, or “CANADEVI” (*Cámara Nacional de la Industria de Desarrollo y Promoción de la Vivienda*), CONAVI (*Comisión Nacional de Vivienda*) and SOFTEC, S.C.  Although we believe our sources and estimates are reliable, we have not independently verified the information or data from third parties and cannot guarantee the accuracy or completeness of such information from third parties or the information and data we have obtained ourselves.

 

**General**

 

The housing market in Mexico is influenced by several social, economic, industrial, and political factors, including demographics, housing supply, market segmentation, government policy, and available financing.

 

**Demographics**

 

National demographic trends drive demand for housing in Mexico.  These trends include:

 

·                                          sustained growth of a relatively young population;

 

·                                          a high rate of new household formation;

 

·                                          a high urban area growth rate; and

 

·                                          a decrease in number of occupants per home.

 

According to INEGI, Mexico had a population of approximately 114.3 million in 2011 and estimates that this will grow to 121.9 million in 2050. Conapo estimates that there will be approximately 29.3 million households in Mexico in 2012 and that there will be approximately 29.9 million households by year-end 2013, approximately 32.9 million by year-end 2018 and approximately 34.0 million by year-end 2020.

 

Mexico experienced a period of particularly high population growth during the 1970s and 1980s.  The children born during this boom are contributing to the current increased demand for housing.  The target consumer group for our homes is typically between 25 and 50 years old.  In 2010, the 20-50 year-old age group represented approximately 49.7 million people or 43.5% of Mexico’s population.  Conapo estimates that by 2020, this age group will represent 54.0 million or 46.8% of Mexico’s population.  The size stability of this group is expected to contribute to increased housing demand in Mexico.

 

**Housing Supply**

 

In 2011, SHF’s housing statistics indicated there was a shortage of 9.04 million homes in Mexico.  This figure included:

 

·                                          1.6 million new homes to accommodate multiple households currently living in a single home and households living in homes that must be replaced; and

 

·                                          7.4 million substandard homes in need of extensive repair and possible replacement.

 

SHF estimates that the growth of the Mexican population will generate a sustained demand for new homes of at least 603,508 units during 2012.  To address the immediate shortage of 9.04 million homes as well as the anticipated new demand, the Mexican government committed to financing and/or building at least 1.0 million units in 2012.

 

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* *

*Instituto de Vivienda del Distrito Federal (“INVI”)*

 

INVI is a public, decentralized institution for the public administration in the Federal District (*Distrito Federal*), legally autonomous with its own working capital; its functions are the design, proposal, promotion, coordination, execution and evaluation of policies and housing programs focused mainly on families with limited economic resources, all of which is regulated within the General Development for the Federal District Program (*Programa General de Desarrollo del Distrito Federal*) derived from the Housing Law for the Federal District (*Ley de Vivienda del Distrito Federal*).

 

The mission of INVI is to satisfy the need for housing of families with limited economic resources located in the Federal District through the granting of mortgages for affordable entry-level homes, with the goal of creating 192,544 new housing units in the years 2007-2012.  For the year ended December 31, 2011, INVI had granted 1,870 mortgages for new homes, and 8,067 credits for home improvements.

 

**Market Segments**

 

In general, Mexico’s developer-built (as opposed to self-built) housing market is divided into four segments according to cost:  affordable entry-level, middle-income, residential and tourism.  The developer-built housing market includes homes built by contractors and developers, which are generally financed by mortgage providers.  These homes are built with official permits, have municipal services, and are located on land that is registered and titled by the homebuyer.  Developers must obtain clear title to the land, proper zoning permits and any necessary financing commitments from lenders in addition to installing infrastructure.

 

Mexico’s developer-built housing market is categorized in the table below:

 

**Housing Market Segments**

 
| **Segment**              | ** ** | **Cost**                                                     | ** ** | **Size**                                        | ** ** | **Characteristics**                                                                                                                         |
|--------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------|
| Affordable   entry-level |       | Between   Ps.195,000 and Ps.540,000 (US$13,950-US$38,630)    |       | 45   m2-76 m2 (484 sq. ft. -818 sq. ft.)   |       | Kitchen;   living, dining area; 1-3 bedrooms; 1 bath; parking; titled; all utilities   available                                            |
|                     |       |                                                         |       |                                            |       |                                                                                                                                        |
| Middle-income            |       | Between   Ps.541,000 and Ps.1,885,000 (US$38,702-US$134,848) |       | 76   m2-172 m2 (818 sq. ft.-1,851 sq. ft.) |       | Kitchen,   family room, living, dining room; 2-4 bedrooms; 2-4 baths; 1-4 parking;   service quarters; titled; all utilities available      |
|                     |       |                                                         |       |                                            |       |                                                                                                                                        |
| Residential              |       | More   than Ps.1,885,000 (US$134,848)                        |       | more   than 172 m2 (1,851 sq. ft.)         |       | Kitchen;   family room; living room; dining room; 3-4 bedrooms; 3-5 baths; 3-6 parking;   service quarters; titled; all utilities available |
|                     |       |                                                         |       |                                            |       |                                                                                                                                        |
| Tourism                  |       | Between   US$300,000 and US$950,000                          |       | Between   1,500 sq. ft. and 2,150 sq. ft.       |       | Kitchen;   family room; living room; dining room; 3-4 bedrooms; 3-5 baths; 3-6 parking;   service quarters; titled; all utilities available |

 

**Government Policy and Available Financing**

 

The size of the developer-built market depends to a great extent on the availability of mortgage financing.  Over the last 20 years, Mexico has experienced fluctuations in the availability of mortgage financing, particularly from private sector sources.  As a result, the supply of affordable entry-level and middle-income housing has also remained low during this period.

 

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During the 1980s, Mexican government policy focused on encouraging investment by the private sector, reducing development costs, and stimulating construction.  Mexican Housing Funds provided mortgage loan guarantees and direct payment and savings procedures.  In 1994, Mexico experienced an economic crisis that led to the devaluation of the Mexican peso and a steep rise in interest rates.  Smaller housing development companies went out of business, and the industry experienced a sharp fall in home sales between 1995 and 1996 due to diminished commercial bank lending.

 

Following the 1994 economic crisis, government policy sought to counterbalance the shortage of available financing and the increases in interest rates that resulted by focusing primarily on providing mortgages and construction financing via Mexican Housing Funds in the affordable entry-level segment.  Government funds no longer provided development or sales activities and functioned instead as true savings-and-loan programs.  Legislative reforms with regard to community-owned agricultural territories (*ejidos*), which made it possible to sell these formerly restricted properties, also increased the potential supply of land available for development.  During this period, the government authorized the creation of Sofoles, which underwrite mortgages with funds and guarantees provided by government agencies, private investment, national, foreign or development bank loans, or through the Mexican capital markets.  Furthermore, the government encouraged industry growth and private sector lending by supporting consolidation in the housing development industry.

 

Between 1997 and 1998, home sales stabilized, growing slightly in 1997 due to improving economic conditions.  During 1999 and 2000, mortgage financing increased due to stabilizing economic conditions.  The level of available financing has continued to grow as a result of Mexican government policies.  President Calderón’s administration’s goal is to finance six million mortgages during his administration.  As of 2011, 5.9 million mortgages have been financed since Calderón took office in 2006, satisfying 98% of the administration’s goal.  President Calderón’s administration has supported four objectives for the homebuilding industry, as originally set forth by President Fox:

 

·                  make more adequate land available, including infrastructure such as sewage and utilities;

 

·                  increase deregulation of the housing industry;

 

·                  encourage consolidation within the industry; and

 

·                  increase financing opportunities available to qualified homebuyers.

 

In addition, the current administration has set further objectives for the homebuilding industry:

 

·                  provide up-front subsidies to low-income population;

 

·                  promote new financial instruments to provide mortgage access to non-affiliated workers; and

 

·                  provide incentives for a rapid transition into the construction of better planned housing projects which include sustainability guidelines.

 

In conjunction with these efforts, the Mexican legislature amended existing tax regulations in order to allow individuals to deduct a portion of their mortgage loan interest payments from their personal income taxes beginning in 2003, which the administration expects will lead to increased mortgage financing activity.

 

The Mexican government implemented a new program to meet the housing needs of families in the very low end of the economic spectrum, a sector of the population whose monthly income would otherwise be insufficient for them to be able to afford the lower valued homes in the market.  This program demonstrates the commitment of Mexican federal government to improving the quality of life for families in Mexico by providing affordable housing.

 

The actions taken by President Calderón’s administration to accelerate the housing and mortgage supply in Mexico has resulted in the emergence of an active housing industry supported by solid private and public institutions.  The developer-built market has continued to expand due to higher levels of available mortgage financing, especially through Mexican Housing Funds such as Infonavit, SHF and Fovissste.

 

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President Calderón has indicated that he will continue to support and promote the housing industry on three main lines:  urban development, very affordable housing and home improvement.  His administration’s goal is for the Mexican Housing Funds to provide seven million mortgages by 2012.  Infonavit, for example, plans to provide 2.9 million mortgages in the five years following December 2011.

 

In early 2009, the Mexican federal government announced a stimulus bill, the “National Agreement in Favor of Personal Finance and Employment” (*Acuerdo Nacional en Favor de la Economía Familiar y el Empleo*), that contains assistance for the homebuilding industry.  Under the bill, the government increased aid from Ps.5.2 billion to Ps.7.4 billion for a federal housing subsidy program designed to provide assistance to low-income families.

 

In 2011, Conavi launched the “2 by 1” housing program, which is a joint program between state governments and the federal government to enhance government subsidies to the housing industry.  During September 2011, the Mexican federal government, through SHF announced a new program to incentivize financial institutions to provide mortgages to persons not affiliated with Infonavit or Fovissste.  The first year of operation of this program is intended to start in 2012 and approximately 20,000 mortgages are intended to be granted through this program.

 

Changes in the availability of mortgage financing from government agencies could adversely affect us.  See “Item 3. Key Information—Risk Factors—Risk Factors Related to Our Business—Decreases in the Amount of Mortgage Financing Provided by Mexican Housing Funds on Which We Depend, or Disbursement Delays, Could Result in a Decrease in Our Sales and Revenues.”

 

**Sources of Mortgage Financing**

 

Principal sources providing mortgage financing for Mexico’s housing market are:

 

·                  mortgage providers financed by mandatory employer or member contributions to public funds, including Infonavit and Fovissste, serving private and public sector employees, respectively, and;

 

·                  SHF, which provides financing to credit-qualified homebuyers through financial intermediaries such as commercial banks, Sofoles and Sofomes through funds from the World Bank, the Mexican government, and its own portfolio;

 

·                  commercial banks and Sofoles using their own funds; and

 

·                  direct subsidies from public housing agencies and state housing trusts, including the Mexican Fund for Popular Housing, or “FONHAPO” (*Fideicomiso Fondo Nacional de Habitaciones Populares*).

 

According to Conavi, from 2000 to 2010 mortgage providers in Mexico granted 6,489,487 mortgages, a 12.9% compound annual growth rate from 331,880 in 2000 to 1,142,035 in 2010.  For the year ended December 31, 2010, a total of 1,142,035 mortgages, 845,229 of which were for new homes, were granted by all public and private entities involved in the Mexican housing market, according to Conavi.  As of December 31, 2011, mortgage providers in Mexico had granted a total of 1,009,650 mortgages.

 

***INFONAVIT***

 

Infonavit was established by the Mexican government, labor unions and private sector employees in 1972 as a social service entity to administer the National Housing Fund for the benefit of private sector employees.  Infonavit provides financing, primarily for affordable entry-level housing, to credit-qualified homebuyers.  Infonavit makes loans for home construction, acquisition or improvement, to workers whose individual monthly earnings are generally less than five times the minimum monthly wage.  It is funded through payroll contributions by private sector employers on behalf of their employees equal to 5.0% of their employees’ gross wages, recovery of the granted mortgages and to a lesser extent from mortgage-backed securities that Infonavit issues in the market from time to time.

 

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Homebuyers qualify for Infonavit loans according to a point system whereby points are awarded based on income, age, amount of monthly contributions, and number of dependents, among other factors.  The total loan amount may equal 100% of the cost of a home, up to a maximum of between 300 and 350 times  the minimum monthly general wage in Mexico City (*Salario Mínimo General Mensual del Distrito Federal*), depending on geographical region.  For 2012, the daily minimum wage in the Federal District is Ps.62.33 (US$4.63).  Repayment is calculated based on the borrower’s wages, for a term of up to 30 years, and is made by direct wage deductions by employers.  Infonavit generally grants loans at variable annual interest rates, which are indexed to inflation and based on a borrower’s income.

 

Infonavit has a program called “Apoyo Infonavit” that is directed at assisting higher-income borrowers obtain mortgage financing.  Apoyo Infonavit customers can use the amounts contributed via payroll deductions to their Infonavit accounts as collateral for mortgage loans held by private sector lenders.  In addition, these customers can apply their monthly Infonavit contributions toward the monthly mortgage payments owed to private sector lenders.

 

In 2007, Infonavit inaugurated a program called Cofinanciamiento, or “Cofinavit”, which is meant to assist high-income borrowers in a manner similar to the Apoyo Infonavit program.  This new program enables Cofinavit customers to obtain a mortgage loan granted by Infonavit in conjunction with a commercial bank or a Sofol.  In addition, the customers can use their individual contributions in their Infonavit accounts as part of the financing or as collateral for the mortgage loan.  Apoyo Infonavit and Cofinavit do not have a maximum limit on the value of the home to be financed.

 

Infonavit also introduced a new program called “Infonavit Total” targeted at workers who qualify for the traditional Infonavit program.  Through Infonavit Total, the loan recipient agrees to a partial assignment of the Infonavit mortgage loan to a commercial bank.  The terms of the Infonavit Total mortgage loan are substantially equal to the traditional Infonavit loan, and Infonavit continues to administer and service the loans under this program, yet Infonavit shares the funding burden and the economic risks and benefits of the portfolio with the commercial bank participating in the program.

 

Early in 2009, Infonavit launched a guarantee program (*Garantía Infonavit*) designed to provide assistance to borrowers who have lost their job, borrowers who have had their wages decreased, and borrowers suffering economic difficulties due to age or sickness.  The program provides mortgage relief to borrowers who have lost their jobs by:  (1) allowing for a one-year grace period with no interest or principal payment; (2) providing partial unemployment insurance, where borrowers pay a minimum required payment of 10.64 times the daily minimum wage in Mexico City and receive a 50% discount on their accrued interest payments; and (3) providing a payment protection program, where borrowers pay a minimum fee of 2% of their monthly mortgage and are protected for up to 6 months every 5 years.  The guarantee program also provides relief to borrowers who have had their wages reduced by allowing these borrowers to take advantage of mortgage payment reductions of up to 25% monthly, reductions corresponding to the borrowers’ new salary, and other adjustments depending on the borrowers’ individual circumstances.

 

Additionally, the guarantee program provides assistance to borrowers seeking to prepay their mortgages by offering a 30% discount for prepayment of mortgages entered into prior to July 31, 1995, and a 10% discount for mortgages in good standing that are at least two years old.

 

Infonavit provided approximately 43.1% of all home mortgage financing in Mexico during the year ended December 31, 2010.  As of December 31, 2011, Infonavit provided approximately 48.9% of all home mortgage financing in Mexico.

 

Infonavit has agreed to guarantee mortgage loans granted to employees by commercial banks and Sofoles in the case of job loss.  Infonavit expects to continue to modernize its operations and increase available financing by focusing on reducing payment defaults, participating more closely with the private sector, and implementing a voluntary savings program.  Infonavit has also recently begun securitizing its loan portfolio in order to contribute to the growth of the secondary mortgage market in Mexico and expand its available sources of funds.

 

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The forecasted Infonavit lending goal for 2012-2017 period has been recently announced as follows:

 
| **Year** | ** ** | **Mortgages** | ** ** |
|----------|------------|---------------|------------|
| 2012     |       | 490,000       |       |
| 2013     |       | 520,000       |       |
| 2014     |       | 540,000       |       |
| 2015     |       | 560,000       |       |
| 2016     |       | 580,000       |       |
| 2017     |       | 590,000       |       |

 

***FOVISSSTE***

 

The Mexican government established Fovissste in 1972 as a pension fund on behalf of public sector employees to provide financing for affordable housing.  Fovissste obtains funds from Mexican government contributions equal to 5% of public sector employee wages, recovery of granted mortgages and increasingly from mortgage-backed securities that Fovissste issues from time to time. The Mexican government administers Fovissste similarly to Infonavit and permits Fovissste to co-finance mortgage loans with private sector lenders in order to maximize available funds.

 

Fovissste mortgage financing is typically available for housing ranging from the affordable entry-level segment through the middle-income segment.  Eligible applicants can obtain Fovissste mortgage loans to purchase new or used homes, remodel or repair existing homes, finance construction of self-built homes, and make down payments on homes not financed through Fovissste.  Fovissste loans are granted based on seniority within the public sector and allocated on a first-come first-served basis that also takes into account wages, number of dependents, and geographic location.  Once the program establishes a number of approved applicants, it allocates mortgage loans by state based on historical demand.

 

Fovissste generally grants loans at variable interest rates, indexed to inflation, for a maximum amount of approximately Ps.803,544 (US$57,483).  Repayment is calculated based on the borrower’s wages, for a term of up to 30 years, and is made by direct wage deductions.

 

Fovissste’s forecasted lending goal for 2011 was to grant approximately 90,000 mortgages.  As of December 31, 2011, Fovissste granted only 75,163 mortgages due to additional steps in its mortgage authorization process that have increased the time to formalize mortgages.  In addition, the lottery system used by Fovissste has affected its timely allocation of mortgages.  Fovissste provided approximately 7.3% of all home mortgage financing in Mexico during the year ended December 31, 2011.

 

***SHF***

 

SHF was created in 2002 as a public sector development bank.  SHF obtains funds from the World Bank, the Mexican government, and SHF’s own portfolio and provides financing through intermediaries such as commercial banks and Sofoles.  In turn, financial intermediaries administer SHF-sponsored mortgage loans, including disbursement and servicing.

 

Traditionally, SHF has been an important source of construction financing for housing developers by providing loans to commercial banks, Sofoles and Sofomes (which in turn make direct bridge loans to developers).  In lieu of funding bridge loans for homes with a higher purchase price of up to UDI 500,000 (approximately Ps.2,345,658 or US$167,802 as of December 31, 2011), SHF will provide guarantees to support efforts by commercial banks and Sofoles to raise capital for the financing of bridge loans to build such homes.

 

In addition, SHF makes financing available to commercial banks and Sofoles for the purpose of providing individual home mortgages for affordable entry-level and middle-income homes.  Historically, SHF has only financed a total amount equal to 80% to 90% of a home’s value, generally for a maximum of approximately UDI 

 

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500,000 (approximately Ps.2,345,658 or US$167,802 as of December 31, 2011).  Beginning in 2005, however, in order to maximize the availability of affordable entry-level mortgages, SHF has replaced its financing of mortgages for homes with a purchase price greater than UDI 150,000 (approximately Ps.703,697 or US$50,341 as of December 31, 2011) with credit enhancements and loan guarantees for commercial banks and Sofoles to support their capital-raising efforts for the financing of such individual mortgage loans.  In terms of total homes financed, SHF provided approximately 1.6% of all home mortgage financing in Mexico during the year ended December 31, 2011.

 

In connection with its mortgage financing operations, SHF also took an active role in issuing mortgage backed securities (*Bonos Respaldados Por Hipotecas*  or “BORHIS”) as well as market making in these securities during 2011.  In addition, SHF reviews issuances of BORHIS to ensure that they comply with market eligibility requirements and criteria, and provides information and analysis regarding historical information, risk of default, and market evolution concerning BORHIS issuances.  By engaging in market-making activities and providing mortgage financing to underserved segments of the population, SHF also provided liquidity to the Mexican housing market.  Additionally, SHF has committed to focus its strategy on the promotion of Self-Sustainable Housing Environments (*Desarrollos Urbanos Integrales Sustentales*) and in the re-population of urban areas.

 

More recently, during September 2011, the Mexican federal government, through SHF, launched a new program to incentivize financial institutions to provide mortgages to persons not affiliated with Infonavit or Fovissste.  The first year of operation of this program is intended to start in 2012 and approximately 20,000 mortgages are intended to be granted through this program.

 

***Commercial Banks, Sofoles and Sofomes***

 

Commercial banks generally target the middle-income and residential markets while Sofoles generally target the affordable entry-level housing market and a portion of the middle-income housing market using SHF financing, and the balance of the middle-income housing market as well as the residential housing market using other sources of funding.  Sofoles and Sofomes provide mortgage loans to borrowers using funds from securities offerings on the Mexican stock market, loans from Mexican and foreign lenders, their own portfolios, and public agencies such as SHF.  They are not allowed to accept deposits from the public.

 

Although commercial banks, Sofoles and Sofomes provide mortgage financing directly to homebuyers, the financing is commonly coordinated through the home builder.  In order to obtain funding for construction, a home builder must submit proposals, including evidence of title to the land to be developed, architectural plans, necessary licenses and permits, and market studies demonstrating demand for the proposed housing.  On approval, lenders provide construction financing and disburse funds at each stage of the housing development.

 

Commercial bank, Sofol and Sofom mortgage loans generally mature in 10 to 20 years, and payments are sometimes adjusted for increases in the monthly minimum wage and rates of inflation.

 

Commercial banks, Sofoles and Sofomes provided approximately 10.8% of all home mortgage financing in Mexico during the year ended December 31, 2011 according to Conavi.

 

***Other Public Housing Agencies***

 

Other public housing agencies such as FONHAPO, Conavi and OREVIS (*Organismos Estatales de Vivienda*), operate at the federal and local levels and target mainly non-salaried workers earning less than 25 times the minimum annual wage, often through direct subsidies.  These agencies lend directly to organizations such as state and municipal housing authorities, housing cooperatives, and credit unions representing low-income beneficiaries, as well as to individual borrowers.  Financing is made available to both the self-built and developer-built markets.  The total amount of available funds depends on the Mexican government budget.

 

According to Conavi, other public housing agencies provided approximately 31.4% of all mortgage financing in Mexico during the year ended December 31, 2011.

 

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**Competition**

 

The Mexican home development and construction industry is highly fragmented and includes a large number of regional participants and a few companies with a more national market presence, including publicly traded companies like Corporación GEO, S.A.B. de C.V., Consorcio ARA, S.A.B. de C.V., SARE, S.A.B. de C.V.  and URBI Desarrollos Urbanos, S.A.B. de C.V.  “Item 3. Key Information—Risk Factors—Competition from other home-builders could result in a decrease in our sales and revenues.”

 

All things considered, we estimate that approximately 1,304 different companies operate new home developments in Mexico.  The following table sets forth the approximate operating information of the largest home builders in Mexico with which we compete based on public information and our estimates:

 
| **Competitor** | ** ** | **2011 Home Sales** | ** ** | **2011 Sales   (millions of Ps.)** | ** ** | **Location in Mexico**           | ** ** |
|----------------|------------|-------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------|------------|
| GEO            |       | 57,865                        |       | 21,162.9                                          |       | National                                   |       |
| URBI           |       | 34,515                        |       | 16,329.9                                          |       | North,   Mexico City and Guadalajara areas |       |
| ARA            |       | 15,142                        |       | 6,837.3                                           |       | National                                   |       |
| SARE           |       | 2,030                         |       | 1,580.1                                           |       | Mexico   City region                       |       |

 

Source:  Companies’ 2011 fourth quarter financial releases.

 

We believe that we are well-positioned to capture future growth opportunities in the affordable entry-level and middle-income housing segments because of our principal business strengths and strategies, as described above.

 

**Seasonality**

 

The Mexican affordable entry-level housing market experiences significant seasonality during the year, principally due to the operational and lending cycles of Infonavit and Fovissste.  The programs, budgets, and changes in the authorized policies of these mortgage lenders are approved during the first quarter of the year.  Payment by these lenders for home deliveries is slow at the beginning of the year and increases gradually through the second and third quarters with a rapid acceleration in the fourth quarter.  We build and deliver affordable entry-level homes based on the seasonality of this cycle because we do not begin construction of these homes until a mortgage provider commits mortgage financing to a qualified homebuyer in a particular development.  Accordingly, we also tend to recognize significantly higher levels of revenue in the third and fourth quarters and our working capital and debt levels tend to be highest in the first and second quarters.  We budget the majority of our purchases for the second half of the year to coincide with peak cash flows.  We anticipate that our quarterly results of operations and our level of indebtedness will continue to experience variability from quarter to quarter in the future.  Mortgage commitments from commercial banks, Sofoles and Sofomes for middle-income housing are generally not subject to significant seasonality.  We do not expect significant changes in the overall seasonality of our results.

 

**Marketing**

 

We conduct advertising and promotional campaigns principally through print media, including billboards, fliers, and brochures designed specifically for the target market, as well as local radio and television.  Moreover, we complement these campaigns with additional advertising efforts, including booths at shopping centers and other high traffic areas, to promote open houses and other events.  In some locations, we work with the business to business (which allows us to present local employers and other groups with information on our communities to their employees or members) and our massive sales program (which consists in organizing massive events in which the benefits of acquiring a Homex home are explained in a communal recreation gathering, and prospects are contacted).  We rely on positive word-of-mouth from satisfied customers for a large percentage of our sales.

 

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**Sales**

 

In general, we make sales either at sales offices or model homes.  Using data we gather through our marketing efforts, we open sales offices in areas where we identify demand.  As of December 31, 2011, we operated 66 sales offices, one in each of the developments we have established.  Similarly, once we have purchased land and planned a development in regions we have identified as underserved, we build and furnish model homes to display to prospective customers.  We have sales offices in each of our branches where trained corporate sales representatives are available to provide customers with relevant information about our products, including financing, technical development characteristics, and information about our competitors and their products.  We provide the same information through trained corporate sales representatives at model homes.  We compensate our sales agents on an exclusively performance-based commission method, typically 2.3% of the total home price.

 

We provide our customers with assistance through our sales departments from the moment they contact us, during the process of obtaining financing, and through the steps of establishing title to their new home.  We have specialized sales areas in each of our offices that advise customers on financing options, collecting necessary documentation, and applying for a loan.  We also help to design down payment plans tailored to each customer’s economic situation.  Once houses are sold and delivered, our specialized teams are available to respond to technical questions or problems during the two-year warranty period following the delivery.

 

**Customer Financing**

 

We assist qualified homebuyers in obtaining mortgage financing by participating in all the stages of applying for and securing mortgage loans from housing funds, commercial banks, Sofomes and Sofoles.

 

For sales of affordable entry-level homes, the process of obtaining customer financing generally occurs as follows:

 

·                  a potential homebuyer enters into an agreement by signing a purchase application and furnishes the necessary documentation to us;

 

·                  we review the documentation to determine whether all the requirements of the relevant mortgage provider have been met;

 

·                  we create an electronic credit file for each homebuyer and submit it to the relevant mortgage provider for approval;

 

·                  we supervise and administer each client file via our database through all the phases of its processing and arrange for signing the required documentation once approval has been obtained;

 

·                  the homebuyer makes any required down payment;

 

·                  once the home has been completed, the homebuyer signs the deed of transfer of title and the mortgage agreement; and

 

·                  we deliver the home to the homebuyer and register the title.

 

For sales of middle-income homes, the process of obtaining customer financing occurs as above, except that we collect a down payment of between 10% to 25% of a home’s total sale price immediately following the homebuyer’s execution of the purchase application, and the homebuyer signs the deed of transfer of title and the mortgage agreement when the home is at least 95% complete.

 

In all cases, the procedures and requirements for obtaining mortgage financing are determined by the mortgage provider.

 

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We have not experienced and do not expect to experience losses resulting from rejections by homebuyers of their purchase applications because we generally have been able to locate other buyers immediately in these cases.  However, we cannot guarantee that we will be able to continue to find replacement buyers in the future.

 

The purchase price of the homes we sell is denominated in pesos and is subject to an upward adjustment for the effects of inflation, except for our tourism homes which purchase price is denominated in US dollars.  In cases where the price of a home is subject to adjustment and increases due to inflation, any difference is payable by the homebuyer.

 

**Design**

 

Most of the designs that we use in our construction are developed internally.  Our architects and engineers are trained to design structures that maximize efficiency and minimize production costs.  Our standardized modular designs, which focus on quality and size of construction, allow us to build our homes quickly and efficiently.  By allowing our customers to upgrade finishing details on a custom basis after homes are delivered, we experience savings that allow us to build larger homes than our competitors.

 

We use advanced computer-assisted design systems and combine market research data in order to plan potential developments.  We believe that our comprehensive design and planning systems, which are intended to reduce costs, maintain competitive prices, and increase sales, constitute a significant competitive advantage in the affordable entry-level housing market.  In order to further enhance the residential nature of our communities, we often design our developments as gated communities, install infrastructure for security surveillance, and arrange street layouts to foster road safety.  We continue to invest in the development of design and planning construction systems to further reduce costs and continue to meet clients’ needs.

 

**Construction**

 

We manage the construction of each development directly, coordinate the activities of our laborers and suppliers, oversee quality and cost controls, and ensure compliance with zoning and building codes.  We have developed efficient, durable, and low-cost construction techniques, based on standardized tasks, which we are able to replicate at all of our developments.  We pay each laborer according to the number of tasks completed.  We generally subcontract preliminary site work and infrastructure development such as roads, sewage and utilities.  Currently, we also subcontract the construction of a limited number of multi-unit middle-income apartment buildings in the Mexico City Metropolitan Area.

 

Our designs are based on modular forms with defined parameters at each stage of construction, which are closely controlled by our central information technology systems.  Our methods result in low construction costs and high quality products.  We use substantially similar materials to build our middle-income homes, with higher quality components for certain finishing details and fixtures.

 

During 2007, we acquired cutting-edge construction technology based on aluminum molds; this technology has improved the efficiency of the construction process.  Among the advantages are shorter construction time; better quality and reduced reprocessing; re-use of the same mold for several prototypes of homes, with an estimated life of 2,000 usages per mold; versatility, because the molds permit construction ranging from simple floors to apartment buildings using the same system; labor savings; compatibility among international suppliers; eco-friendliness because, unlike traditional construction methods, mold construction does not utilize timber; and durability, due to the use of concrete.  During the year ended December 31, 2011 we used this technology in the construction of 83% of our home construction.

 

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**Materials and Suppliers**

 

We maintain strict control over our building materials through a sophisticated electronic barcode identification system that tracks deliveries and monitors all uses of supplies.  In general, we reduce costs by negotiating supply arrangements at the corporate level for the basic materials used in the construction of our homes, including concrete, concrete block, steel, windows, doors, roof tiles, and plumbing fixtures.  We take advantage of economies of scale in contracting for materials and services in every situation and seek to establish excellent working relationships with our suppliers.  In order to better manage our working capital, we also arrange lines of credit for many of our suppliers through a factoring program sponsored by Nacional Financiera, S.N.C., a Mexican government-owned development bank, as well as certain additional financial institutions.  We guarantee a portion of the financing provided to some of our suppliers for materials we buy from them during construction and repay these lenders directly with funds received when homes are delivered, which allows us to ensure suppliers are paid on time while minimizing our need to secure construction financing.

 

Our main suppliers include Cemex México, S.A. de C.V., Aceros Turia, S.A. de C.V., Home Depot Mexico, S. de R.L.  de C.V., Promotora de Obras Civiles Sigma, S.A. de C.V., Edenred Mexico, S.A. de C.V., Distribuidora Tamex, S.A. de C.V., Compañía Sherwin Williams, S.A. de C.V., Drago de Mexico, S.A. de C.V., Fanosa, S.A. de C.V., Mexicana de Laminación, S.A. de C.V., Construcciones Lizarraga, S.A. de C.V., Sanitarios, Azulejos y Recubrimientos, S.A. de C.V., KS Tuberia, S.A. de C.V., Emsco, S.A. de C.V., Capeco, S.A. de C.V., Cuprum, S.A. de C.V., Prefabricados Realiza del Norte, S.A. de C.V., Prodar, S.A. de C.V., Grupo Chilpa, S.A. de C.V.  and Construcción, Dirección y Control de Obra, S.A. de C.V.

 

Substantially all of the materials that we use are manufactured in Mexico and are delivered to our sites from the supplier’s local facilities on a time-efficient basis designed to keep low levels of inventory on hand.  Our principal materials and supplies are readily available from multiple sources and we have not experienced any shortages or supply interruptions.

 

**Labor**

 

As of December 31, 2011 we had a total of approximately 11,299 employees, of whom 10,419 were employed in Mexico, 828 in Brazil and 52 in India.  Our total employees at December 31, 2010 and 2009 were 23,085 and 12,295, respectively.  Approximately 62% of our employees as of December 31, 2011 were administrative and managerial personnel.

 

We hire local labor forces for specific housing developments in each region that we operate in, as well as experienced in-house personnel for supervisory and highly skilled work.  We have an efficient information technology system that controls payroll costs.  Our systems, using bar-coded identification cards, track the number of tasks completed by each employee according to the parameters of our modular construction designs, assign salaries according to tasks and homes completed, and award incentives for each stage of the development based on team performance.  We also streamline governmental and social security costs for our workforce using a strict attendance control system that captures information fed via our system through workers’ identification cards.

 

We have implemented programs throughout Homex to assist our employees in obtaining elementary and middle-school equivalency degrees.  We believe that these programs enhance our ability to attract and retain high quality employees.

 

As of December 31, 2011, all of our construction employees were members of a national labor union of construction workers.  The economic terms of our collective bargaining agreements are negotiated on an annual basis.  All other terms and conditions of these agreements are negotiated every other year.  We believe that we have an excellent working relationship with our workforce.  We have not experienced a labor strike or any significant labor-related delay to date.

 

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**Customer Services and Warranties**

 

We hold insurance that covers defects, hidden or visible, during construction and which also covers the warranty period provided by us to homebuyers.  As mentioned in Note 25 to our consolidated financial statements, we provide a two-year warranty to all of our customers.  This warranty could apply to damages derived either from our operations or from defects in materials supplied by third parties (such as electrical installations, plumbing, gas, waterproofing, etc.) or other circumstances outside our control.

 

For manufacturing defects, we do not recognize a warranty accrual in our consolidated financial statements since we obtain a security bond from our contractors that covers the claims related to the quality of their work.  We withhold a guarantee deposit from them, which is reimbursed to our contractors once the warranty for manufacturing defects period expires.  Generally, the warranty period lasts for one year after the contractors complete their work and covers any visible or hidden defect.  We believe that at December 31, 2011 we had no unrecorded losses with respect to these warranties.

 

**Community Services**

 

We seek to foster brand loyalty after construction is complete, by strengthening community relations in the developments we build.  As part of agreements with potential customers and governmental authorities, we donate land and build community infrastructure such as schools, day-care centers, churches, and green areas, often amounting to 10% to 15% of the total land area of the developments we construct.  For a period of 18 months, we also provide for community development specialists to assist in promoting community relations in certain developments by organizing neighborhood events such as competitions for beautiful homes and gardens.

 

**Risk Management**

 

We are exposed both to general entrepreneurial risks and to industry-specific risks.  Key areas of exposure are capacity and utilization risks, strategy-related risks, political risks, operational risks, procurement risks, wage policy risks, IT risks and financial and treasury management risks.  Our risk management strategy permits the exploitation of business opportunities that present themselves as long as a risk-return ratio in line with market conditions can be realized and the associated risks are an appropriate and sustainable component value creation.

 

Sensible management of entrepreneurial opportunities and business risks is an integral part of our corporate management and decision-making.  Consequently, our system for the timely detection and management of risk consists of a large number of components that are systematically embedded in our entire organization and operational structure.  There is no autonomous organizational structure; instead, risk management is regarded as a primary responsibility of the managers of all business entities and of the process and project managers.  One of their management responsibilities is to ensure that the staff is also integrated into the risk management system.

 

The Risk Management Committee ensures, on behalf of the board of directors, that risks are identified and assessed continuously across functions and processes.  It is responsible for the system’s constant further refinement and for verifying its effectiveness.  It reports to the board of directors.  The Committee further develops the basic principles of risk policy and oversees their compliance.  It also communicates our risk policy, defines the documentation requirements and initiates any necessary reviews of specific aspects of the risk management system by the internal audit department.

 

All major potential risks to our profitability or continued existence are documented in a risk map.  This risk map is regularly updated and extended.  Potential interdependencies between different risks are duly noted.  This measure is designed to ensure that the timely detection, limitation and elimination of these risk systems are regularly reviewed and reinforced.

 

Over and above appropriate insurance solutions, contingency plans tailored to each individual risk situation are in place for the purpose of combating and controlling risks.  An analysis of risks, together with the possibilities 

 

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of limiting and overcoming them, also forms an integral part of our strategy development process and is incorporated into our operational planning.

 

**Regulation**

 

***General***

 

Our operations are subject to Mexican federal, state and local regulation as a corporation doing business in Mexico.  Some of the most relevant statutes, regulations and agencies that govern our operations as a housing development company include the following:

 

·                  the Mexican General Human Settlements Law (*Ley General de Asentamientos Humanos*), which regulates urban development, planning and zoning and delegates to the Mexico City and state governments the authority to promulgate urban development laws and regulations within their jurisdiction, including the Urban Development**Law (*Ley de Desarrollo Urbano*) of each state where we operate, which regulates state urban development.

 

·                  the Mexican Federal Housing Law (*Ley Federal de Vivienda*), which coordinates the activities of states, municipalities and the private sector within the context of the housing industry.  As in effect, the Federal Housing Law seeks to encourage and promote the construction of affordable entry-level housing.

 

·                  local Building Regulations (*Reglamentos de Construcción*) and urban development plans promulgated by the states, Mexico City, and local municipalities, which control building construction, establish the required licenses and permits, and define local zoning and land-use requirements.

 

·                  the Mexican Infonavit Law (*Ley del Instituto del Fondo Nacional de la Vivienda para los Trabajadores*), which requires that financing provided by Infonavit be granted only to homebuyers of registered developers that participate in public Infonavit bidding processes.

 

·                  the Federal Mortgage Society Organizational Law (*Ley Orgánica de la Sociedad Hipotecaria Federal*), which encourages the development of the primary and secondary home mortgage markets by authorizing SHF to grant home mortgage loans pursuant to the Federal Mortgage Society General Financing Conditions (*Condiciones Generales de Financiamiento de Sociedad Hipotecaria Federal*), which regulate the general terms and conditions on which these loans may be granted.

 

·                  the Mexican Federal Consumer Protection Law (*Ley Federal de Protección al Consumidor*), which promotes and protects consumer rights and seeks to establish equality and legal certainty in relationships between consumers and commercial suppliers.

 

On July 29, 2010, Article 17 of the Mexican Constitution was amended in order to authorize class actions to be brought in federal courts in connection with civil actions on matters related, among others, with consumer protection, economic competition, and environmental law. Consequently, on August 30, 2011, the Federal Code of Civil Procedure (*Código Federal de Procedimientos Civiles*), the Federal Antitrust Law (*Ley Federal de Competencia Ecónomica*), the Federal Law for Consumer Protection (*Ley Federal de Protección al Consumidor*) and the General Environmental Protection Law (*Ley General del Equilibrio Ecológico y la Protrección al Medio Ambiente*) were amended to incorporate class actions; such amendments will be effective as of March 1, 2012.

 

***Environmental***

 

Our operations are subject to the Mexican General Environmental Protection Law (*Ley General del Equilibrio Ecológico y la Protección al Ambiente*), the Mexican General Waste Prevention and Management Law (*Ley General para la Prevención y Gestión Integral de los Residuos*), and the related regulations.  The Mexican Ministry of the Environment and Natural Resources (*Secretaría del Medio Ambiente y Recursos Naturales*) and the Mexican Federal Environmental Protection Agency (*Procuraduría Federal de Protección al Ambiente*) are the federal government authorities responsible for enforcing environmental regulations in Mexico, including 

 

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environmental impact studies, which are required for obtaining land-use permits, investigations and audits, as well as to provide guidelines and procedures regarding the generation, handling, disposal and treatment of hazardous and non-hazardous waste.

 

We are committed to conducting our business operations in a manner that minimizes their environmental impact.  Our business processes include procedures that are intended to ensure compliance with the Mexican General Environmental Protection Law, the Mexican General Waste Prevention and Management Law, and the related regulations.  In accordance with these laws, we build our homes with aluminum mold metal instead of wooden beams and treat waste water.  We plant trees on the land of homes we sell and provide seedlings on land that we donate to our communities.  Our internal teams conduct environmental studies for each project and produce environmental reports that are intended to identify environmental issues and assist in project planning in order to minimize adverse environmental effects, such as limiting the felling of trees during the process of urbanizing rural land for use in our developments.  Our costs include the cost of complying with applicable environmental regulations.  To date, the cost of complying and monitoring compliance with environmental regulations applicable to us has been immaterial.

 

**Significant Subsidiaries**

 

We are a holding company and conduct our operations through subsidiaries.  The table below sets forth our principal subsidiaries as of December 31, 2011 and December 31, 2010:

 
| ** **                                                                   | ** ** | **Jurisdiction   of** | ** ** | **Ownership   percentage** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------|------------|------------|------------|
| **Name of Company**                                                | ** ** | **Incorporation**     | ** ** | **2011**                   | ** ** | **2010**   | ** ** | **Products/Services** | ** ** |
| Proyectos   Inmobiliarios de Culiacán, S.A. de C.V. (“PICSA”) |       | Mexico                |       | 100                        | %          | 100        | %          | Promotion, design, construction and sale of   entry-level, middle-income and upper-income housing |   |
|                                                                         |       |                  |       |                       |       |       |       |   |   |
| Nacional   Financiera, S.N.C. Fid. del Fideicomiso AAA Homex 80284           |       | Mexico                |       | 100                        | %          | 100        | %          | Financial services |   |
|                                                                         |       |                  |       |                       |       |       |       |   |   |
| Administradora Picsa,   S.A. de C.V.                                         |       | Mexico                |       | 100                        | %          | 100        | %          | Administrative services and promotion related to   the construction industry |   |
|                                                                         |       |                  |       |                       |       |       |       |   |   |
| Altos Mandos de   Negocios, S.A. de C.V.                                     |       | Mexico                |       | 100                        | %          | 100        | %          | Administrative services |   |
|                                                                         |       |                  |       |                       |       |       |       |   |   |
| Aerohomex, S.A. de   C.V.                                                    |       | Mexico                |       | 100                        | %          | 100        | %          | Air transportation and lease services |   |
|                                                                         |       |                  |       |                       |       |       |       |   |   |
| Desarrolladora de   Casas del Noroeste, S.A. de C.V. (DECANO)                |       | Mexico                |       | 100                        | %          | 100        | %          | Construction and development of housing complexes |   |
|                                                                         |       |                  |       |                       |       |       |       |   |   |
| Homex Atizapán, S.A.   de C.V.                                          |       | Mexico                |       | 67                         | %          | 67         | %          | Promotion, design, construction and sale of   entry-level and middle-income housing |   |
|                                                                         |       |                  |       |                       |       |       |       |   |   |
| Casas Beta del   Centro, S. de R.L. de C.V.                                  |       | Mexico                |       | 100                        | %          | 100        | %          | Promotion, design, construction and sale of |   |

 

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| ** **                                                     | ** ** | **Jurisdiction   of** | ** ** | **Ownership   percentage** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------|------------|-----------------------|------------|----------------------------|------------|------------|------------|
| **Name of Company**                                  | ** ** | **Incorporation**     | ** ** | **2011**                   | ** ** | **2010**   | ** ** | **Products/Services** | ** ** |
| (1)                                                            |       |                  |       |                       |       |       |       | entry-level and middle-income housing |   |
|                                                           |       |                  |       |                       |       |       |       |   |   |
| Casas Beta del   Norte, S. de R.L. de C.V.                     |       | Mexico                |       | 100                        | %          | 100        | %          | Promotion, design, construction and sale of   entry-level housing |   |
|                                                           |       |                  |       |                       |       |       |       |   |   |
| Casas Beta del   Noroeste, S. de R.L. de C.V.                  |       | Mexico                |       | 100                        | %          | 100        | %          | Promotion, design, construction and sale of   entry-level housing |   |
|                                                           |       |                  |       |                       |       |       |       |   |   |
| Hogares del   Noroeste, S.A. de C.V. (2)                       |       | Mexico                |       | 50                         | %          | 50         | %          | Promotion, design, construction and sale of   entry-level and middle-income housing |   |
|                                                           |       |                  |       |                       |       |       |       |   |   |
| Opción Homex, S.A.   de C.V.                              |       | Mexico                |       | 100                        | %          | 100        | %          | Sale, lease and acquisition of properties |   |
|                                                           |       |                  |       |                       |       |       |       |   |   |
| Homex Amuéblate, S.A.   de C.V.                           |       | Mexico                |       | 100                        | %          | 100        | %          | Sale of housing-related products |   |
|                                                           |       |                  |       |                       |       |       |       |   |   |
| Homex Global, S.A.   de C.V. (3)                               |       | Mexico                |       | 100                        | %          | 100        | %          | Holding company for foreign investments |   |
|                                                           |       |                  |       |                       |       |       |       |   |   |
| Sofhomex,   S.A. de C.V. S.F.O.M. E.R.                         |       | Mexico                |       | 100                        | %          | 100        | %          | Financial services |   |
|                                                           |       |                  |       |                       |       |       |       |   |   |
| Nacional   Financiera, S.N.C. Fid. del Fideicomiso Homex 80584 |       | Mexico                |       | 100                        | %          | 100        | %          | Employee stock option plan administration |   |
|                                                           |       |                  |       |                       |       |       |       |   |   |
| HXMTD, S.A. de C.V.                                            |       | Mexico                |       | 100                        | %          | 100        | %          | Promotion, design, construction and sale of   upper-income tourism housing |   |
|                                                           |       |                  |       |                       |       |       |       |   |   |
| Homex Central   Marcaria, S.A. de C.V.                         |       | Mexico                |       | 100                        | %          | 100        | %          | Administration of industrial and intellectual   property |   |
|                                                           |       |                  |       |                       |       |       |       |   |   |
| Homex   Infraestructura, S.A. de C.V. (4)                      |       | Mexico                |       | 100                        | %          | 100        | %          | Design and construction service for public or   private services |   |
|                                                           |       |                  |       |                       |       |       |       |   |   |
| CRS Morelos, S.A.   de C.V.                                    |       | Mexico                |       | 100                        | %          | 100        | %          | Construction services to government |   |
|                                                           |       |                  |       |                       |       |       |       |   |   |
| CT Prop, S. de R.L.   de C.V. (5)                              |       | Mexico                |       | 100                        | %          | 100        | %          | Promotion, design, construction and sale of   tourism |   |

 

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| ** **                          | ** ** | **Jurisdiction   of** | ** ** | **Ownership   percentage** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|-----------------------|------------|----------------------------|------------|------------|------------|
| **Name of Company**       | ** ** | **Incorporation**     | ** ** | **2011**                   | ** ** | **2010**   | ** ** | **Products/Services** | ** ** |
|                                |       |                  |       |                       |       |       |       | housing |   |
|                                |       |                  |       |                       |       |       |       |   |   |
| CT Loreto, S. de   R.L. de C.V. (5) |       | Mexico                |       | 100                        | %          | 100        | %          | Promotion, design, construction and sale of   tourism housing |   |

 

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(1)                     Casas Beta del Centro, S.  de R.L.  de C.V.  (“CBC”) owns 100% of the outstanding stock of Super Abastos Centrales y Comerciales, S.A. de C.V. and 50% of the outstanding stock of Promotora Residencial Huehuetoca, S.A. de C.V.  (“Huehuetoca”), which are engaged in the promotion, design, construction and sale of entry-level housing.  Huehuetoca is fully consolidated in accordance with MFRS B-8, Consolidated or Combined Financial Statements, since we have control over this subsidiary.  Through October 20, 2009, CBC owned 100% of the outstanding stock of Comercializadora Cántaros, S.A. de C.V.  That company was sold to a third party on that date.

 

(2)                     Hogares del Noroeste, S.  A.  de C.V.  is a 50% owned and controlled subsidiary of Desarrolladora Homex, S.A.B. de C.V., which is engaged in the promotion, design, construction and sale of entry-level and middle-income housing.  This entity is fully consolidated in accordance with the guidance included in Bulletin B-8 *Consolidated and Combined Financial Statements and Valuation of Permanent Investments*, since we have control of this subsidiary.

 

(3)                     Homex Global, S.A. de C.V, (“Homex Global”) owns the outstanding stock of the following companies:

 

(a)          Homex Global owns 100% of the outstanding stock of Homex India Private Limited, a subsidiary located in India and that is to perform the construction and development of entry-level and middle-income housing in India.  This company has had no significant operations to date.

 

(b)         Homex Global owned 15% of the outstanding stock of Orascom Housing Communities “S.A.E.”, a company located in Cairo, Egypt that performs the construction and development of entry-level and middle-income housing in Egypt.  Pursuant the application of MFRS C-7, *Investments in Associates and Other Permanent Investments*, effective January 1, 2009, this company was no longer considered an associate but another permanent investment.  On December 31, 2009 we sold our total investment in this company to a third party.

 

(c)          Homex Global owns 100% of the outstanding stock of Desarrolladora de Sudamérica, S.A. de C.V., a Mexican company that had no operations during the periods presented herein.

 

(d)         Homex Global owns 100% of the outstanding common stock of Homex Brasil Participacoes Limitada (“Homex Brasil”), through its subsidiaries Éxito Construcoes e Participacoes Limitada and HMX Empreendimentos Imobiliarios Limitada.  Through twenty three subsidiaries, Homex Brasil performs construction and development of entry-level housing in Sao Paulo, Brazil.  During 2009, Homex Brasil started operations in Brazil with a 1,300-unit affordable entry-level development in Sao Jose dos Campos, northeast of Sao Paulo.  During the years ended December 31, 2011 and 2010 we recognized revenues from its Brazilian operations of Ps.598,678 and Ps. 173,272, respectively.

 

(e)          Effective June 2011, Homex Global owns 100% of the outstanding stock of MCA Incorporacoes, S.A., a subsidiary located in Brazil that entered into a simple and guaranteed debentures issuance, through the issuance of 1,279 debentures (See Note 12).

 

(f)            Starting in December 2011, Homex Global owns 55% of the outstanding stock of Homex Alesayi Company Limited, a subsidiary located in Saudi Arabia and that is to perform the construction and development of entry-level and middle-income housing in Saudi Arabia. This company had no operations during 2011.

 

(4)                     Homex Infraestructura, S.A. de C.V. owns 100% of the outstanding common stock of Homex Infraestructura Concesiones, S.A. de C.V. and Homex Infraestructura Obras, S.A. de C.V., which are engaged in the design and construction for public or private services.

 

(5)                     These companies were acquired in 2010.  See “Item 4. Information on the Company—Business Overview—Our Products.” and Note 4 to our consolidated financial statements.  CT Prop, S. de R.L. de C.V. owns 100% of the outstanding stock of CT Commercial Properties, S. de R.L. de C.V.

 

**ITEM 4A. Unresolved Staff Comments.**

 

Not applicable.

 

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**ITEM 5.****Operating and Financial Review and Prospects.**

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion should be read in conjunction with our audited consolidated financial statements and their accompanying notes included elsewhere herein.  Our consolidated financial statements are stated in thousands of historical pesos.  Other financial information included in this annual report, unless otherwise specified, is also stated in historical pesos.  Our consolidated financial statements have been prepared in accordance with Mexican Financial Reporting Standards (“MFRS”), which differ in certain respects from US GAAP as described in Notes 28 through 30 to our audited consolidated financial statements.

 

This annual report contains forward-looking statements that reflect our plans, estimates and beliefs.  Our actual results could differ materially from those discussed in the forward-looking statements.  Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this annual report, particularly in “Forward-Looking Statements” and “Item 3.  Key Information.”

 

***Critical Accounting Estimates***

 

Our consolidated financial statements have been prepared in accordance with MFRS, which require that we make certain estimates and use certain assumptions that affect the amounts reported in our consolidated financial statements and the accompanying notes.  Although these estimates are based on our best knowledge of current events, actual results may differ.  Our critical accounting estimates are listed below:

 

***Revenue and Cost Recognition***

 

Pursuant to MFRS, prior to January 1, 2010, we recognized revenues from the sale of homes based on the percentage-of-completion method of accounting, which required us to recognize revenues measured by the percentage of actual costs incurred to total estimated costs for each development and each project.

 

In December 2008, IMFRS 14 was issued by the CINIF to complement Bulletin D-7, Construction Agreements and Manufacturing of Certain Capital Assets.  This Interpretation is applicable to the recognition of revenues, costs and expenses for all entities that undertake the construction of capital assets directly or through sub-contractors.

 

Due to the application of this Interpretation, effective January 1, 2010, we stopped recognizing our revenues, costs and expenses based on the percentage-of-completion method.  At that date, we began to recognize them based on methods mentioned in this Interpretation. Revenue and cost recognition more closely approximate what is often referred to as a “completed contract method” (or the “deposit accounting method”) in which revenues, costs and expenses should be recognized when all of the following conditions are fulfilled:

 

·                                          we have transferred the control to the homebuyer, in other words, the significant risks and benefits due to the property or the assets ownership;

 

·                                          we do not retain any continued participation of the actual management of the sold assets, in the usual grade associated with the property, nor do we retain the effective control of the sold assets;

 

·                                          the revenues amount can be estimated reliably;

 

·                                          it is probable that we will receive the economic benefits associated with the transaction; and

 

·                                          the costs and expenses incurred or to be incurred related to the transaction can be estimated reliably.

 

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The above conditions are typically met upon the completion of construction, and the signing us, the customer and (if applicable) the lender of the legal contracts and deeds of ownership (*escrituras*) over the property. At that time, the customer would have the legal right to take possession of the home.

 

This Interpretation was adopted as of January 1, 2010, with retrospective application to prior accounting periods presented with these 2010 consolidated financial statements as required by MFRS B-1 *Accounting Changes and Error Correction*.

 

We consolidate the results of the Morelos Correctional Facility Contract.  Revenue recognition for that contract is discussed in Note 3b to our consolidated financial statements.  As discussed in Note 3n to our consolidated financial statements, we apply the equity method of accounting over our 24% ownership interest in Makobil, who in turn consolidates the results for the Chiapas Correctional Facility Contract.  For an additional description of revenue recognition with respect to our federal correctional facilities, see “Item 4. Information on the Company—Business Overview— Infrastructure Division.”

 

Pursuant to US GAAP, we apply ASC No. 360.20 for the substantial majority of our revenues.  Revenues under US GAAP’s ASC 360.20 are recognized when all the following events occur:  a) a sale is consummated; b) a significant initial down payment is received (when applicable); and c) the earnings process is complete and the collection of any remaining receivables is reasonably assured.

 

The principal remaining differences between ASC 360.20 and IMFRS 14 relate to:  (1) revenues from FOVI and INVI financial institutions, which are typically recognized for MFRS purposes before they are recognized for US GAAP purposes, since for US GAAP purposes they do not yet comply with one of the ASC conditions above, specifically that a significant down payment is received, that is typically more than 10%, and (2) the deferral and thus recognition on a cash basis for US GAAP of unsecured home-buyer receivables.

 

The remaining variations in our gross profit and gross profit margin between MFRS and US GAAP principally relate to differences in amounts included in cost of sales.  Under MFRS certain financing costs are included in interest expense that are considered a component of cost of sales for US GAAP.  Furthermore, under both MFRS and US GAAP, certain other financing costs are capitalized and ultimately charged to cost of sales when inventory is sold.  However, the method and amounts capitalized varies between MFRS and US GAAP and can result in varying gross profit margins and thus operating profits.

 

In 2011, revenues under MFRS were Ps.21,853 million while revenues under US GAAP were Ps.21,761 million.  In 2010, revenues under MFRS were Ps. 19,652 million while revenues under US GAAP were Ps. 19,629 million.  For a further discussion of revenue recognition policies under US GAAP, refer to Notes 28 through 30 to our consolidated financial statements.

 

Total units closed and recognized as MFRS revenue in 2011 were 52,486 units (44,347 in 2010) compared to 52,592 units closed under US GAAP in 2011 (44,277 in 2010).  Total units closed of 52,486 in 2011 represents an 18.4% increase compared to total units closed in 2010 of 44,347.  The increase is attributable primarily due to our strategy of focusing on home prototypes in the affordable entry-level which produce higher revenue and profit margins.

 

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***Impairment evaluation of inventories***

 

We review the carrying amounts of our inventories annually or earlier when an impairment indicator suggests that such amounts might not be recoverable.  If events or changes in circumstances indicate that the carrying value may not be recoverable an assessment is undertaken to determine whether carrying values are in excess of their net realizable value.  Net realizable value is the estimated sales price in the ordinary course of business, less estimated costs for completion and effecting a sale.

 

Net realizable value for development properties is based on internal project evaluations where assumptions are made about the project’s expected revenues and expenses.  Valuation of these projects is performed according to lower cost of market principle.  If the carrying amount of a project exceeds the net realizable value, a provision is recorded to reflect the inventory at the recoverable amount in the balance sheet.  Impairment losses are recognized in the consolidated income statement.

 

During the year ended December 31, 2011, we adjusted the value of our inventory in-process at each our three Brazilian projects whereby total inventory balances were written down by approximately Ps. 131,079.

 

***Income Taxes***

 

Income tax expense, calculated as the higher of IETU or regular income tax, is recorded in the results of the year in which such tax expense or benefit is incurred.  We prepare financial projections to determine whether we expect to incur IETU or regular income tax in the future.  Such projections are based on estimates regarding futures revenues, expenses and cash flow.  Deferred income taxes are calculated by applying the corresponding tax rate to the applicable temporary differences resulting from comparing the accounting and tax bases of assets and liabilities, including the effects of any tax loss carry-forwards or asset tax credits.  We evaluate the recoverability of deferred income tax assets based on historical taxable income, projected future taxable income and the expected timing of the reversals of existing taxable temporary differences.  A valuation allowance is recognized when, based on this analysis, it is highly probable that the deferred income tax asset will not be realized.

 

We recognize deferred tax assets and liabilities based on the differences between the financial statements, carrying amounts and the tax bases of assets and liabilities.  We regularly review our deferred tax assets for recoverability and, if necessary, establish a valuation allowance based on historical taxable income, projected future taxable income and the expected timing of the reversals of existing temporary differences.  If these estimates and related assumptions change in the future, we may be required to record a valuation allowance against deferred tax assets resulting in additional income tax expense.  Included as a component of our net deferred tax liabilities are tax loss carry-forward assets (“NOL carry-forwards”) of Ps. 5,536,795 (post-tax effected — Ps. 1,550,303) as of December 31, 2011 related to our operations in Mexico.  We believe that it is more likely than not that such NOL carry-forwards will be ultimately recovered, primarily through the reversal of deferred tax liabilities.  Accordingly, no valuation allowance has been recognized against these NOL carry-forwards in our consolidated financial statements, except by NOL carry-forwards mentioned in Note 24 f) to our consolidated financial statements.  We also have tax loss carry-forward assets (“NOL carry-forwards”) of Ps. 328,213 (post-tax effected Ps. 111,592 ) as of December 31, 2011 related to our operations in Brazil.  Given the start-up nature of our Brazilian operations, a valuation allowance has been recognized against these NOL carry-forwards in our consolidated financial statements.  See Notes 3 and 24 to our consolidated financial statements.

 

On December 7, 2009, a tax reform bill was approved and published which reformed, amended and annulled certain tax dispositions that were effective on January 1, 2010.  This new bill reform enacted and income tax rate (*Impuesto Sobre la Renta,* or “ISR”) effective as follows: (a) from 2010 to 2012, 30%; (b) for 2013, 29%; and (c) for 2014 and future years, 28%.

 

We establish reserves to remove some or all of the tax benefit of any of our tax positions at the time we 

 

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determine that it becomes evident that the tax position is “more likely than not” to not be sustainable upon challenge by the tax authorities.  For purposes of evaluating whether or not a tax position is uncertain, (1) we presume the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information, (2) the technical merits of a tax position are derived from authorities such as legislation and statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and circumstances of the tax position, and (3) each tax position is evaluated without consideration of the possibility of offset or aggregation with other tax positions taken.

 

A number of years may elapse before a particular uncertain tax position is audited and finally resolved or when a tax assessment is raised.  The number of years subject to tax assessments varies depending on the tax jurisdiction and is generally five years for the countries in which we principally operate.  The tax benefit that has been previously reserved because of a failure to meet the “more likely than not” recognition threshold would be recognized in our income tax expense in the first period in which:  (1) the tax position meets such threshold, (2) the tax position, amount, and/or timing is ultimately settled through negotiation or litigation, or (3) the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired.

 

We have taken certain positions in our annual tax returns which are classified as uncertain tax positions for financial reporting purposes.  Specifically, uncertain tax positions currently outstanding relate to our interpretation of the Mexican Federal Income Tax Law (*Ley del Impuesto sobre la Renta* ) related to the inclusion of certain debts in the calculation of the inflation adjustment, and the deduction of land by real estate developers.  As of December 31, 2011 and 2010, uncertain tax positions resulted in Ps.942,234 and Ps.604,139, respectively, in deferred tax assets which had been provided for through a full valuation allowance, and an additional current liability in the amount of Ps.1,599,642 and Ps.775,946 in our consolidated financial statements, respectively.

 

**OPERATING RESULTS**

 

The following table sets forth selected data for the periods indicated, stated in nominal pesos.  The table also sets forth the data as a percentage of our total revenues:

 
| ** **                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                   | ** ** | **2011**                                   | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                   | ** ** | **(in thousands of Ps.)**   | ** ** |
| **MFRS:**                                    |       |                                       |       |   |   |   |   |
| Revenues                                     |       | 21,853,279                                 |       | 19,652,309 |   | 17,476,489 |   |
| Costs of sales                               |       | 16,165,752                                 |       | 13,727,484 |   | 12,285,836 |   |
| Gross profit                                 |       | 5,687,527                                  |       | 5,924,825 |   | 5,190,653 |   |
| Selling, general and administrative expenses |       | 2,767,974                                  |       | 2,980,379 |   | 2,471,680 |   |
| Income from operations                       |       | 2,919,553                                  |       | 2,944,446 |   | 2,718,973 |   |
| Other (expenses) income, net                 |       | (344,867                                   | )          | (142,765 | ) | 5,320 |   |
| Net comprehensive financing cost**(1)**      |       | 394,804                                    |       | 314,742 |   | 148,511 |   |
| Income taxes                                 |       | 865,940                                    |       | 906,997 |   | 994,389 |   |
| Consolidated Net income                      |       | 1,313,942                                  |       | 1,579,942 |   | 1,581,393 |   |

 
| ** **                                   | ** ** | **Year Ended December 31,**         | ** ** |
|----------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                   | ** ** | **2011**                                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                   | ** ** | **(as a percentage of sales)** | ** ** |
| **MFRS:**                                    |       |                                               |       |   |   |   |   |
| Revenues                                     |       | 100.0                                              | %          | 100.0 | % | 100.0 | % |
| Costs of sales                               |       | 74.0                                               | %          | 69.9 | % | 70.3 | % |
| Gross profit                                 |       | 26.0                                               | %          | 30.1 | % | 29.7 | % |
| Selling, general and administrative expenses |       | 12.6                                               | %          | 15.2 | % | 14.1 | % |
| Income from operations                       |       | 13.4                                               | %          | 14.9 | % | 15.6 | % |
| Other (expenses) income, net            |       | 1.6                                                | %          | 0.7 | % | 0.0 | % |
| Net comprehensive financing cost             |       | 1.8                                                | %          | 1.6 | % | 0.9 | % |
| Income taxes                                 |       | 4.0                                                | %          | 4.6 | % | 5.7 | % |
| Consolidated Net income                      |       | 6.0                                                | %          | 8.0 | % | 9.0 | % |

 

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(1)          Represents interest income, interest expense, foreign exchange gains and losses and valuation effects of financial derivative instruments.

 

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***Results of Operations for the Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010 - MFRS***

 

***Revenues***

 

Total housing revenues in 2011 increased 9.4% to Ps. 20,210.0 million from Ps. 18,465.2 million in 2010, driven by volume growth within the affordable entry-level segment, confirming Homex’ focus on organic growth in Mexico in attractive home markets that provide continued growth opportunities. The middle-income segment represented 14.9% of total revenues in 2011 compared to 26.3% in 2010 as a result of our proactive measures to reduce exposure to the segment.  Revenues from Brazil represented 2.7% of our total revenues in 2011 compared to 0.9% during 2010, reflecting Homex’s improved operations and increased experience in the country. Other revenues remained relatively stable at 7.5% of total revenues during 2011 from 6.0% during 2010.

 

Units closed in 2011 increased 18.4% to 52,486 homes, from 44,347 homes in 2010. Affordable entry-level sales volume in Mexico increased by 21.8% in 2011 representing 91.2% of total titled volume.  Middle-income sales volume decreased 25.5% compared to 2010 levels reflecting our strategy to reduce our exposure to the high-middle-income segment and concentrate our product offering at a price where middle-income homes can be readily financed through co-financing mortgage programs and in view of continued mortgage financing constraints through commercial banks and sofoles. We have continued to concentrate on increasing our market share in our core business, the affordable entry-level segment, where mortgage financing availability is strongly supported by Infonavit and Fovissste, as well as state housing funds. For the full year 2011, our homes titled in Brazil totaled 1,065 units or 2.0% of total titled units, a 226.7% increase from the 326 units, or 0.7% of total titled units, titled during 2010.

 

***Gross Profit***

 

Gross profit decreased to 26.0% in 2011 from 30.1% in 2010 which includes the effects of MFRS D-6. Pursuant to the application of MFRS D-6, we are required to capitalize a portion of our CFC, which includes interest expense, exchange gains and losses and, monetary position gains and losses and to apply capitalized CFC to cost of sales as the related inventory is sold in future periods.

 

During the year ended December 31, 2011, our capitalized CFC that was applied to cost of sales increased 79.8% to Ps. 1,363.3 million compared to Ps.758.3 million during the same period in 2010, primarily as a result of:

 

·                  a 32.5% increase in capitalized interest expense to Ps.1,046.4 million during the year ended December 31, 2011 from Ps. 789.8 million as of December 31, 2010, reflecting the 18.9% increase in total debt in connection with an increased investment in construction-in-process inventory; and

 

·                  capitalized foreign exchange loss applied to cost of sales of Ps.306.6 million, compared to a gain of Ps. 27.9 million during the same period in 2010, reflecting the depreciation of the Mexican peso relative to the US dollar.

 

Costs of sales increased by 17.8% for the year ended December 31, 2011 to Ps. 16,165.8 million from Ps.13,727.4 million for the same period in 2010, due primarily to the increase in our capitalized CFC.  On a pro-forma basis (without considering the application of MFRS D-6 in 2011 and 2010) our gross margin in 2011 was 32.3%, compared to 34.0% in 2010. The decrease in gross margin was mainly driven by our product mix change where middle-income segment revenue contribution decreased from 26.3% during 2010 to 14.9% in 2011. Also 

 

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contributing to this result is a higher cost per unit incurred in Brazil as compared to Mexico. At the same time the lower margin reflects a lower average price for all homes titled in Mexico which decreased from Ps.415 thousand as of December 31, 2010 to Ps.381 thousand as of December 31, 2011.

 

***Selling, General and Administrative (“SG&A”) Expenses***

 

Selling, general and administrative expenses decreased by 7.1% to Ps. 2,767.9 million in 2011 compared to Ps. 2,980.3 million in 2010.  As a percentage of total revenues, SG&A expenses decreased to 12.7% in 2011 compared to 15.2% in 2010.  The decrease in SG&A for the full year 2011 was mainly derived from efficiencies generated during the year from expenses as advertising, outsourcing and general expenses in both Mexico and Brazil.

 

***Income from Operations***

 

In 2011, income from operations decreased by 0.8% to Ps. 2,919.6 million compared to Ps. 2,944.4 million in 2010. On a pro-forma basis (without considering the application of MFRS D-6), our operating margin in 2011 increased 76 basis points (“bps”) to 19.6% compared to 18.8% in 2010. The higher margin is mainly driven by lower SG&A expenses during 2011 as previously explained in the SG&A discussion.

 

***Net Comprehensive Financing Cost***

 

Net comprehensive financing cost (comprised of interest income, interest expense, foreign exchange gains and losses and valuation effects of derivative instruments) increased to Ps.394.8 million in 2011 compared to Ps.314.7 million in 2010, primarily as a result of the following:

 

·                  net interest expense increased to Ps.196.6 million in 2011 from Ps.177.2 million in 2010, primarily due to an increase in our total debt of 18.9%;

 

·                  we had a foreign exchange loss of Ps.265.8 million in 2011 compared to a loss of Ps.97.8 million in 2010; and

 

·                  the net valuation effects of financial derivative instruments decreased to a gain of Ps.67.6 million from a loss of Ps.39.6 million in 2010 as a result of the changes in the mark-to-market of our financial derivative instruments during the year.

 

***Foreign Exchange Exposure and Currency Derivatives***

 

As of December 31, 2011, Homex’s US Dollar denominated debt mainly consisted of two US$250 million bonds issued in 2005 and 2009 with single principal payments due at maturity in 2015 and 2019, respectively.  In connection with our US$250 million bond maturing in 2015, we entered into an interest-only swap to hedge the foreign exchange risk in respect of the interest payable on this debt at an average rate of Ps.13.89 per U.S. dollar through 2012.  In connection with our US$250 million bond maturing in 2019, we entered into a principal-only swap to hedge the foreign exchange risk associated with the principal amount of this debt at a rate of Ps.12.93 per U.S. dollar through 2019 and at an average weighted cost of 4.39%.  In addition, we entered into an interest-only swap to hedge the foreign exchange risk in respect of the interest payable on this debt at an average rate of Ps.11.67 per U.S. dollar through 2012.

 

The net valuation effects of financial derivative instruments recognized in the consolidated income statements for the years ended December 31, 2011, 2010 and 2009, were Ps. (67.6) million, Ps. 39.7 million and Ps. 66.5 million, respectively.

 

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***Income Tax Expense***

 

Income tax expense decreased by 4.5% to Ps.865.9 million from Ps.906.9 million in 2010.The effective tax rate was 39.7% in 2011 compared to 36.5% in 2010.The effective tax rate increased in 2011 due to the increase in the valuation allowance for net operating loss carry-forwards from our Brazil operations

 

***Net Income of controlling interest***

 

Net income of controlling interest decreased 13.7% to Ps. 1,304.4 million in 2011 compared to Ps. 1,511.7 million in 2010, as a result of the factors described above.

 

***Results of Operations for the Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009 - MFRS***

 

***Revenues***

 

Total housing revenues in 2010 increased 7.4% to Ps.18,465.2 million from Ps.17,198.7 million in 2009, driven by higher average prices in the affordable-entry-level segment and increased volume in the middle-income segment.  Affordable entry-level homes (including our operations in Brazil) represented 67.6% of total revenues in 2010 compared to 78.9% in 2009.  Middle-income homes represented 26.3% of total revenues in 2010 compared to 19.5% in 2009.  In 2010, other revenues increased to Ps.1,187.0 million, compared to Ps.277.7 million in 2009.  The increase is primarily a result of additional construction service contracts we entered into with the Mexican federal government.

 

Units closed in 2010 decreased 3.6% to 44,347 homes, from 46,016 homes in 2009 primarily due to our strategy of focusing on home prototypes in the affordable entry-level and middle-income segment, which produce higher revenue and profit margins.  Thus, while the number of units closed has decreased, resulting revenues and profits have increased.  Affordable entry-level sales volume decreased to 39,579 homes in 2010 or 89.2% of total sales volume compared to 92.4% in 2009.  Middle-income sales volume increased 10.8% to 4,768 homes in 2010 compared to 3,483 homes in 2009, reflecting the our strategy of focusing on home prototypes that can be financed through co-financing mortgage programs with Infonavit and Fovissste in response to commercial banks providing mortgages that are co-financed by such agencies.

 

***Gross Profit***

 

Gross profit margins increased to 30.1% in 2010 from 29.7% in 2009 which includes the effects of MFRS D-6.  Pursuant to the application of MFRS D-6, if applicable, we are required to capitalize a portion of our CFC, which includes interest expense, exchange gains and losses and monetary position gains and losses and to apply capitalized CFC to cost of sales as the related inventory is sold in future periods.

 

During 2010, our capitalized CFC that was applied to cost of sales increased 41.1% to Ps.758.3 million compared to Ps.537.4 million during 2009 primarily as a result of:

 

·                                          a 68.7% increase in capitalized interest expense to Ps.781.6 million during the year ended December 31, 2010 from Ps.463.1 million as of December 31, 2009, reflecting the 28% increase in total debt in connection with an increased investment in construction-in-process inventory; and

 

·                                          capitalized foreign exchange gain applied to cost of sales of Ps.36.2 million, compared to a loss of Ps.66.6 million during the same period in 2009, reflecting the appreciation of the Mexican peso relative to the US dollar.

 

Costs of sales increased by 11.7% for the year ended December 31, 2010 to Ps.13,727.4 million from Ps.12,285.8 million for the same period in 2009, due primarily to the increase in our capitalized CFC.  On a pro-forma basis (excluding the application of MFRS D-6 in 2009 and 2010) our gross margin in 2010 would have 

 

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been 34.0%, compared to 32.8% in 2009.  The increase in gross margin was mainly driven by a higher average price in our affordable-entry and middle-income level segment homes as described under “Revenues” above.

 

***Selling, General and Administrative Expenses***

 

SG&A expenses increased by 20.6% to Ps. 2,980.3 million in 2010 compared to Ps.2,471.6 million in 2009.  As a percentage of total revenues, SG&A expenses increased to 15.2% in 2010 compared to 14.1% in 2009.  The increase in SG&A was primarily a result of the addition of personnel in our international and tourism divisions, an expense which was not yet offset by revenue contributions from those divisions.

 

***Income from Operations***

 

In 2010, income from operations increased by 8.3% to Ps. 2,944.4 million compared to Ps. 2,718.9 million in 2009.  On a pro-forma basis (without considering the application of MFRS D-6), our operating margin in 2010 would have increased 21 bps to 18.8% compared to 18.6% in 2009.  The higher margin reflected our increased profitability as a result of higher average prices.

 

***Net Comprehensive Financing Cost***

 

Net CFC (comprised of interest income, interest expense, foreign exchange gains and losses, valuation effects of derivative instruments and monetary position gains and losses) increased to Ps.314.7 million in 2010 compared to Ps.148.5 million in 2009, substantially as a result of the following:

 

·                                          net interest expense increased to Ps.177.2 million in 2010 from Ps.141.5 million in 2009, primarily due to an increase in our total debt of 28%;

 

·                                          we had a foreign exchange loss of Ps.97.8 million in 2010 compared to a foreign exchange gain of Ps.59.5 million in 2009; and

 

·                                          the net valuation effects of financial instruments decreased from Ps.66.4 million in 2009 to Ps.39.6 million in 2010 as a result of the changes in the mark-to-market of our financial instruments during the year.

 

***Foreign Exchange Exposure and Currency Derivatives***

 

As of December 31, 2010, our US Dollar denominated debt consisted of two US$250 million bonds issued in 2005 and 2009 with single principal payments due at maturity in 2015 and 2019, respectively.  In connection with our US$250 million bond maturing in 2015, we entered into an interest-only swap to hedge the foreign exchange risk in respect of the interest payable on this debt at an average rate of Ps.13.95 per U.S. dollar from 2010 through 2012.  In connection with our US$250 million bond maturing in 2019, we entered into a principal-only swap to hedge the foreign exchange risk associated with the principal amount of this debt at a rate of Ps.12.93 per U.S. dollar through 2019 and at an average weighted cost of 4.39%.  In addition, we entered into an interest-only swap to hedge the foreign exchange risk in respect of the interest payable on this debt at an average rate of Ps.11.67 per U.S. dollar through 2012.

 

The net valuation effects of financial derivative instruments for the years ended December 31, 2010, 2009 and 2008, were Ps.39.7 million, Ps.66.5 million and Ps.314 million, respectively.

 

***Income Tax Expense***

 

Income tax expense decreased by 8.8% to Ps.906.9 million in 2010 compared to Ps.994.3 million in 2009.  The effective tax rate was 36% in 2010 compared to 39% in 2009.  The decrease in the effective tax rate was attributable to charges recorded in 2009 related to the adoption of a new tax law in Mexico, along with fewer non-deductible tax items in 2010, partially offset by a higher statutory tax rate in 2010.

 

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***Net Income of controlling interest***

 

Net income of controlling interest decreased 3.5% to Ps. 1,511.7 million in 2010 compared to Ps.1,565.8 million in 2009, as a result of the factors described above.

 

***Results of Operations —Years Ended December 31, 2010 and 2011 —US GAAP***

 

As disclosed in Note 28 to our consolidated financial statements, until the adoption of IMFRS 14, the primary differences between our financial statements prepared under MFRS and US GAAP related to revenue and cost recognition for construction projects, although certain smaller differences existed for other accounts. However, pursuant to the adoption of IMFRS 14, our revenue recognition policy under MFRS is more similar to US GAAP.

 

In 2011, revenues under MFRS were Ps. 21,853.2 million while revenues under US GAAP were Ps.21,760.9 million.  In 2010, revenues under MFRS were Ps.19,652.3 million while revenues under US GAAP were Ps.19,628.5 million.  Revenues under US GAAP’s ASC 360.20 are recognized when all the following events occur: a) a sale is consummated; b) a significant initial down payment is received (when applicable); and c) the earnings process is complete and the collection of any remaining receivables is reasonably assured. Subsequent our adoption of IMFRS 14, its revenue recognition policy under MFRS is more closely aligned to US GAAP, although certain differences still exist. The principal remaining differences between ASC 360.20 and IMFRS 14 relate to: (1) revenues from FOVI and INVI financial institutions, that are typically recognized for MFRS purposes before they are recognized for US GAAP purposes, since for US GAAP purposes they do not yet comply with one of the ASC conditions above, specifically that a significant down payment is received, that is typically more than 10%, and (2) the deferral and thus recognition on a cash basis for US GAAP of unsecured home-buyer receivables.  For a further discussion of revenue recognition policies under US GAAP, refer to Note 28 to our consolidated financial statements.

 

Total units closed and recognized as US GAAP revenue in 2011 were 52,592 units (44,277 in 2010) compared to 52,846 units closed under MFRS in 2011 (44,347 in 2010). The higher volume in units closed in 2011 is primarily attributable to our strategy of focusing on the affordable entry-level segment. During 2011, we reduced our exposure to the middle income segment by focusing on home prototypes that can be financed through co-financing mortgage programs with INFONAVIT and FOVISSSTE in response to commercial banks providing mortgages that are co-financed by such agencies. Total units closed of 52,592 in 2011 represents a 18.8% increase compared to total units closed in 2010 of 44,277.  In 2010, units closed decreased by 3.6% over 2009.  The proportion of units sold and units closed are generally consistent when evaluated by operating segment during both 2011 and 2010.

 

Gross profit margins were 26.0% for MFRS in 2011, compared to 27.0% for US GAAP.  Gross profit margins were 30.1% for MFRS in 2010, compared to 29.9% for US GAAP.  The remaining variations in our gross profit and gross profit margin between MFRS and US GAAP principally relate to differences in amounts included in cost of sales.  Under MFRS certain financing costs are included in interest expense, but are considered a component of cost of sales for US GAAP.  Furthermore, under both MFRS and US GAAP, certain other financing costs are capitalized and ultimately charged to cost of sales when inventory is sold.  However, the method and amounts capitalized varies between MFRS and US GAAP and can result in varying gross profit margins and thus operating profits.

 

Selling, general and administrative expenses are not significantly impacted by the differences between MFRS and US GAAP.  Accordingly, fluctuations in US GAAP SG&A expenses during 2011 and 2010 are consistent with those described for MFRS discussed above. SG&A expenses, as percentage of total revenues, were 12.7% for MFRS in 2011, compared to 12.9% for US GAAP.

 

CFC is different between MFRS and US GAAP for the reasons discussed above. These differences could result in periodic fluctuations in gross profit margins and CFC levels between the two accounting frameworks.

 

Our effective tax rate is not significantly impacted by the differences between MFRS and US GAAP. Our effective tax rate under MFRS was 39.7% in 2011 compared to 43.3% under US GAAP and 36.5% under MFRS in 2010 compared to 34.7% under US GAAP; the difference in the effective tax rate is due to reconciling items are diluted in relation to the tax because of the fluctuation in the pre-tax income from MFRS to USGAAP.

 

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Refer to Note 28 through 30 to our consolidated financial statements for a complete reconciliation of consolidated net income between MFRS and US GAAP.

 

***Results of Operations —Years Ended December 31, 2009 and 2010 —US GAAP***

 

As disclosed in Note 28 to our consolidated financial statements, until the adoption of IMFRS 14, the primary differences between our financial statements prepared under MFRS and US GAAP related to revenue and cost recognition for construction projects, although certain smaller differences existed for other accounts.  However, pursuant to the adoption of IMFRS 14, our revenue recognition policy under MFRS is more similar to US GAAP.

 

In 2010, revenues under MFRS were Ps.19,652 million while revenues under US GAAP were Ps.19,629 million.  In 2009, revenues under MFRS were Ps.17,476 million while revenues under US GAAP were Ps.17,616 million.  Revenues under US GAAP’s ASC 360.20 are recognized when all the following events occur:  a) a sale is consummated; b) a significant initial down payment is received (when applicable); and c) the earnings process is complete and the collection of any remaining receivables is reasonably assured.  Subsequent to our adoption of IMFRS 14, our revenue recognition policy under MFRS is more closely aligned to US GAAP, although certain differences still exist.  The principal remaining differences between ASC 360.20 and IMFRS 14 relate to:  (1) revenues from FOVI and INVI financial institutions, that are typically recognized for MFRS purposes before they are recognized for US GAAP purposes, since for US GAAP purposes they do not yet comply with one of the ASC conditions above, specifically that a significant down payment is received, that is typically more than 10%, and (2) the deferral and thus recognition on a cash basis for US GAAP of unsecured home-buyer receivables.  For a further discussion of revenue recognition policies under US GAAP, refer to Note 28 to our consolidated financial statements.

 

Total units closed and recognized as US GAAP revenue in 2010 were 44,277 units (46,631 in 2009) compared to 44,347 units closed under MFRS in 2010 (46,016 in 2009).  The lower volume in units closed in 2010 is primarily attributable to our strategy of focusing on more profitable segments within the affordable entry-level and low middle-income segments.  We reduced our exposure to the economic segment by focusing on home prototypes that can be financed through co-financing mortgage programs with Infonavit and Fovissste in response to commercial banks providing mortgages that are co-financed by such agencies.  Total units closed of 44,277 in 2010 represents a 5% decrease compared to total units closed in 2009 of 46,631.  In 2009, units closed increased by 11.9% over 2008.  The proportion of units closed and units closed are generally consistent when evaluated by operating segment during both 2010 and 2009.

 

Gross profit margins were 30.1% for MFRS in 2010, compared to 29.9% for US GAAP.  Gross profit margins were 29.7% for MFRS in 2009, compared to 28.1% for US GAAP.  The remaining variations in our gross profit and gross profit margin between MFRS and US GAAP principally relate to differences in amounts included in cost of sales.  Under MFRS certain financing costs are included in interest expense that are considered a component of cost of sales for US GAAP.  Furthermore, under both MFRS and US GAAP, certain other financing costs are capitalized and ultimately charged to cost of sales when inventory is sold.  However, the method and amounts capitalized varies between MFRS and US GAAP and can result in varying gross profit margins and thus operating profits.

 

Selling, general and administrative expenses are not significantly impacted by the differences between MFRS and US GAAP.  Accordingly, fluctuations in US GAAP SG&A expenses during 2010 and 2009 are consistent with those described for MFRS discussed above.

 

CFC is different between MFRS and US GAAP for the reasons discussed above.  These differences could result in periodic fluctuations in gross profit margins and CFC levels between the two accounting frameworks.

 

Our effective tax rate is not significantly impacted by the differences between MFRS and US GAAP.  Our effective tax rate under MFRS was 36% in 2010 compared to 35% under US GAAP and 39% under MFRS in 2009 compared to 41% under US GAAP.

 

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Refer to Note 28 through 30 to our consolidated financial statements for a complete reconciliation of net income between MFRS and US GAAP.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

We have experienced, and expect to continue to experience, substantial liquidity and capital resource requirements, principally to finance development and construction of homes and for land inventory purchases.

 

Adverse economic conditions in the U.S. throughout the 2008 — 2010 period affected the mortgage banking sector in the U.S., therefore negatively impacting performance of the homebuilding industry in the country, impacting the financial positions of a majority of U.S. homebuilders.  Our domestic mortgage system, as explained herein, differs from that of the U.S. The Mexican housing market differs from the U.S. housing industry in several significant respects.  The housing market in Mexico is in an early stage of development compared to the U.S. housing industry, which, according to some economists, has been subjected to heightened price speculation that has led to an excess supply of housing and a lack of liquidity stemming from earlier excessive mortgage lending activity.  The Mexican housing market on the other hand is characterized by a large deficit of housing stock driven in part by a growing young population, high rates of urban growth, new household formation, and a decreasing number of occupants per home.  Additionally, the Mexican government has implemented housing policies and created agencies designed to address the housing deficit by making funds available to a large segment of the population.  As a result, in the past few years, a significant market for companies like us targeting the affordable entry-level market has emerged.  Accordingly, we do not believe that the housing market in Mexico is suffering from the same impairment and liquidity issues currently facing the U.S. housing industry.  Moreover, while it may be reasonably possible that the impairment and liquidity issues currently facing the U.S. housing industry may deteriorate further, we do not have any current reason to believe these specific problems will materially affect its operations and liquidity directly.  However, no assurances can be given that impairment or liquidity issues in the United States will not affect our operations and liquidity in the future, or that impairment or liquidity issues will not arise in Mexico.

 

As of December 31, 2011, we had Ps.3,992.7 million of cash and cash equivalents and Ps.15,364.1 million of outstanding indebtedness for money borrowed and capital leases (none of which was construction financing provided by Sofoles for developments under construction), as compared to Ps.3,435.2 million of cash and cash equivalents and Ps.12,921.1 million of outstanding indebtedness as of December 31, 2010.

 

Although we do not commence construction of any development until the availability of mortgage financing for qualified homebuyers is determined, we do acquire land and perform licensing, permit-securing, and certain infrastructure development activities prior to receiving confirmation of the availability of mortgage financing.  Historically, we have financed our development and construction activities through internally generated funds, commercial paper programs, bridge loans and long-term financing.

 

Our primary sources of liquidity are:

 

·                                          cash flow from operations;

 

·                                          financing from sellers of land and, to a lesser extent, suppliers of materials;

 

·                                          commercial banks and other financial institutions; and

 

·                                          down payments from homebuyers.

 

We believe that our working capital and other sources of financing will be sufficient to meet our foreseeable liquidity requirements in the short term.

 

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The table below sets forth information regarding our outstanding debt as of December 31, 2011:

 

**Debt Outstanding as of December 31, 2011**

 
| **Homex Debt**                                                                                                                                               | ** ** | **Aggregate Lender Principal   Amount** | ** ** | **Interest Rate(4)** | ** ** | **Maturity**                                    | ** **        |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------|------------|-------------------------------------------------|-------------------|
| ** **                                                                                                                                                        | ** ** | **(in thousands of Ps.)**          | ** ** | ** **                | ** ** | ** **                                      | ** **        |
| Senior Guaranteed Notes due 2019(1)                                                                                                                               |       | Ps.                                               | 3,494,675  |                      | 9.5        | %                                               | December 11, 2019 |   |
| Senior Guaranteed Notes due 2015(2)****                                                                                                                           |       | 3,494,675                                         |       | 7.5                       | %          | September 28, 2015                              |              |
| Grupo   Financiero Inbursa, S.A.   (“Inbursa”) A credit line of Ps.2,078 million granted on June   26, 2008 (the “Inbursa Credit Agreement”). |       | 2,078,000                                         |       | TIIE+1.50                 | %          | June 26, 2013                                   |              |
| Banco Nacional   de México, S.A.A credit line of Ps. 1,000 million granted on July 16, 2009, renewed to   Ps. 1,500 million on March 25, 2010.               |       | 1,110,295                                         |       | TIIE+5.00                 | %          | July 16,   2013                                 |              |
| Banco Mercantil del   Norte, S.A.   (Banorte) A credit line of Ps. 34,877 granted on July 2011                                                                    |       | 33,836                                            |       | TIIE+3.50                 | %          | February   2013                                 |              |
| HSBC México, S.A.   A credit line of Ps. 50,000 granted on November 25, 2011.                                                                                |       | 50,000                                            |       | TIIE+5.50                 | %          | February 2012                                   |              |
| Banco Nacional   de México, S.A.A credit line of Ps. 394,700 granted in December 2011.                                                                       |       | 394,700                                           |       | TIIE+5.00                 | %          | January   2012                                  |              |
| Credite Suisse AG (3)A credit   line granted by Credit Suisse AG on April 27, 2011 for US$150 million.                                                            |       | 2,096,805                                         |       | LIBOR+3.50                | %          | April 27,   2012                                |              |
| Deutsche Bank AGA credit   line granted by Deutsche Bank AG on December 15, 2011 for US$50 million.                                                               |       | 698,935                                           |       | LIBOR+6.375               | %          | December   14, 2012                             |              |
| Ficade, S.A. de C.V., SOFOM, E.N.R.A credit   line of Ps. 400,000 granted on December 30, 2011                                                                    |       | 400,000                                           |       | 15.00                     | %          | December   30, 2015                             |              |
| IXE Banco, S.A..A credit   line of Ps. 100,000 granted on December 7, 2011                                                                                        |       | 100,000                                           |       | TIIE +5.00                | %          | March 6,   2012                                 |              |
| Deutsche Bank, S.A.A credit line granted by Deutsche Bank, S.A. (a Brazilian financial   institution) on May 31, 2011 for 127.3 million BR$.                      |       | 956,723                                           |       | CDI+5.25                  | %          | April 11,   2016                                |              |
| Bancomer, S.A.Financial   leases of machinery and equipment                                                                                                       |       | 69,021                                            |       | TIIE +   0.80             | %          | January   2013                                  |              |
| Bancomer, S.A.Financial   leases of machinery and equipment                                                                                                       |       | 23,505                                            |       | TIIE +   0.80             | %          | October   2013                                  |              |
| Bancomer, S.A.Financial   leases of machinery and equipment                                                                                                       |       | 28,019                                            |       | TIIE +   3.50             | %          | January   2014                                  |              |
| Bancomer, S.A.Financial   leases of machinery and equipment                                                                                                       |       | 11,761                                            |       | TIIE +   3.50             | %          | April 2014                                      |              |
| GE Financial   Mexico, S.A. de C.V.Financial   leases granted in June 2010 and July 2011                                                                          |       | 773                                          |       | 12.98                     | %          | October   2013                                  |              |
| GE Financial   Mexico, S.A. de C.V.Financial   lease granted in August 2011                                                                                       |       | 65,805                                            |       | 7.18                      | %          | September   2016                                |              |
| Leasing Operations   de México, S. de R.L. de C.V.Leases   granted in April, May, and August 2010.                                                           |       | 85,199                                            |       | 13.39                     | %          | During   2013                                   |              |
| Banco Bradesco, S.A.Financial   leases provided in November 2009, December 2009 and November 2010.                                                                |       | 49,371                                            |       | 16.25                     | %          | November   and December 2012 through March 2014 |              |
| Banco Consorcio, S.A.Financial   leases provided in November 2009, December 2009 and November 2010.                                                               |       | 1,111                                             |       | 23.91                     | %          | January   2014 through November 2016            |              |
| Banco Itaú, S.A.Financial   leases provided from May through October 2009, and                                                                               |       | 6,217                                             |       | 20.69                     | %          | November,   2013                                |              |
|                                                                                                                                                                   |            |                                                   |            |                           |            |                                                 |                   |  |

 

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| **Homex Debt**              | ** ** | **Aggregate Lender Principal   Amount** | ** ** | **Interest Rate** | ** ** | **Maturity** | ** ** |
|----------------------------------|------------|---------------------------------------------------|------------|------------------------|------------|--------------|------------|
| ** **                       | ** ** | **(in thousands of Ps.)**          | ** ** | ** **             | ** ** | ** **   | ** ** |
| from May through September 2010. |       |                                              |       |                   |       |         |       |
| Interest payable                 |       | 114,710                                           |       |                   |       |         |       |
|                             |       |                                              |       |                   |       |         |       |
| Total debt                       |       | Ps.                                               | 15,364,136 |                   |       |         |       |   |
|                                  |            |                                                   |            |                        |            |              |            |  |

 

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(1)          Issued an aggregate principal amount of US$250 million with a coupon of 9.50%. We entered into a principal-only swap to hedge the foreign exchange risk associated with the principal amount of this debt at a rate of Ps.12.93 per U.S. dollar and at an average rate weighted cost of 3.87%. In order to increase the amount of thresholds of these financial instruments and to avoid collateral margin calls, in May 2010 we changed our Principal-Only Swap rate from 3.87% to 4.39%.

(2)          Issued an aggregate principal amount of US$250 million with a coupon rate of 7.50%.  We entered into a foreign exchange swap to hedge the foreign exchange risk associated with the principal amount of this debt at a rate of Ps.10.83 per U.S. dollar and at an average weighted cost of 2.92%.  The Principal-Only Swap was cancelled on July 5, 2008.

(3)          We entered into a credit line with a principal amount of US$150 million at interest rate of LIBOR plus 3.50% per annum. We entered into a foreign exchange swap to hedge the foreign exchange risk associated with the interest of this debt at a rate of TIIE minus 82.5 bps over a Ps. 1,731.75 million fixed principal.

(4)          TIIE refers to the 28-day Mexican interbank rate (Tasa de Interés Interbancaria de Equilibrio), which was 4.79% as of December 31, 2011.

 

Our total indebtedness increased to Ps.15,364.1 million as of December 31, 2011 from Ps.12,921.1 million as of December 31, 2010, mainly as a result of working capital requirements and the effects of the depreciation of the Mexican Peso relative to the U.S. dollar on our U.S. dollar-denominated debt.

 

As of December 31, 2011, our short-term debt was Ps. 3,851.2 million, including approximately Ps. 544.7 million of indebtedness under various revolving credit lines granted by financial institutions and the current portion of long-term portion of our equipment lease obligations in the amount of Ps.188.9 million.  Our long-term debt was Ps.11,512.8 million, which includes the long-term portion of our equipment lease obligations in the amount of Ps.154.9 million, a line of credit with Inbursa for Ps.2,078 million, and the remaining balance consisting of a credit line with Banamex for Ps.1,110.3 million, a credit line with Ficade for Ps.400 million, a credit line with Banorte for Ps.33.8 million, a credit line with Deutsche Bank for Ps. 956.7 million, the Senior Guaranteed Notes due 2015 in the aggregate principal amount of Ps.3,494.7 million and the Senior Guaranteed Notes due 2019 in the aggregate principal amount of Ps.3,494.7 million.

 

On September 28, 2005, we issued US$250 million of senior guaranteed notes due 2015 (the “Senior Guaranteed Notes due 2015”) with a coupon rate of 7.50%, payable semiannually.  On December 11, 2009, we issued US$250 million of senior guaranteed notes due 2019 (the “Senior Guaranteed Notes due 2019” and together with the Senior Guaranteed Notes due 2015, the “Senior Guaranteed Notes”) with a coupon rate of 9.50%, payable semiannually.

 

As of December 31, 2011, our U.S. dollar-denominated debt included our Senior Guaranteed Notes, both with a single principal payment at maturity.  We have two interest-only swaps that effectively minimize short and mid-term exchange risk in interest payments on the Senior Guaranteed Notes 2015 and 2019.  As of December 31, 2011 and 2010, the net fair value of these instruments were an asset position of Ps.47.7 million and a liability position of Ps.41.1 million, respectively.

 

As of December 31, 2011, the fair value of the principal-only swap was Ps. 33.8 million and represented a favorable asset position. As of December 31, 2010, the fair value of this swap was Ps. 447.2 million and represented a liability position.

 

As of December 31, 2011, we had an interest-only swap in order to hedge the monthly interest payment of the short-term credit line with Credit Suisse granted on April 27, 2011. The fair value of this instrument represented a favorable asset position of Ps. 3.6 million.

 

The net accumulated gain in the consolidated statement of income of the interest-only swaps covering the 2015 and 2019 bonds was Ps. 64.0 million and Ps. 3.6 million for the interest-only swap covering the 2012 bond for 

 

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the year ended December 31, 2011, respectively.  The net accumulated expense in the statement of income of the interest-only swaps covering the 2015 and 2019 bonds was Ps. (39.7) million for the year ended December 31, 2010.

 

The net valuation effects of financial instruments for the years ended December 31, 2011, 2010 and 2009 were Ps.(67.6) million, Ps. 39.7 million and Ps. 66.5 million, respectively.

 

We have not paid dividends since our inception in 1998 and we do not foresee paying dividends in the near future.

 

**Covenants**

 

Loan covenants require us and our guarantor subsidiaries to meet certain obligations. These covenants cover changes in ownership control, restrictions on incurring additional debt that does not meet certain requirements established in the loan contracts, restrictions on the sale of assets and the sale of capital stock in subsidiaries, unless they meet certain requirements, restricted payments where dividends cannot be paid or capital reimbursed to equity unless they are made between the guarantor subsidiaries. In addition, we cannot pledge any of our assets or properties to guarantee any additional debt until certain limits.

 

 Financial covenants, derived from the Senior Guaranteed Notes due 2015, the Senior Guaranteed Notes due 2019, the Credit Suisse Credit Agreement, the Deutsche Bank Credit Agreement, and the credit lines with Inbursa and Banamex, require us to maintain:

 

·                                          minimum equity;

 

·                                          a ratio of interest coverage (EBITDA) to net financing expense;

 

·                                          a ratio of leverage (liabilities with cost) to EBITDA;

 

·                                          a ratio of leverage (liabilities) to equity;

 

·                                          a ratio of leverage (liabilities with cost) to equity;

 

·                                          additional debt based on assets; and

 

·                                          consolidated fixed charge coverage.

 

There are also restrictions applicable to additional debt based on EBITDA levels, such as EBITDA to interest expense, including payments of dividends.

 

In the event we do not comply with any of the above provisions, there is a resulting limitation on our ability to pay dividends to our stockholders.

 

Included in our credit agreements and indentures with the aforementioned financial institutions, if we fail to comply with the terms and conditions of our covenants, an event of default may occur that may result in the amounts owing to these institutions together with interest accrued becoming due and payable.  In addition, an event of default under any of our credit agreements and indentures may in turn trigger events of default under our other credit agreements and indentures which may result in the amounts outstanding under such debt obligations becoming due and payable.  Acceleration or cross-default under any of our credit agreements and indentures could have a material adverse effect upon our business, financial condition, results of operations and prospects.

 

As of December 31, 2011 and 2010, we were in compliance with the financial covenants of our debt agreements and indentures.

 

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The financial covenants of our leases from BBVA Bancomer require us to maintain:

 

·                                          a liquidity ratio of current assets to short-term liabilities;

 

·                                          a ratio of total liabilities to equity; and

 

·                                          a ratio of operating income to comprehensive financing cost.

 

As of December 31, 2011 and 2010, we were in compliance with these financial covenants.  The prison project financing loans, described in greater detail under “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Prison Project Financing Loans,” are non-recourse to us.

 

**Prison Project Financing Loans**

 

***Chiapas Correctional Facility***

 

For the Chiapas, Mexico correctional facility, Makobil (which we account for using the equity method of accounting in 2011) entered into a loan agreement for an aggregate principal amount of approximately Ps.3.8 billion with Banobras and Banco Nacional de Mexico, S.A., Integrante del Grupo Financiero Banamex (the “Chiapas Loan”).  As of December 31, 2011, no amounts were borrowed under the Chiapas Loan; however, a borrowing of approximately Ps.480.0 million was made by Makobil as of January 31, 2012.  This borrowing has a term of 15.3 years and bears a fixed rate and/or a variable rate plus the Margin as follows:

 

a)              During the first 120 months from January 31, 2012 the Chiapas Loan bears (i) a fixed rate of 8.0% plus the Margin on 90% of the outstanding balance of the loan and (ii) a variable rate of TIIE plus the Margin on the outstanding balance of the loan.

 

b)             As of the 121st month as from January, 31, 2012, the Chiapas Loan will bear a variable rate of TIIE plus the Margin.

 

For purposes of the Chiapas Loan, “Margin” means: (i) 2.75% beginning on January 31, 2012 and ending on December 27, 2012, (ii) 3.0% beginning on December 28, 2012 and ending on December 27, 2014, (iii) 3.25% beginning on December 28, 2014 and ending on December 27, 2019, (iv) 3.5% beginning on December 28, 2019 and ending on December 27, 2022 and (v) 3.75% beginning on December 28, 2022 and ending on the maturity date (i.e. July 30, 2028).

 

The Chiapas Loan is secured by a pledge of Homex’s equity interests in Makobil, and a lien over all of Makobil’s assets.  The Chiapas Loan contains customary covenants and events of default for this type of project financing, with the restrictive covenants only limiting the actions of Makobil.

 

***Morelos Correctional Facility***

 

For the Morelos, Mexico correctional facility, our subsidiary, CRS Morelos, entered into a loan agreement for an aggregate principal amount of approximately Ps.3.9 billion with Banobras, Banco Mercantil del Norte, S.A., Institución de Banca Múltiple, Grupo Financiero Banorte and Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander (the “Morelos Loan”).  As of December 30, 2011, no amounts were borrowed under the Morelos Loan; however, a borrowing of approximately Ps.422.7 million was made by CRS Morelos as of January 31, 2012.  This borrowing has a term of 15.3 years and bears a variable rate of TIIE plus a margin equal to (i) 2.75% beginning on January 31, 2012 and ending on December 31, 2012, (ii) 3.0% beginning on January 1, 2013 and ending on December 31, 2014, (iii) 3.25% beginning on January 1, 2015 and ending on December 31, 2019, (iv) 3.5% beginning on January 1, 2020 and ending on December 31, 2022 and (v) 3.75% beginning on January 1, 2023 and ending on the maturity date.

 

The Morelos Loan is secured by a pledge of Homex’s equity interests in CRS Morelos, and a lien over all of CRS Morelos’ assets.  The Morelos Loan contains customary covenants and events of default for this type of project financing, with the restrictive covenants only limiting the actions of CRS Morelos.

 

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Our subsidiaries participating in the correctional facility construction and servicing have been designated as “unrestricted” for the purpose of our indentures and certain other debt instruments.  The effect of this designation is to, generally, eliminate the results of operations and financial position of these subsidiaries in computing compliance with many of the covenants contained in our debt instruments and to exempt such subsidiaries from certain other covenants and events of default.

 

For additional information regarding our Peso-denominated debt, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources.”

 

**TREND INFORMATION**

 

After two economically complicated and challenging years (2008 — 2009), since 2010 we witnessed a global economic recovery, in spite of sluggish growth in some developed economies and debt crises in certain European countries.  In 2011, global GDP increased by approximately 3.8% according to the International Monetary Fund (“IMF”), with advanced economies growing at a rate of 1.6% and emerging and developing markets at a 6.2% rate, led by China and India.

 

According to the IMF, the global recovery is threatened by intensifying strains in the euro zone and fragilities elsewhere. Financial conditions have deteriorated, growth prospects have dimmed and downside risks have escalated. Global output is projected to expand by 3.25% in 2012.  The IMF is expecting that the euro zone economy will go into a mild recession in 2012 as a result of the rise in sovereign yields, the effects of bank deleveraging on the economy and the impact of additional fiscal consolidation. Growth in emerging and developing economies is also expected to slow because of the worsening external environment and a weakening of internal demand.

 

Despite the weakening economic environment during 2011, the Mexican economy maintained a favorable pace of growth due to: an acceleration of domestic demand, has increased competitiveness and diversification of exports.  Mexico’s market share of total U.S. imports increased to 13.1%during 2011, from 12.1% during the same period of 2010.  Mexico’s export sector grew by 8.3% totaling $29.1 billion as of December 31, 2011, derived from a 12.4% increase in oil exports and a 7.6% increase in the non-oil sectors.  Mexican exports were favored especially in the manufacturing sector, which accounted for 78.7 percent of total exports.  Additionally employment growth, consumer confidence and a more dynamic consumption trend translated into an increase in productivity during the year.  Mexico’s economic activity indicator (IGAE) for the full year, the index registered an improvement of 3.5%compared to 2010.  Mexico’s unemployment rate improved to 4.51% as of December, 2011 from 4.94% during the year ago period.****Although inflation temporarily increased late in 2011, it remained at moderate levels at 3.82% as of December 31, 2011 and domestic interest rates were close to historical low at 4.80%.

 

Despite of the positive economic performance of the country, during 2011, Sofoles contracted their mortgage lending by 5.7%, because of continued liquidity constraints for the entities and continued Non Performing Loan rates deterioration in their overall portfolios.  On the other hand, commercial banks mortgage lending continued to recover during the year and as of December 2011, commercial banks’ mortgage portfolio grew 8.45 to Ps.392.8 billion compared to 2010.

 

Sofoles negative performance could affect our profitability to the extent that some of our suppliers rely on sofoles financing.  At the same time, we might benefit from Commercial banks positive performance to the extent that commercial banks might increase their mortgage lending mainly benefiting the Middle-Income market performance.

 

**OFF-BALANCE SHEET ARRANGEMENTS**

 

We had no off-balance sheet arrangements as of December 31, 2011.

 

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**CONTRACTUAL OBLIGATIONS**

 

The following table sets forth information regarding our contractual obligations as of December 31, 2011:

 
| ** **                         | ** ** | **Payment Due by Period** | ** ** |
|------------------------------------|------------|------------------------------------------|------------|
| **Contractual Obligations**   | ** ** | **Total**                                | ** ** | **Less than   1 Year** | ** ** | **1-3 Year** | ** ** | **3-5 Years** | ** ** | **More than   5 Years** | ** ** |
| ** **                         | ** ** | **(in thousands of Ps.)** | ** ** |
| Long-term debt obligations         |       | Ps.                                      | 14,908,644 |   | Ps. | 3,340,440 |   | Ps. | 3,222,131 |   | Ps. | 4,851,398 |   | Ps. | 3,494,675 |   |
| Capital (finance) lease       |       | 340,782                                  |       | 185,849 |   | 112,927 |   | 42,006 |   | — |   |
| Total debt                         |       | 15,249,426                               |       | 3,526,289 |   | 3,335,058 |   | 4,893,404 |   | 3,494,675 |   |
| Estimated interest**(1)**          |       | 5,118,041                                |       | 1,169,236 |   | 1,798,209 |   | 1,154,614 |   | 995,982 |   |
| Operating lease obligations**(2)** |       | 102,376                                  |       | 52,389 |   | 40,643 |   | 9,344 |   | — |   |
| Land suppliers                     |       | 1,172,293                                |       | 1,172,293 |   | — |   | — |   | — |   |
| Total                              |       | Ps.                                      | 21,642,136 |   | Ps. | 5,920,207 |   | Ps. | 5,173,910 |   | Ps. | 6,057,362 |   | Ps. | 4,490,657 |   |

 

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(1)          In estimating interest expense we used the applicable rate (see debt table in “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources.”) as of December 31, 2011.

(2)          Operating leases using the applicable base rate as of December 31, 2011.

 

Contractual obligations increased by 15.1% from Ps.18,804,551 as of December 31, 2010 to Ps.21,642,136 as of December 31, 2011.  This change was mainly due to working capital requirements as well as the Mexican Peso depreciation.

 

**New Accounting Pronouncements**

 

***Mexican Financial Reporting Standards (MFRS)***

 

The most relevant standards that came into force in 2011 are described below:

 

**MFRS B-5, Reporting Financial Information by Segment**

 

 This MFRS replaces MFRS B-5, Reporting Financial Information by Segment and establishes the criteria to identify the entity’s segments to disclose as well as the disclosures about those segments.  In addition, MFRS B-5 establishes certain other disclosure requirements.

 

The main changes of this MFRS are as follows:  (a) MFRS B-5 includes a managerial approach, while previous MFRS B-5, although it referred to managerial approach, required that the information to disclose were referred to identified segments based on the products or services, geographical areas and customers homogenous groups, also requiring that that information would be segregated in primary and secondary information; (b) new MFRS does not require that business areas are subject to different risks amongst them, in order to qualify as operative segments, while previous MFRS B-5 did; (c) in accordance to new MFRS B-5, business areas in development stage could be catalogued as operative segment, while previous MFRS B-5 required operative segments to generate revenues; (d) MFRS B-5  requires to disclose by segments interest income and interest expense, as well as other comprehensive financial cost items, while previous MFRS B-5 did not require this information; and (e) MFRS B-5 requires to disclose the amounts of liabilities that are included in the usual information of an operative segment that we normally uses to make decisions, while previous MFRS B-5 did not require this and let management the option to do so or not.

 

The adoption of this MFRS did not significantly change the periodic segment disclosures made by us.

 

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**MFRS C-4, Inventories**

 

** **In November 2010, the CINIF issued MFRS C-4, effective for fiscal years beginning on or after January 1, 2011 and replaced Mexican accounting Bulletin C-4, Inventories.  Any accounting changes resulting from the adoption of this standard related to changes in the formula for assigning inventory costs are recognized retrospectively.  Changes in valuation methods must be recognized prospectively.

 

 The principal difference between Mexican accounting Bulletin C-4 and MFRS C-4 is that the new standard does not allow using direct costs as the inventory valuation method nor does it allow using the LIFO cost method as the formulas (former method) for the assignment of unit cost to the inventories.  MFRS C-4 establishes that inventories must be valued at the lower of either acquisition cost or net realizable value.  Such standard also establishes that advances to suppliers for the acquisition of merchandise must be classified as inventories provided the risks and benefits are transferred to us.  Lastly, MFRS C-4 includes guidelines for the valuation of the inventories of service suppliers.

 

This MFRS was adopted as of January 1, 2011, with retrospective application to prior accounting periods presented with these 2011 consolidated financial statements as required by MFRS B-1, *Accounting Changes and Error Corrections*. The application of MFRS C-4 to the consolidated financial statements had the following effects with respect to the year ended December 31, 2010 consolidated balance sheet:

 
| ** **                                     | ** ** | **As originally issued** | ** ** | **Adjustment** | ** ** | **As adjusted********2010** | ** ** |
|------------------------------------------------|------------|------------------------------------|------------|----------------|------------|----------------------------------|------------|
| Assets:                                        |       |                               |       |           |       |                             |       |
| Cash and cash equivalents                      |       | Ps.                                | 3,435,222  |           | Ps.        | —                           |       | Ps. | 3,435,222 |   |
| Trade accounts receivable                      |       | 1,975,203                          |       | —         |       | 1,975,203                        |       |
| Inventories and land held for development      |       | 17,236,366                         |       | (114,509       | )          | 17,121,857                       |       |
| Prepaid expenses and other current assets, net |       | 627,682                            |       | 114,509        |       | 742,191                          |       |
| Total current assets                           |       | Ps.                                | 23,274,473 |           | Ps.        | —                           |       | Ps. | 23,274,473 |   |

 

Consolidated statement of cash flows information related to 2010 and 2009 has also been adjusted to reflect the change in classifications disclosed above.

 

**MFRS C-5, Prepaid Expenses**

 

In November 2010, the CINIF issued MFRS C-5, which is effective for fiscal years beginning on or after January 1, 2011.  MFRS C-5 replaces Mexican accounting Bulletin B-5.  Any accounting changes resulting from the adoption of this standard must be recognized retrospectively.

 

This standard establishes that the main characteristic of a prepaid expense is that it does not result in the transfer to the entity of the benefits and risks inherent to the goods or services to be received.  Consequently, prepaid expenses must be recognized in the balance sheet as either current or non-current assets, depending on the item classification in the statement of financial position.  Moreover, MFRS C-5 establishes that prepaid expenses made for good or services whose inherent benefits and risks have already been transferred to the entity must be carried to the appropriate caption.

 

The adoption of this MFRS required us to reclassify certain amounts in the December 31, 2010 balance sheet from inventories to other current assets. The impact of the adoption of this MFRS is presented above.

 

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**MFRS C-6, Property, Plant and Equipment**

 

MFRS C-6 was issued by the CINIF in December 2010 to replace Mexican accounting Bulletin C-6, Property, Machinery and Equipment, and is effective for fiscal years beginning on or after January 1, 2011, except for the changes related to the segregation of property, plant and equipment into separate components for those assets with different useful lives.  For entities that have not performed this component segregation, the provisions of this new standard will be effective as of January 1, 2012.

 

The new standard establishes that for acquisitions of free-of-charge assets, the cost of the assets must be null, thus eliminating the option of performing appraisals.  In the case of asset exchanges, MFRS C-6 requires entities to determine the commercial substance of the transaction and the amount to be depreciated is the cost of acquisition less the asset’s residual value.  Prepaid expenses for the acquisition of assets are to be recognized as a component of the asset as of the time the benefits and risks inherent to such assets are transferred.  In the case of retirement of assets, income is recognized when the requirements for income recognition outlined under the standard have been met.  MFRS C-6 also outlines new specific disclosures for public entities presented in Note 10 to our consolidated financial statements.

 

The adoption of this MFRS did not have any effects on our consolidated financial statements. The most relevant standards that came into force in 2010 are described below:

 

**IMFRS 14, Construction, Sales and Services Agreements related to Real Estate**

 

In December 2008, IMFRS 14 was issued by the CINIF to complement Bulletin D-7, *Construction Agreements and Manufacturing of Certain Capital Assets*.  This Interpretation is applicable to the recognition of revenues, costs and expenses for all entities that undertake the construction of capital assets directly or through sub-contractors.

 

Due to the application of this Interpretation, effective January 1, 2010, we stopped recognizing its revenues, costs and expenses based on the percentage-of-completion method.  At that date, we began to recognize them based on methods mentioned in this Interpretation.  Revenue and cost recognition will then more closely approximate what is often referred to as a “completed contract method” (or the “deposit accounting method”) in which revenues, costs and expenses should be recognized when all of the following conditions are fulfilled:

 

·                                          we have transferred the control to the homebuyer, in other words, the significant risks and benefits due to the property or the assets ownership;

 

·                                          we do not retain any continued participation of the actual management of the sold assets, in the usual grade associated with the property, nor does retain the effective control of the sold assets;

 

·                                          the revenues amount can be estimated reliably;

 

·                                          it is probable that we will receive the economic benefits associated with the transaction; and

 

·                                          the costs and expenses incurred or to be incurred related to the transaction can be estimated reliably.

 

 The above conditions are typically met upon the completion of construction, and signing by us, the customer and (if applicable) the lender of the legal contracts and deeds of ownership (*escrituras*) over the property.  At that time, the customer would have the legal right to take possession of the home.

 

This Interpretation was adopted as of January 1, 2010, with retrospective application to prior accounting periods as required by MFRS B-1 *Accounting Changes and Error Corrections.*

 

**MFRS C-1, Cash and cash equivalents**

 

Mexican FRS C-1 was issued by the CINIF in November 2009 to replace Mexican accounting Bulletin C-1, Cash, and is effective for fiscal years beginning on or after January 1, 2010.  The main differences between Mexican 

 

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FRS C-1 and Mexican accounting Bulletin C-1 lie in the presentation of restricted cash and the substitution of the term “short-term investments” by the new term “liquid investments”, which are those investments whose maturities do not exceed three months.

 

The adoption of this MFRS did not have significant effects on our consolidated financial statements, except for the reclassification of restricted cash to cash and cash equivalents in the consolidated balance sheets, with related effects on the consolidated statements of cash flows.

 

The most relevant standards that came into force in 2009 are described below:

 

**MFRS B-7, Business Acquisitions**

 

This MFRS substitutes Bulletin B-7 Business Acquisitions and was issued by the CINIF to replace Mexican accounting Bulletin B-7 *Business Acquisitions*.  This standard establishes general rules for the initial recognition of net assets, non-controlling interests and other items, as of the acquisition date.

 

According to this statement, purchase and restructuring expenses resulting from acquisition process, should not be part of the consideration, because these expenses are not an amount being shared by the business acquired.

 

In addition, MFRS B-7 requires a company to recognize non-controlling interests in the acquiree at fair value as of the acquisition date.

 

**MFRS B-8, Consolidated or Combined Financial Statements**

 

The CINIF issued in December 2008, MFRS B-8 Consolidated or Combined Financial Statements which replaces Mexican Bulletin B-8 *Consolidated Financial Statements* and describes general rules for the preparation, presentation and disclosure of consolidated and combined financial statements.

 

The main changes of this MFRS are as follows:  (a) this rule defines “Specific-Purpose Entity” (SPE), establishes the cases in which an entity has control over a SPE, and when a company should consolidate this type of entity; (b) addresses that potential voting rights should be analyzed when evaluating the existence of control over an entity;  and (c) set new terms for “controlling interest” instead of “majority interest,” and “non-controlling interest” instead of “minority interest.”

 

The adoption of this MFRS did not have any effect on our consolidated financial statements.

 

**MFRS C-7, Investments in Associates and Other Permanent Investments**

 

MFRS C-7 was issued by CINIF in December 2008 and describes the accounting treatment for investments in associates and “other permanent investments”, which were previously treated within Bulletin B-8 *Consolidated Financial Statements*.  This MFRS requires the recognition of a Specific-Purpose Entity, through equity method.  Also, this MFRS establishes that potential voting rights should be considered when analyzing the existence of significant influence.

 

In addition, this rule defines a procedure and a limit for the recognition of losses in an associate.

 

The adoption of this MFRS required us to consider the associate in Egypt as another permanent investment effective January 1, 2009, and no longer as an associate, and therefore to stop applying the equity method of accounting to this company. On December 31, 2009 we sold our total investment in this company to a third party.

 

**MFRS C-8, Intangible Assets**

 

This rule substitutes Bulletin C-8 *Intangible Assets*.  The new rule defines intangible assets as non-monetary items and broadens the criteria of identification, indicating that an intangible asset must be separable; 

 

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this means that such asset could be sold, transferred, or used by the entity.  In addition, intangible asset arises from legal or contractual rights, whether those rights are transferable or separable from the entity.

 

On the other hand, this standard establishes that preoperative costs should be eliminated from the capitalized balance, affecting retained earnings, and without restating prior financial statements.

 

The adoption of this MFRS did not have any effect on our consolidated financial statements.

 

**MFRS D-8, Share-Based Payments**

 

MFRS D-8 establishes the recognition of share-based transactions.  When an entity purchases goods or pay services through share-based transactions, the entity is required to recognize those goods or services at fair value and the corresponding increase in equity.  According with MFRS D-8, if share-based payments cannot be settled with equity instruments, they have to be settled using an indirect method considering MFRS D-8 parameters, and thus recorded as a liability.

 

The adoption of this MFRS did not have a material effect on our consolidated financial statements.

 

**IMFRS 18, Effects on Recognition from the 2010 Tax Reform Bill in Income Taxes**

 

On December 15, 2009 the CINIF published the IMFRS 18 of Mexican Financial Reporting Standards with the objective to provide guidance in regards to the 2010 Tax Reform Bill about the accounting recognition that should be completed in the companies’ financial statements.

 

This Interpretation establishes certain parameters for the recognition of changes to the new Tax Reform, mainly in regards to Income Tax rates changes, changes to the consolidation regime (fundamentally related to tax losses), losses on stock transfers, special consolidation terms, distributed dividends not from Net Tax Profit Account (CUFIN), consolidation tax benefits and differences between CUFIN.  The effects of the application of IMFRS 18 are disclosed in Note 24 to our consolidated financial statements.

 

**Effective in 2012:**

 

**International Financial Reporting Standards (IFRS)**

 

Pursuant to Article 78 of the General Provisions Applicable to Securities Issuers and Other Participants in the Securities Market (*Disposiciones de Carácter General Aplicables a las Emisoras de Valores y a Otros Participantes del Mercado de Valores*), beginning in 2012, certain Mexican companies with securities listed on a Mexican securities exchange, including Homex, must report their financial information in accordance with IFRS as issued by the International Accounting Standards Board (“IASB”). We will adopt IFRS as of December 31, 2012, with a Transition Date to IFRS of January 1, 2011. Accordingly, as of January 1, 2011, we adopted IFRS 1, “*First time Adoption of International Financial Reporting Standards*”.  Consequently the last financial statements prepared under MFRS are the ones as of December 31, 2011 presented herein. A summary of the principal accounting policies changes and estimated effects on our financial statements is described in the Note 27 to our audited consolidated financial statements.

 

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**U.S. GAAP**

 

The most relevant US GAAP standards that became effective for each of the three years ended December 31, 2011 are described below:

 

**Effective in 2011 and 2010:**

 

No significant US GAAP standards were initially adopted in 2011 and 2010.

 

**Effective in 2009:**

 

***ASC 810.10 (formerly FAS 160)***

 

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No.  160, “Non-controlling Interest in Consolidated Financial Statements — an amendment of ARB No.  51” (“FAS 160”).  FAS 160 was codified as a component of ASC 810.10.  ASC 810.10 requires non-controlling interests held by parties other than the parent in subsidiaries to be clearly identified, labeled, and presented in the consolidated statements of financial position within equity, but separate from the parent’s equity.

 

This new guidance is effective for fiscal years beginning after December 15, 2008.  Our US GAAP financial information included in Note 28 to our consolidated financial statements has been retrospectively adjusted for all periods to reflect the adoption of ASC 810.10.

 

***ASC 805.10 (formerly FAS 141 (R))***

 

In December 2007, the FASB issued Statement of Financial Accounting Standards No.  141 (revised 2007), “Business Combinations” (“FAS 141 (R)”).  FAS 141 (R) was a revision of FAS 141 and was codified as a component of ASC 805.10.  This new guidance requires that costs incurred to effect the acquisition (i.e., acquisition-related cost) be recognized separately from the acquisition.  In addition, restructuring costs that the acquirer expected but was not obligated to incur, which included changes to benefit plans, were recognized as if they were a liability assumed at the acquisition date.  This new guidance requires the acquirer to recognize those costs separately from the business combination.  This new guidance is effective for us in 2009, and did not have any impact on our consolidated financial statements, primarily as no acquisitions occurred during the year.

 

***ASC 815.10 (formerly FAS 161)***

 

In March 2008, the FASB issued Statement of Financial Accounting Standards No.  161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No.  133” (“FAS 161”).  FAS 161 was codified as a component of ASC 815.10.  This new guidance requires enhanced disclosures about an entity’s derivatives and hedging activities to improve the transparency of financial reporting.  It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.  This new guidance increases year end disclosures but did not have an impact on our consolidated financial position and results of operations.

 

***ASC 350.10 (formerly FSP FAS 142-3)***

 

In April 2008, the FASB issued FASB Staff Position FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”).  FSP FAS 142-3 was codified as a component of ASC 350.  This new guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset.  The new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008.  This pronouncement did not have any impact on our consolidated financial position and results of operation.

 

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***ASC 323.10 (formerly EITF 08-6)***

 

In November 2008, the Emerging Issues Task Force (EITF) reached a consensus on EITF 08-6, “Equity Method Investment Accounting Considerations.” EITF 08-6 was codified as a component of ASC 323.10.  This new guidance provides guidance on the application of the equity method.  It states equity-method investments should be recognized using a cost accumulation model.  Also, it requires that equity method investments as a whole be assessed for other-than-temporary impairments.  This new guidance is effective on a prospective basis for transactions in an investee’s shares occurring or impairments recognized in fiscal years beginning on or after December 15, 2008.  During the years ended December 31, 2009, our equity method investments did not represent a significant component of its operations.  Accordingly, the adoption of this EITF did not have a significant impact on our consolidated financial statements.

 

***ASC 855 (formerly FAS 165)***

 

In May 2009, the FASB issued ASC 855, “Subsequent Events.” ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  In particular, ASC 855 sets forth (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.  In accordance with ASC 855, an entity should apply the requirements to annual financial periods ending after June 15, 2009.  Subsequent events have been considered through the financial statements approval date specified in Note 1 to our consolidated financial statements.

 

**ITEM 6.****Directors, Senior Management and Employees.**

 

**DIRECTORS AND EXECUTIVE OFFICERS**

 

Our board of directors currently consists of nine members and is responsible for managing our business.  Each director is elected for a term of one year or until a successor has been appointed.  Our board of directors meets quarterly.  Pursuant to Mexican law, at least 25% of the members of the board of directors must be independent, as such term is defined by the Mexican Securities Market Law.  As required by New York Stock Exchange regulations, a majority of the members of our board of directors are independent.

 

As of the date of this annual report, the members of our board of directors are as follows:

 
| **Name**                                            | ** ** | **Born** | ** ** | **Position**              |
|-----------------------------------------------------|------------|----------|------------|---------------------------|
| Eustaquio Tomás de Nicolás Gutiérrez |       | 1961     |       | Chairman                  |
| Gerardo   de Nicolás Gutiérrez            |       | 1968     |       | Chief   Executive Officer |
| José Ignacio de Nicolás Gutiérrez    |       | 1964     |       | Director                  |
| Luis   Alberto Harvey MacKissack                    |       | 1960     |       | Director                  |
| Z.  Jamie Behar                                |       | 1957     |       | Director                  |
| Wilfrido   Castillo Sánchez-Mejorada           |       | 1941     |       | Director                  |
| Edward   Lowenthal                                  |       | 1944     |       | Director                  |
| Rafael   Matute                                     |       | 1960     |       | Director                  |
| Dennis   G.  Lopez                             |       | 1954     |       | Director                  |

 

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**Eustaquio Tomás de Nicolás Gutiérrez** is Chairman of Homex’s Board of Directors.  Before co-founding our predecessor in 1989, Mr. de Nicolás founded and managed DENIVE, a clothing manufacturing company.  Mr. de Nicolás has been a Board Member of the Mexican Stock Exchange since 2005, and has served as regional Chairman and regional Vice Chairman of CANADEVI and as a member of the regional advisory board of financial institutions such as BBVA Bancomer, Banamex, HSBC (formerly BITAL) and IPADE Business School.  Currently, Mr. de Nicolás oversees our main operations, focusing on new businesses as Homex infrastructure division, land acquisition and developing new geographical markets.

 

**Gerardo de Nicolás Gutiérrez** is our Chief Executive Officer.  Mr. de Nicolás served as Chief Strategic Officer and head of the Executive Committee from October 2006 to June 2007.  Mr. de Nicolás also served as our CEO from 1997 to September 2006.  Prior to his appointment as CEO, Mr. de Nicolás served as regional manager, systems manager, and construction manager and supervisor.  He holds an undergraduate degree in industrial engineering from Universidad Panamericana, in Mexico City and an MBA from Instituto Tecnológico y de Estudios Superiores de Monterrey in Guadalajara.

 

**José Ignacio de Nicolás Gutiérrez** is Chairman of the Board of Directors of Nico Commodities S.A. de C.V. a global food trading company.  Mr. de Nicolás served as Minister of Economic Development for the state government of Sinaloa from June 2007 to December 2010.  Mr. de Nicolás was founder and Chairman of the Board of Directors of Hipotecaria Crédito y Casa, S.A. de C.V., a Sofol that became the third largest mortgage bank in Mexico from 1997 to 2007.  Mr. de Nicolás also cofounded Homex and served as CEO from 1989 to 1997. Mr. de Nicolás is a board member of CEMEFI (the Mexican Center for Philanthropy); in addition he founded and was chairman of a non-profit organization for social assistance in the state of Sinaloa from 2002 to 2005.  Mr. de Nicolás received a B.S. in finance and administration from Universidad Panamericana, in Mexico City.

 

**Luis Alberto Harvey MacKissack** is Co-founding Partner and Senior Managing Director of Nexxus Capital, S.A.  He has more than 20 years of experience in investment banking and private equity.  Before founding Nexxus Capital, Mr. Harvey held positions at Grupo Bursatil Mexicano, Fonlyser, Operadora de Bolsa, and Servicios Industriales Peñoles S.A. de C.V.  His experience includes several private and public equity transactions and initial public offerings of several major Mexican corporations on the BMV and international capital markets.  Mr. Harvey is a member of the boards of directors of Nexxus Capital, S.A. de C.V., Grupo Sports World, S.A.B de C.V., Genomma Lab Internacional, S.A.B. de C.V., Harmon Hall Holding, S.D.R.L.  de C.V., Crédito Real S.A. de C.V.  SOFOM, E.N.R., Estudios Clínicos TJ Oriard and Grupo Hotelero Santa Fe, S.A. de C.V., among others.  Mr. Harvey is also member of the investment committees of ZN México II, L.P., Nexxus Capital Private Equity Fund III, Nexxus Capital IV and Nexxus Capital Private Equity Fund V.  Mr. Harvey received a B.S.  in economics from Instituto Tecnológico Autónomo de México (“ITAM”) and an MBA with a concentration in finance from the University of Texas at Austin.

 

**Z.  Jamie Behar** is Managing Director, Real Estate & Alternative Investments, for General Motors Investment Management Corporation, or GMIMCO, which has approximately $107  billion of total assets under management on behalf of both GM-affiliated and non-affiliated clients.  She manages GMIMCO’s clients’ real estate investment portfolios, including both private market and publicly traded security investments, as well as their alternative investment portfolios, totaling approximately $8.7 billion. She is a member of GMIMCO’s Management Committee, Investment Committee and Investment Review and Approval Committee. Ms. Behar is a member of the Board of Directors of Sunstone Hotel Investors, Inc., a publicly listed hotel company operating in the United States.  She also serves on the Board of Directors of the Pension Real Estate Association (“PREA”), and serves on the advisory boards of several domestic and international private real estate investment entities. Ms. Behar holds a B.S.E. degree from The Wharton School of the University of Pennsylvania, an M.B.A. degree from the Columbia University Graduate School of Business and the CFA charter.

 

**Wilfrido Castillo Sánchez-Mejorada** is the Chief Financial Officer of Qualitas Compañía de Seguros, S.A.B de C.V., a Mexican insurance company.  Mr. Castillo is a member of the Board of Directors of Qualitas Compañía de Seguros, S.A.B. de C.V., Grupo Sports World S.A.B. de C. V., Afianzadora Insurgentes, S.A. de C.V., Afianzadora Aserta, S.A. de C.V., and Crédito Real, S.A. de C.V.

 

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**Edward Lowenthal**is President of Ackerman Management LLC, an investment management and advisory company with particular focus on real estate and other asset-based investments.  Previously, Mr. Lowenthal founded and was President of Wellsford Real Properties, Inc., or WRP, a publicly-owned real estate merchant banking company that merged with Reis, Inc., a real estate market information and analytics provider.  He also founded and was trustee and President of Wellsford Residential Property Trust, a publicly-owned multi-family real estate investment trust that was merged into Equity Residential Properties Trust.  Mr. Lowenthal is a member of the Board of Directors of several companies, including Reis, Inc., where he is non-executive Chairman of the Board, Omega Healthcare Investors, Inc., a healthcare real estate investment trust and American Campus Communities, a publicly traded Real Estate Investment Trust which focuses solely on student housing in the United States.  He also serves as non-executive Chairman of Tiburon Lockers, Inc., a privately held owner-operator of rental storage lockers for transportation, entertainment, sports and other venues.

 

**Rafael Matute**is Executive Vice-President and Chief Financial Officer of Wal-Mart de Mexico.  He has been a member of the Board of Directors and the Executive Committee of the Board of Directors for Walmex since 1998; Mr. Matute is also a member of the Board of Directors for Banco Wal-Mart de México and Wal-Mart Foundation.  He has also been member of Consultative Boards for Banorte, Banamex/Citibank, and NAFINSA.  He has an MBA from the Instituto de Estudios Superiores de la Empresa (IESE), in Barcelona, Spain.  He studied Management at IMD in Lausanne, Switzerland and at Chicago University (GSB).

 

**Dennis G.  Lopez** is the Chief Investment Officer of Paris-based AXA Real Estate, the second largest global real estate investment manager with over US$55 billion of property assets under management.  Mr. Lopez is responsible for AXA Real Estate’s Fund Management activities overseeing a team of 110 fund management professionals.  The funds comprise a broad range of real estate investment strategies including:  opportunistic, value added, core-plus, core, development properties, listed funds, regulated funds and separate accounts.  Previously, Mr. Lopez was CEO of SUN Group, a private equity firm focused on real estate activities in India and Russia.  Mr. Lopez had a career of over 25 years in Investment Banking and Real Estate Investment Management, where he has occupied senior positions as Global Head of Real Estate at Cambridge Place Investment Management, a London based hedge fund, and as a Managing Director at JP Morgan in New York and London.  Mr. Lopez received his MBA from the University of California Los Angeles (“UCLA”).

 

**Secretary**

 

The secretary of the board of directors is Jaime Cortés Rocha, who is not a member of the board of directors.

 

**Audit Committee**

 

Our Audit Committee consists of Wilfrido Castillo Sánchez-Mejorada (Chairman), Edward Lowenthal and Z.  Jamie Behar.  Our Board of Directors has determined that Mr. Castillo has the attributes of an “audit committee financial expert” as defined by the SEC and that each member of the Audit Committee satisfies the financial literacy requirements of the New York Stock Exchange.  Our statutory auditor may attend audit committee meetings, although he does not have the right to vote.  Among other duties and responsibilities, the committee issues opinions to the board of directors regarding related party transactions; where if it deems appropriate, it recommends that independent experts be retained to render fairness opinions in connection with related party transactions and tender offers; reviews the critical accounting policies adopted by us and advises the board of directors on changes to such policies; assists the board of directors with planning and conducting internal audits; and prepares a yearly activity report for submission to the board of directors.  The committee is also responsible for the appointment, retention, and oversight of any accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit review or attest services and for the establishment of procedures for the receipt, retention, and treatment of complaints received with respect to accounting, internal controls, or auditing matters and the confidential, anonymous submission by employees with regard to the same.

 

**Executive Committee**

 

Our Executive Committee consists of Eustaquio Tomás de Nicolás Gutiérrez, Gerardo de Nicolás Gutiérrez, Edward Lowenthal, Luis Alberto Harvey MacKissack and Rafael Matute Labrador.  Among other duties 

 

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and responsibilities, the committee acts on general planning and financial matters not reserved exclusively for action by the board of directors, including appointing and removing our CEO, members of management, and any of our employees; entering into credit agreements on our behalf; and convening shareholders’ meetings.

 

**Corporate Governance and Compensation Committee**

 

Our corporate governance and compensation committee consists of Luis Alberto Harvey MacKissack (Chairman) and Edward Lowenthal.  Among other duties and responsibilities, the committee identifies individuals qualified to become board members and makes recommendations to the board of directors and shareholders regarding director and executive nominees; issues opinions to the board of directors regarding related party transactions; develops and recommends to the board of directors a set of corporate governance principles applicable to us; oversees the evaluation of the board and management; and makes recommendations for compensation policies applicable to our executives and officers.  The committee also reviews and approves corporate goals and objectives relating to CEO compensation, evaluates the CEO’s performance in light of those goals and objectives, determines and approves the CEO’s compensation level based on this evaluation, and makes recommendations to the board with respect to non-CEO compensation, incentive-compensation plans and equity-based plans.

 

**Risk Management Committee**

 

Our Risk Management Committee consists of Eustaquio Tomás de Nicolás Gutiérrez, Gerardo de Nicolás Gutiérrez, Edward Lowenthal, Luis Alberto Harvey, Rafael Matute Labrador MacKissack, and Wilfrido Castillo Sánchez-Mejorada.  The Committee reviews and approves the activities related to the contracting of our hedging instruments.  The Committee also identifies, assesses and limits other business risk associated with our normal activities.

 

**Disclosure Committee**

 

Our disclosure committee, as approved by the Board of Directors, is comprised of executives within management.  This committee is chaired by the Investor Relations Officer and is comprised of the Chief Executive Officer, the Chief Financial Officer, the Manager of Financial Reporting, the Administrative and Accounting Officer and the General Counsel.  Among other duties and responsibilities, the committee establishes the criteria to identify relevant information and reviews before publishing all documents that are to be presented to the general public as well as to buy side and sell side analysts.  By doing this, the committee acts to ensure that the relevant information issued by us is accurate in all financial, economic and operative aspects.

 

**Ethics Committee**

 

Our ethics committee, as approved by the Board of Directors is comprised of executives within management.  This committee is comprised of the Chief Executive Officer, the Executive Director of Human Resources and Corporate Responsibility, the General Counsel, the Training Director, the Director of Administrative Support and an external legal counsel.  Among other functions, the committee acts to ensure that we comply with our code of ethics and determines the sanctions if certain actions are considered to be not in compliance therewith.  The Committee also receives and processes complaints from our personnel.

 

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**Senior Management**

 

As of the date of this annual report, our senior management is as follows:

 
| **Name**                                            | ** ** | **Born** | ** ** | **Position**                                                  |
|-----------------------------------------------------|------------|----------|------------|---------------------------------------------------------------|
| Eustaquio Tomás de Nicolás Gutiérrez |       | 1961     |       | Chairman                                                      |
| Gerardo   de Nicolás Gutiérrez            |       | 1968     |       | Chief   Executive Officer                                     |
| Carlos   Moctezuma Velasco                          |       | 1971     |       | Chief   Financial Officer                                     |
| Ramón   Lafarga Bátiz                     |       | 1960     |       | Administrative   and Accounting Officer                       |
| Ana Cristina Herrera-Lasso Espinosa                 |       | 1964     |       | Vice   President of Human Resources and Social Responsibility |
| Rubén   Izábal González              |       | 1968     |       | Vice   President—Construction                            |
| Alberto   Menchaca Valenzuela                       |       | 1969     |       | Vice   President—Mexico Division                         |
| Alberto   Urquiza Quiroz                            |       | 1962     |       | Vice   President—International Division                  |
| Carolina   Silva Sánchez                       |       | 1981     |       | Vice   President—Tourism Division                        |

 

**Eustaquio Tomás de Nicolás Gutiérrez**is Chairman of Homex’s Board of Directors.  Before co-founding our predecessor in 1989, Mr. de Nicolás founded and managed DENIVE, a clothing manufacturing company.  Mr. de Nicolás has been a Board Member of the Mexican Stock Exchange since 2005, and has served as regional Chairman and regional Vice Chairman of CANADEVI and as a member of the regional advisory board of financial institutions such as BBVA Bancomer, Banamex, HSBC (formerly BITAL) and IPADE Business School.  Currently, Mr. de Nicolás oversees our main operations, focusing on new businesses such as our infrastructure division, land acquisition, and developing new geographical markets.

 

**Gerardo de Nicolás Gutiérrez** is our Chief Executive Officer.  Mr. de Nicolás served as Chief Strategic Officer and head of the Executive Committee from October 2006 to June 5, 2007.  Mr. de Nicolás also served as our CEO from 1997 to September 2006.  Prior to his appointment as CEO, Mr. de Nicolás served as regional manager, systems manager, and construction manager and supervisor.  He holds an undergraduate degree in industrial engineering from Universidad Panamericana, in Mexico City and an MBA from Instituto Tecnológico y de Estudios Superiores de Monterrey in Guadalajara.

 

**Carlos Moctezuma Velasco** is our Chief Financial Officer.  Mr. Moctezuma has served as CFO since December 2009. Prior to his appointment as CFO, Mr. Moctezuma served as our Director of Strategic Planning from December of 2007 to 2009 and as Investor Relations Officer from April 2004 to December 2009.  Prior to joining Homex, Mr. Moctezuma served as Senior Manager of Finance and Investor Relations Officer in Grupo Iusacell, S.A. de C.V., a publicly traded Mexican wireless telecommunications company that was formerly a subsidiary of Verizon Communications.  From 1993 to 1999, Mr. Moctezuma held various finance-related positions in Tubos de Acero de Mexico, S.A., including Manager of Investor Relations.  Mr. Moctezuma is former President and co-founder of the Mexican Investor Relations Association (AMERI), having held various positions there from 2002 through 2008.

 

**Ramón Lafarga Bátiz**has been the Administrative and Accounting Officer of Homex since June 2007.  Prior to this position, Mr. Lafarga served as Administrative Vice President from 1993 to 2006.  His prior experience includes serving as CEO and partner in Lafarga Bátiz, Contadores Públicos, a public accounting firm, and partner and CEO of a private company specializing in computer equipment.

 

**Ana Cristina Herrera-Lasso Espinosa** has been Vice President of Human Resources and Corporate Social Responsibility since March 2011.  Ms. Herrera-Lasso has worked in Human Capital Development at Homex since 2008.  Prior to 2008, Cristina was Human Resources Director at Ferrero’s Group for 10 years, working in Mexico and in Europe where she oversaw the management and development of talent for more than 50 countries with a particular focus on emerging markets:  South America, Africa and Asia.  Ms. Herrera-Lasso has worked in the banking sector, including positions with Banca Promex and HSBC, and in retail, including Walmart Group.  She holds an undergraduate degree in business administration from Universidad Anahuac in Mexico City, and a postgraduate degree in Finance from ITAM. Ms. Herrera-Lasso has also attended various specialization courses in 

 

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Human Resources development and Corporate Social Responsibility: Compensation and Benefits Seminar, Management by Competence. Driving Performance through Talent Management and CSR from Harvard Business School.

 

**Rubén Izábal González**has served as Vice President—Construction since 1997.  Prior to joining us, Mr. Izabal served at different construction companies, including Gomez y Gonzales Constructores, Provisur S.A. de C.V., Promotoria de Vivienda del Pacifico, S.A. de C.V., and Constructor Giza, S.A. de C.V.  Currently, Mr. Izabal oversees our construction operations, with a focus on the homebuilding process.  Mr. Izabal earned an undergraduate degree in architecture from Instituto Tecnológico y de Estudios Superiores del Occidente in Guadalajara, Jalisco.  Mr. Izabal also earned an associate degree in Business Management from Instituto Tecnológico de Estudios Superiores de Monterrey. In addition, Mr. Izabal took a seminar with Eliyahu Goldrat in regard to Theory of Restrictions as well as a seminar of effective negotiations with Chester L. Karras.

 

**Alberto Menchaca Valenzuela** has served as Vice President—Mexico Division since January 2010.  Prior to becoming Vice President—Mexico Division, Mr. Menchaca served as Vice President—Affordable Entry-Level division and as Chief Operations Officer from 2007 to 2009, as Vice President—Operations from 2000 to 2006 and as finance manager from 1996 to 2000.  His prior experience includes work at Banco Mexicano, InverMexico and Banca Confia.  Mr. Menchaca earned an undergraduate degree in agricultural engineering from Universidad Autónoma Agraria Antonio Narro in Saltillo, Coahuila. During the 2010-2011 period Mr. Menchaca took the Executive Education program (AD-2) with IPADE Business School.

 

**Alberto Urquiza Quiroz**serves as Vice President—International Division.  Mr. Urquiza also served as Vice president of NAFINSA, a Mexican development bank for five years, where he held several positions including Government Banking VP, Business Development VP and Mexico City Metropolitan Area VP.  Prior thereto Mr. Urquiza worked in Bancomer, one of the biggest banks in Mexico, for more than 15 years as Government Banking VP, Corporate Banking VP and Finance Engineer.  He also owns a software company.  He holds an undergraduate degree in business administration from Universidad Iberoamericana in Mexico City, an MBA from IPADE Business School and a postgraduate in Finance from ITAM.

 

**Carolina Silva Sánchez** has been the Vice President of Homex’s Tourism Division since February 2011.  Prior to being appointed as Vice President of our Tourism Division, Mrs.  Silva served as Corporate Affairs Officer directly reporting to Homex’s CEO from February 2005 to January 2011.  Mrs.  Silva has a degree in International Commerce from Instituto Tecnologico y de Estudios Superiores de Monterrey.

 

**Compensation of Directors and Senior Management**

 

Each member of the board of directors is paid a fee of US$12,500 for each board meeting that he or she attends, subject to an annual cap of US$50,000.  In addition, members of the audit committee are also paid an annual compensation fee of US$25,000 (the chairman of the audit committee’s annual compensation is US$35,000) and members of the executive, corporate governance and compensation committees are paid an annual fee of US$5,000.

 

For 2011, the aggregate amount of compensation net of taxes paid to all directors, alternate directors and committee members was approximately US$438,169, which includes US$123,669 of variable compensation for directors paid during the second quarter of 2011.

 

For 2011, a compensation of Ps. 4,557.6 was paid to executive officers through the Long Term Executives Stock Option Plan.

 

We offer a bonus plan to our directors and senior management that is based on individual performance and our results of operations.  This variable compensation can range from 30% to 50% of annual base compensation, depending on the employee’s level.

 

Since late 2007, we have offered a stock option plan as an incentive to our key executives.  The shares for the stock option plan for executives (999,200 shares) were repurchased by us, through a trust especially created for this purpose.  In 2007, 978,298 stock options were granted to the key executives at an exercise price of greater than the market value at the grant date of Ps.98.08.  During 2008, a total of 29,929 options were exercised, and 335,853 options were cancelled upon departure of the related employees.  In addition, during 2009 we increased the stock 

 

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option plan by approving the issuance of 73,232 additional stock options and granted 321,549 options at an exercise price of Ps.43.54.  None of our executives own more than 1% of our stock other than as set forth in the table below.  During 2011 and 2010 we did not increase any of the shares underlying its stock options plan, nor did we grant any new options. However a total of 47,873 and 126,691 stock options from the 2009 stock option plan were exercised in 2011 and 2010, respectively. Also during 2010, 612,516 options from the 2007 stock option plan were forfeited as the right for them to be exercised concluded. In addition, during 2011 32,637 options from the 2009 stock option plan were forfeited as the right for them to be exercised concluded.

 

The executives have the right to exercise one-third of their total options granted per year.  The right to exercise the option expires after one year from the grant date or, in some cases, after 180 days from the departure of the executive from the Company.

 

On October 27, 2009, certain modifications to the plan were made, as a result, the plan changed from a cash settled award to an equity settlement award.

 

The average fair value of 321,549 stock options granted during 2009 was Ps. 15.63, per stock option.

 

During the years ended December 31, 2011 and 2010, 47,873 and 126,691 of the stock options were exercised at and exercise price of Ps. 43.54, resulting in an increase of Ps. 2,716 and Ps. 5,516, in equity, respectively.

 

Total compensation cost related to vested stock option awards totaled Ps. 689, Ps. 10,638 and Ps. 4,212 at December 31, 2011, 2010 and 2009, respectively.

 

During 2011 we approved a new stock option plan, known as a “Phantom Plan” and consists of 965,596 options granted to the key executives. This plan became effective on January 1, 2011 and the executives have the right to exercise one-third of their total options granted per year. The right to exercise the option expires after one year from the grant date or, in some cases, after 180 days from the departure of the executive from the Company.

 

The grants were made at an exercise price of 56.88 Mexican pesos and during 2011, a total of 53,675 options were exercised. Also during 2011 a total of 323,898 options were forfeited.

 

The average fair value of the Phantom Plan stock options granted was 5.15 Mexican pesos per stock option, during the year ended December 31, 2011.

 

Total compensation cost related to the Phantom Plan recognized amounted to Ps. 3,685 at December 31, 2011.

 

**EMPLOYEES**

 

As of December 31, 2011 we had a total of approximately 11,299 employees, of whom 10,419 were employed in Mexico, 828 in Brazil and 52 in India.  Our total employees at December 31, 2010 and 2009 were 23,085 and 12,295, respectively.  Approximately 62% of our employees as of December 31, 2011 were administrative and managerial personnel.

 

**Share Ownership**

 

The following table sets forth the beneficial ownership of our capital stock by our directors and senior management as of the date of this annual report.  The table includes only those individuals who hold more than one percent of the outstanding shares of our capital stock.

 
| **Name**                                                  | ** ** | **Number of   Common Shares   Owned** | ** ** | **Percentage of   Common Shares   Outstanding** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Eustaquio   Tomás de Nicolás Gutiérrez (1) |       | 28,756,036                                      |       | 8.56                                                      | %          |
| Gerardo de Nicolás Gutiérrez (1)                |       | 27,318,234                                      |       | 8.13                                                      | %          |
| José   Ignacio de Nicolás Gutiérrez (1)    |       | 28,329,068                                      |       | 8.43                                                      | %          |
| Julián de Nicolás   Gutiérrez              |       | 21,567,027                                      |       | 6.42                                                      | %          |

 

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(1)          For additional information regarding the share ownership of the de Nicolás family, see “Item 7. Major Shareholders and Related Party Transactions— Major Shareholders” in this annual report.

 

**ITEM 7.****Major Shareholders and Related Party Transactions.**

 

**MAJOR SHAREHOLDERS**

 

As of December 31, 2011, there were 334,856,530 common shares issued and outstanding, with 203,777,568 shares held in the United States in the form of American Depositary Shares by six record holders.  The remaining shares were held through Mexican custodians.  Because certain of the shares are held by nominees, the number of record holders may not be representative of the number of beneficial holders.

 

The de Nicolás family now holds 34.1% of Homex’s capital.  The public float remains below 65.9%.

 

The table below sets forth information concerning the percentage of our capital stock owned by any person known to us to be the owner of 5% or more of any class of our voting securities, our directors and officers as a group and our other shareholders as of April 29, 2012.  Our major shareholders do not have different or preferential voting rights with respect to the shares they own.

 
| ** **                            | ** ** | **As of April 29, 2012** | ** ** |
|---------------------------------------|------------|----------------------------------------------|------------|
| **Identity of Shareholder** | ** ** | **Number of Shares**               | ** ** | **% of Share Capital** | ** ** |
| de Nicolás family(1)             |       | 114,597,176                                  |       | 34.1 | % |
| Total(2)                              |       | 335,869,550                                  |       | 100.0 | % |

 

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(1)          Held by Ixe Banco, S.A.  as trustee of Trust No.  F/466 for the benefit of the de Nicolás family, including Eustaquio Tomás de Nicolás Gutiérrez, José Ignacio de Nicolás Gutiérrez, Gerardo de Nicolás Gutiérrez, Julián de Nicolás Gutiérrez and Ana Luz de Nicolás Gutiérrez.  Voting and dispositive control over these shares is directed by a Technical Committee comprised of Eustaquio Tomás de Nicolás Gutiérrez, José Ignacio de Nicolás Gutiérrez, Gerardo de Nicolás Gutiérrez, Julián de Nicolás Gutiérrez and Juan Carlos Torres Cisneros.

 

(2)          Includes public shareholders that in the aggregate hold 65.9% of our share capital.

 

**RELATED PARTY TRANSACTIONS**

 

We have engaged, and in the future may engage, in transactions with our shareholders and companies affiliated with our shareholders.  We believe that the transactions in which we have engaged with these parties have been made on terms that are no less favorable to us than those that could be obtained from unrelated third parties.  We currently require that transactions with our shareholders and companies affiliated with our shareholders be approved by our board of directors after considering the recommendation of our audit committee or our corporate governance and compensation committee and, in certain cases, after an independent fairness opinion, as required by the Mexican Securities Market Law and other applicable laws.

 

**Financing to Related Parties**

 

We have a 24% equity interest in Makobil, a Mexican entity.  The other shareholder in Makobil is the Arendal Group, a well-known Mexican construction contractor. Makobil was awarded the Chiapas Correctional Facility Contract. We are not party to the Chiapas Correctional Facility, nor are we a guarantor in any of Makobil’s financing agreement.

 

We will be performing sub-contractor services to Makobil in connection with the construction and operation of the federal correctional facility in Chiapas, Mexico, and we have a receivable of Ps. 174,073 from Makobil as of December 31, 2011, which has been the largest amount outstanding. This note

 

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receivable is due in August 2012 and bears a variable interest at TIIE plus 1.6%.

 

No related party financing transactions were reported in 2010 and 2009.

 

**Land Purchases from Related Parties**

 

No related party land purchase transactions were reported in 2011, 2010 and 2009.

 

**ITEM 8.****Financial Information.**

 

See “Item 18.  Financial Statements.”  For information on our dividend policy, see “Item 3.  Key Information—Dividends.” For information on legal proceedings related to us, see “—Legal Proceedings.”

 

**LEGAL PROCEEDINGS**

 

As of the date of this annual report, we are involved in certain legal proceedings incidental to the normal operation of our business.  We do not believe that liabilities resulting from these proceedings are likely to have a material adverse effect on our financial condition, cash flow, or results of operations.

 

**ITEM 9.****The Offer and Listing.**

 

Our common shares have been traded on the Mexican Stock Exchange (*Bolsa Mexicana de Valores, S.A. de C.V.*) since June 29, 2004.  The ADSs, each representing six common shares, have been trading on the New York Stock Exchange since June 29, 2004.  On December 31, 2011, there were 334,856,530 outstanding common shares (of which 203,777,568 were represented by 33,962,928 ADSs held by six holders of record in the United States).

 

The following table sets forth, for the periods indicated, the quarterly and monthly high and low closing sale prices of our common shares and ADSs as reported by the Mexican Stock Exchange and the New York Stock Exchange, respectively.

 
| ** **  | ** ** | **Mexican Stock Exchange** | ** ** | **NYSE**                                                                   | ** ** |
|-------------|------------|--------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **  | ** ** | **High**                             | ** ** | **Low**                                                                    | ** ** | **High** | ** ** | **Low** | ** ** |
| ** **  | ** ** | **(Ps. per share)**        | ** ** | **(US per ADS)   (one ADS=   six common shares)** | ** ** |
| **2009**    |       |                                 |       |                                                                       |       |   |   |   |   |
| 1st Quarter |       | 56.78                                |       | 26.06                                                                      |       | 25.55 |   | 10.05 |   |
| 2nd Quarter |       | 65.83                                |       | 33.58                                                                      |       | 29.21 |   | 14.54 |   |
| 3rd Quarter |       | 89.75                                |       | 60.23                                                                      |       | 40.39 |   | 26.69 |   |
| 4th Quarter |       | 95.59                                |       | 69.29                                                                      |       | 43.81 |   | 31.65 |   |
|        |       |                                 |       |                                                                       |       |   |   |   |   |
| **2010**    |       |                                 |       |                                                                       |       |   |   |   |   |
| 1st Quarter |       | 77.51                                |       | 54.13                                                                      |       | 36.63 |   | 26.08 |   |
| 2nd Quarter |       | 64.70                                |       | 52.23                                                                      |       | 31.83 |   | 24.05 |   |
| 3rd Quarter |       | 68.02                                |       | 54.71                                                                      |       | 32.37 |   | 25.17 |   |
| 4th Quarter |       | 72.84                                |       | 67.47                                                                      |       | 35.74 |   | 32.23 |   |
|        |       |                                 |       |                                                                       |       |   |   |   |   |
| **2011**    |       |                                 |       |                                                                       |       |   |   |   |   |
| 1st Quarter |       | 69.62                                |       | 50.95                                                                      |       | 34.01 |   | 25.33 |   |
| 2nd Quarter |       | 57.01                                |       | 43.18                                                                      |       | 28.92 |   | 21.75 |   |
| 3rd Quarter |       | 51.28                                |       | 31.16                                                                      |       | 26.25 |   | 13.10 |   |
| 4th Quarter |       | 39.03                                |       | 26.33                                                                      |       | 16.87 |   | 11.40 |   |
|        |       |                                 |       |                                                                       |       |   |   |   |   |
| **2012**    |       |                                 |       |                                                                       |       |   |   |   |   |
| January     |       | 44.97                                |       | 39.10                                                                      |       | 20.71 |   | 17.14 |   |
| February    |       | 47.34                                |       | 38.60                                                                      |       | 22.31 |   | 18.01 |   |
| March       |       | 41.41                                |       | 37.76                                                                      |       | 19.57 |   | 17.45 |   |
| April       |       | 39.37                                |       | 35.41                                                                      |       | 18.51 |   | 16.04 |   |

 

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On April 29, 2012, the last reported sale price of the common shares on the Mexican Stock Exchange was Ps.36.85 per common share and the last reported sale price of the ADSs on the New York Stock Exchange was US$17.06 per ADS.

 

**MEXICAN STOCK EXCHANGE**

 

The Mexican Stock Exchange, located in Mexico City, is the only stock exchange in Mexico.  Operating continuously since 1907, the Mexican Stock Exchange is organized as a corporation (*sociedad anónima bursátil de capital variable*).  Securities are traded on the Mexican Stock Exchange each business day from 8:30 a.m. to 3:00 p.m., Mexico City time.

 

Since January 1999, all trading on the Mexican Stock Exchange has been effected electronically.  The Mexican Stock Exchange may impose a number of measures to promote an orderly and transparent trading price of securities, including the operation of a system of automatic suspension of trading in shares of a particular issuer when price fluctuation exceeds certain limits.  The Mexican Stock Exchange may also suspend trading in shares of a particular issuer as a result of:

 

·                                          non-disclosure of material events; or

 

·                                          changes in the offer or demand, volume traded, or prevailing share price, that are inconsistent with the shares’ historical performance and cannot be explained through publicly available information.

 

The Mexican Stock Exchange may reinstate trading in suspended shares when it deems that the material events have been adequately disclosed to public investors or when it deems that the issuer has adequately explained the reasons for the changes in offer and demand, volume traded, or prevailing share price.  Under current regulations, the Mexican Stock Exchange may consider the measures adopted by other stock exchanges in order to suspend and/or resume trading in an issuer’s shares in cases where the relevant securities are simultaneously traded on a stock exchange outside Mexico.

 

Settlement on the Mexican Stock Exchange is effected two business days after a share transaction.  Deferred settlement is not permitted without the approval of the CNBV, even where mutually agreed.  Most securities traded on the Mexican Stock Exchange are on deposit with the Mexican Securities Depository, or “INDEVAL” (*S.D. Indeval, S.A. de C.V., Institución para el Depósito de Valores, S.A. de C.V.*), a privately owned securities depositary that acts as a clearinghouse, depositary, and custodian, as well as a settlement, transfer, and registration agent for Mexican Stock Exchange transactions, eliminating the need for physical transfer of securities.

 

Although the Mexican Securities Market Law (*Ley del Mercado de Valores*) provides for the existence of an over-the-counter market, no such market for securities in Mexico has developed.

 

***Market Regulation and Registration Standards***

 

In 1925, the Mexican Banking Commission (*Comisión Nacional Bancaria*) was established to regulate banking activity and in 1946 the CNBV was established to regulate stock market activity.  In 1995, these two entities were merged to form the CNBV.  The Mexican Securities Market Law, which took effect in 1975, introduced important structural changes to the Mexican financial system, including the organization of brokerage firms as corporations (*sociedades anónimas*).  The Mexican Securities Market Law sets standards for authorizing companies to operate as brokerage firms, which authorization is granted at the discretion of the CNBV by resolution of its board of governors.  In addition to setting standards for brokerage firms, the Mexican Securities Market Law authorizes the CNBV, among other things, to regulate the public offering and trading of securities and to impose sanctions for the illegal use of insider information and other violations of the Mexican Securities Market Law.  The CNBV regulates the Mexican securities market, the Mexican Stock Exchange, and brokerage firms through a board of governors composed of 13 members.

 

Effective June 28, 2006, the Mexican Securities Market Law requires issuers to increase the protections offered to minority shareholders and to bring corporate governance practices in line with international standards.

 

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Such protections and corporate governance practices have been incorporated to our bylaws.  See “Item 3. Key Information—Risk Factors — Risk Factors Related to Mexico Our Common Shares and ADSs—Minority Shareholders Have Different Rights Against Us, Our Directors, or Our Controlling Shareholders in Mexico.”

 

To offer securities to the public in Mexico, an issuer must meet specific qualitative and quantitative requirements.  In addition, only securities that have been registered with the Mexican Securities Registry pursuant to CNBV approval may be listed on the Mexican Stock Exchange.  The CNBV’s approval for registration does not imply any kind of certification or assurance related to the investment quality of the securities, the solvency of the issuer, or the accuracy or completeness of any information delivered to the CNBV.

 

In March 2003, the CNBV issued certain general regulations applicable to issuers and other securities market participants.  The general regulations, which repealed several previously enacted CNBV regulations (*circulares*), now provide a single set of rules governing issuers and issuer activity, among other things.  The CNBV general regulations were amended to conform to the Mexican Securities Market Law by resolution of the CNBV published on September 6, 2004, September 22, 2006, and were updated on September 19, 2008, January 27, July 22 and December 29, 2009, December 10 and 20, 2010, March 16, July 27, August 31 and December 28, 2011.

 

The general regulations state that the Mexican Stock Exchange must adopt minimum requirements for issuers to list their securities in Mexico.  These requirements relate to matters such as operating history, financial and capital structure, and distribution.

 

The general regulations also state that the Mexican Stock Exchange must implement minimum requirements for issuers to maintain their listing in Mexico.  These requirements relate to matters such as financial condition, trading minimums, and capital structure, among others.  The Mexican Stock Exchange will review compliance with the foregoing requirements and other requirements on an annual, semi-annual and quarterly basis.  The Mexican Stock Exchange must inform the CNBV of the results of its review and this information must, in turn, be disclosed to investors.  If an issuer fails to comply with any of the foregoing requirements, the Mexican Stock Exchange will request that the issuer propose a plan to cure the violation.  If the issuer fails to propose a plan, or if the plan is not satisfactory to the Mexican Stock Exchange, or if an issuer does not make substantial progress with respect to the corrective measures, trading of the relevant series of shares on the Mexican Stock Exchange will be temporarily suspended.  In addition, if an issuer fails to propose a plan or ceases to follow the plan once proposed, the CNBV may suspend or cancel the registration of the shares.

 

Issuers of listed securities are required to file unaudited quarterly financial statements and audited annual financial statements as well as various periodic reports with the CNBV and the Mexican Stock Exchange.  Mexican issuers must file the following reports with the CNBV:

 

·                                          an annual report prepared in accordance with CNBV regulations by no later than June 30 of each year (analogous to reports filed with the SEC by U.S.  issuers on Form 10-K and by foreign private issuers on Form 20-F);

 

·                                          quarterly reports, within 20 days following the end of each of the first three quarters and 40 days following the end of the fourth quarter (analogous to reports filed with the SEC by U.S. issuers on Form 10-Q); and

 

·                                          current reports promptly upon the occurrence of material events (analogous to reports filed with the SEC by U.S. issuers on Form 8-K and by foreign private issuers on Form 6-K).

 

Pursuant to the CNBV’s general regulations, the internal rules of the Mexican Stock Exchange were amended to implement an automated electronic information transfer system, or “SEDI” (*Sistema Electrónico de Envío y Difusión de Información*), for information required to be filed with the Mexican Stock Exchange.  Issuers of listed securities must prepare and disclose their financial information via a Mexican Stock Exchange-approved electronic financial information system, or “SIFIC” (*Sistema de Información Financiera Computarizada*). Immediately upon its receipt, the Mexican Stock Exchange makes financial information prepared via SIFIC available to the public.

 

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The CNBV’s general regulations and the rules of the Mexican Stock Exchange require issuers of listed securities to file information through SEDI that relates to any act, event, or circumstance that could influence an issuer’s share price.  If listed securities experience unusual price volatility, the Mexican Stock Exchange must immediately request that the issuer inform the public as to the causes of the volatility or, if the issuer is unaware of the causes, that the issuer make a statement to that effect.  In addition, the Mexican Stock Exchange must immediately request that issuers disclose any information relating to relevant material events, when it deems the information currently disclosed to be insufficient, as well as instruct issuers to clarify the information when necessary.  The Mexican Stock Exchange may request issuers to confirm or deny any material events that have been disclosed to the public by third parties when it deems that the material event may affect or influence the securities being traded.  The Mexican Stock Exchange must immediately inform the CNBV of any such requests.  In addition, the CNBV may also make any of these requests directly to issuers.  An issuer may defer the disclosure of material events under some circumstances, as long as:

 

·                                          the issuer implements adequate confidentiality measures;

 

·                                          the information is related to incomplete transactions;

 

·                                          there is no misleading public information relating to the material event; and

 

·                                          no unusual price or volume fluctuation occurs.

 

The CNBV and the Mexican Stock Exchange may suspend trading in an issuer’s securities:

 

·                                          if the issuer does not disclose a material event; or

 

·                                          upon price or volume volatility or changes in the offer or demand in respect of the relevant securities that are not consistent with the historic performance of the securities and cannot be explained solely through information made publicly available pursuant to the CNBV’s general regulations.

 

The Mexican Stock Exchange must immediately inform the CNBV and the general public of any such suspension.  An issuer may request that the CNBV or the Mexican Stock Exchange resume trading, assuming the issuer demonstrates that the causes triggering the suspension have been resolved and that it is in full compliance with the periodic reporting requirements under the applicable law.  If the issuer’s request has been granted, the Mexican Stock Exchange will determine the appropriate mechanism to resume trading.  If trading in an issuer’s securities is suspended for more than 20 business days and the issuer is authorized to resume trading without conducting a public offering, the issuer must disclose via SEDI a description of the causes that resulted in the suspension and reasons why it is now authorized to resume trading before trading may resume.

 

Similarly, if an issuer’s securities are traded on both the Mexican Stock Exchange and a foreign securities exchange, the issuer must simultaneously file the information that it is required to file pursuant to the laws and regulations of the foreign jurisdiction with the CNBV and the Mexican Stock Exchange.

 

Pursuant to the Mexican Securities Market Law:

 

·                                          members of the board of directors and principal officers of a listed issuer;

 

·                                          shareholders controlling 10% or more of a listed issuer’s outstanding share capital, and the directors and principal officers of such shareholders;

 

·                                          groups having significant influence on a listed issuer; and

 

·                                          other insiders

 

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must abstain from purchasing or selling securities of the issuer within 90 days from the most recent public tender of shares of the issuer for sale or purchase, respectively.  Shareholders of issuers listed on the Mexican Stock Exchange must notify the Mexican Stock Exchange of any transactions made in or outside the Mexican Stock Exchange that result in a transfer of 10% or more but less than 30% of an issuer’s share capital on the day following the respective transaction.

 

The Mexican Securities Market Law requires any acquirer of more than 30% of an issuer’s outstanding share capital to make a public tender offer.

 

Any intended acquisition of a public company’s shares that results in the acquirer obtaining control of the company requires the potential acquirer to make a tender offer for 100% of the company’s outstanding share capital.  These tender offers must be made at the same price for all tendering shareholders.  The board of directors must give an opinion on any tender offer within 10 days after the tender offer notice.

 

In addition, the Mexican Securities Market Law requires shareholders holding 10% or more of a listed issuer’s share capital to notify the CNBV of any share transfer.

 

Pursuant to the January 27, 2009 CNBV regulations update, we must notify the CNBV by June 30 of each year the individual shareholdings by directors and executive officers of 1% or more of our share capital, or any other shareholdings of more than 5% of said capital.

 

***Mexican Securities Market Law***

 

The Mexican legislature issued an amended Mexican Securities Market Law effective June 28, 2006.  The amendments provide, among other things, that:

 

·                                          issuers must have a board of directors with at least five and not more than 21 members, of which 25% must qualify as “independent directors” under Mexican law;

 

·                                          issuers’ boards of directors must approve related party transactions and material asset transactions;

 

·                                          issuers must appoint and maintain an audit committee and a corporate governance committee; and

 

·                                          issuers must provide additional protections for minority shareholders.

 

The Mexican Securities Market Law permits issuers to include anti-takeover defenses in their bylaws and provides for specified minority rights and protections, among other things.

 

The Mexican Securities Market Law does not permit issuers to implement mechanisms where common shares and limited or non-voting shares are jointly traded or offered to public investors, unless the limited or non-voting shares are convertible into common shares within a term of up to five years.  In addition, the aggregate amount of shares with limited or non-voting rights may not exceed 25% of the aggregate amount of publicly-held shares, unless approved by the CNBV.

 

**ITEM 10.****Additional Information.**

 

**BYLAWS**

 

Set forth below is a brief summary of certain significant provisions of (1) our bylaws, as amended by our shareholders in accordance with the Mexican Securities Market Law and regulations, and (2) the Mexican Companies Law.  This description does not purport to be complete and is qualified by reference to our bylaws, which have previously been filed with the SEC.

 

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**Organization and Register**

 

We are a corporation (*sociedad anónima bursátil de capital variable*) organized in Mexico under the *Ley General de Sociedades Mercantiles*, or the “Mexican Companies Law” and the  *Ley del Mercado de Valores*, or the “Mexican Securities Market Law”.  We were incorporated on March 30, 1998 and the duration of our corporate life is indefinite.  Our corporate purpose, as fully described in Article 2 of our bylaws, is to act as a holding company.  As such, our bylaws grant us the power to engage in various activities, which allow us to function as a holding company.  These powers include, but are not limited to, the ability to (i) promote, establish, organize and administer all types of companies, mercantile or civil; (ii) acquire or dispose of stock or interests in other mercantile or civil companies, either by taking part in their formation or acquiring shares or interests in companies that are already in existence; (iii) receive from third parties and give to the companies of which it is a shareholder or partner or to any other third party, guidance or technical consulting services, including services in the fields of administration, accounting, merchandising or financing; (iv) obtain, acquire, utilize or dispose of any patent, brand or commercial name, franchise or rights in industrial property in Mexico or abroad; (v) obtain any type of financing or loan, with or without a specific guarantee, and grant loans to mercantile or civil companies or other persons in which the company has an interest or with others with which it has a business relationship; (vi) grant any type of guarantee and endorsement in respect to obligations or credit instruments, for the benefit of mercantile or civil companies or other persons with which the company has an interest or with which it maintains a business relationship; (vii) issue, subscribe, draw, accept and endorse all types of credit instruments, including obligations with or without a guarantee; (viii) acquire, rent, administer, sell, mortgage, pledge, encumber or dispose of goods, in whatever form, being movable or immovable, as well as rights over the same; (ix) execute any kind of act and formalize any kind of labor, civil, mercantile or administrative agreement or contract permitted by Mexican legislation, with real and corporate personalities that are either public or private, obtaining from these, concessions, permits and authorizations relating directly or indirectly to the company’s objectives as set forth in its bylaws, including, actively or passively entering into any agreement regarding any type of services, consulting work, supervisory work and technical direction that would be necessary or proper for the aforementioned goals; (x) issue treasury stock in accordance with Article 81 of the Mexican Securities Market Law; (xi) establish agencies or representatives and act as broker, agent, representative, mercantile mediator or distributor; and (xii) perform any acts necessary to accomplish the foregoing.

 

**Directors**

 

Our bylaws provide that our board of directors will consist of a minimum of five and a maximum of 21 members, as resolved by the relevant shareholders’ meeting.  At least 25% of the members of our board of directors must be independent pursuant to Mexican law.  At each shareholders’ meeting for the election of directors, holders of at least 10% of our outstanding share capital are entitled to appoint one member of the board of directors.

 

Pursuant to Mexican law, any director who has a conflict of interest with us relating to a proposed transaction must disclose the conflict and refrain from voting on the transaction or be liable for damages.  Directors receive compensation as determined at the ordinary shareholders’ meetings.

 

**Authority of the Board of Directors**

 

The board of directors is our legal representative and is authorized to take any action in connection with our operations not expressly reserved to our shareholders.  Pursuant to the Mexican Securities Market Law, the board of directors must approve, among other things:

 

·                                          strategic decisions for the Company and its subsidiaries;

 

·                                          any transactions outside the ordinary course of business to be undertaken with related parties;

 

·                                          significant asset transfers or acquisitions;

 

·                                          credit policies;

 

·                                          granting material guarantees or collateral;

 

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·                                          designation of the Chief Executive Officer (or Director General); and

 

·                                          any other important transactions.

 

Meetings of our board of directors are validly convened and held if a majority of its members are present.  Resolutions passed at these meetings will be valid if approved by a majority of the disinterested members of the board of directors present at the meeting.  If required, the chairman of the board of directors may cast a tie-breaking vote.

 

**Voting Rights and Shareholders’ Meetings**

 

Each common share entitles its holder to one vote at any meeting of our shareholders.

 

Under Mexican law and our bylaws, we may hold two types of shareholders’ meetings:  ordinary and extraordinary.

 

Ordinary shareholders’ meetings are those called to discuss any issues not reserved for extraordinary shareholders’ meetings.  An annual ordinary shareholders’ meeting must be held within the first four months following the end of each fiscal year to discuss, among other things:

 

·                                          approving or modifying the report of the board of directors including the audited year-end financial statements, as well as the report of the Chief Executive Officer (or Director General);

 

·                                          allocating profits, if applicable;

 

·                                          appointing or ratifying the appointment of members of the board of directors and the secretary, and determining their compensation;

 

·                                          appointing the chairman of the audit committee and of the corporate governance committee;

 

·                                          designating the maximum amount that may be allocated to share repurchases;

 

·                                          discussing the audit committee’s and corporate governance committee’s annual reports to the board of directors; and

 

·                                          approving transactions of the Company and subsidiaries representing 20% or more of the consolidated assets of the Company.

 

Extraordinary shareholders’ meetings may be called to consider any of the following matters, among other things:

 

·                                          extending the corporate duration of the Company;

 

·                                          dissolution;

 

·                                          increases or reductions of our fixed share capital;

 

·                                          changes in the Company’s corporate purpose or nationality;

 

·                                          transformation or merger;

 

·                                          issues of preferred shares;

 

·                                          share redemptions;

 

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·                                          delisting of our shares with the Mexican Securities Registry or with any stock exchange;

 

·                                          any amendments to our bylaws; and

 

·                                          any other matters for which applicable Mexican law or the bylaws specifically require an extraordinary shareholders’ meeting.

 

The board of directors, the audit committee and the corporate governance committee may call any shareholders’ meeting.  Any shareholder or group of shareholders with voting rights representing at least 10% of our share capital may request in writing that the board of directors call a shareholders’ meeting to discuss the matters indicated in the written request.  If the board of directors fails to call a meeting within 15 calendar days following the date of such written request, the shareholder or group of shareholders may request that a competent court call the meeting.  A single shareholder may request a call for a shareholders’ meeting if no meeting has been held for two consecutive years or if matters to be dealt with at an ordinary shareholders’ meeting have not been considered.

 

Holders of 20% of our outstanding shares may oppose any resolution adopted at a shareholders’ meeting and file a petition for a court order to suspend the resolution temporarily within 15 days following the adjournment of the meeting at which the action was taken, provided that the challenged resolution violates Mexican law or our bylaws and the opposing shareholders neither attended the meeting nor voted in favor of the challenged resolution.  In order to obtain such a court order, the opposing shareholder must deliver a bond to the court in order to secure payment of any damages that we may suffer as a result of suspending the resolution in the event that the court ultimately rules against the opposing shareholder.  Shareholders representing at least 10% of the shares present at a shareholders’ meeting may request to postpone a vote on a specific matter on which they consider themselves to be insufficiently informed.

 

Notices of shareholders’ meetings must be published in one newspaper of general circulation in the country at least 15 calendar days prior to the date of the meeting.  Each notice must set forth the place, date, and time of the meeting and the matters to be addressed and must be signed by whomever convenes the meeting.  Shareholders’ meetings will be deemed validly held and convened without a prior notice or publication whenever all the shares representing our capital are duly represented.  All relevant information relating to the shareholders’ meeting must be made available to shareholders starting on the date the notice is published.

 

To be admitted to any shareholders’ meeting, shareholders must be registered in our share registry or provide evidence of their status as shareholders as provided in our bylaws (including through certificates provided by INDEVAL and INDEVAL participants).  Shareholders may appoint one or more attorneys-in-fact to represent them pursuant to general or special powers of attorney or by a proxy.  Attorneys-in-fact may not be directors of Homex.

 

At or prior to the time of the publication of any notice of a shareholders’ meeting, we will provide copies of the notice to the depositary for distribution to the ADS holders.  ADS holders are entitled to instruct the depositary as to the exercise of voting rights pertaining to the common shares.

 

**Quorum**

 

Ordinary shareholders’ meetings are legally convened pursuant to a first notice when a majority of our share capital is present or duly represented.  Any number of shares present or duly represented at an ordinary meeting of shareholders convened pursuant to a second or subsequent notice constitutes a quorum.  Resolutions at ordinary shareholders’ meetings are valid when approved by a majority of the shares present at the meeting.

 

Extraordinary shareholders’ meetings are regarded as legally convened pursuant to a first notice when at least 75% of the shares of our share capital are present or duly represented.  A majority of shares must be present or duly represented at an extraordinary shareholders’ meeting called pursuant to a second or subsequent notice to be considered legally convened.  Resolutions at extraordinary shareholders’ meetings are valid when approved by one-half of our share capital.

 

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**Registration and Transfer**

 

We have registered our common shares with the Mexican Securities Registry maintained by the CNBV, as required under the Mexican Securities Market Law and regulations issued by the CNBV.  If we wish to cancel our registration, or if it is cancelled by the CNBV, our shareholders who are deemed to have “control” at that time will be required to make a public offer to purchase all outstanding shares, prior to the cancellation.

 

Our shareholders may hold our common shares as physical certificates or, upon registration, through institutions having accounts at INDEVAL.  These accounts may be maintained by brokers, banks and other entities approved by the CNBV.  In accordance with Mexican law, only holders listed in our share registry and those holding ownership certificates issued by INDEVAL and INDEVAL participants are recognized as our shareholders.

 

**Changes in Share Capital and Pre-emptive Rights**

 

Our minimum fixed share capital may be reduced or increased by a resolution of an extraordinary shareholders’ meeting, subject to the provisions of our bylaws, the Mexican General Business Corporations Law, the Mexican Securities Market Law and regulations issued thereunder.  Our variable share capital may be reduced or increased by resolution of an ordinary shareholders’ meeting in compliance with the voting requirements of our bylaws.

 

In the event of a share capital increase, our shareholders will have a pre-emptive right to subscribe and pay for new stock issued as a result of the increase in proportion to their shareholder interest at that time, except if the new stock is issued for a public offering.  This pre-emptive right must be exercised by subscribing and paying for the relevant shares within the time period set forth in the resolution authorizing the increase, which will be no less than 15 calendar days following the date of publication of the corresponding notice to our shareholders in the official gazette of Sinaloa and in one newspaper of general circulation in Culiacán, Sinaloa.

 

**Share Repurchases**

 

Pursuant to the Mexican Securities Market Law and our bylaws, we may repurchase our shares on the Mexican Stock Exchange at the prevailing market price.  Repurchased shares cannot be represented at any shareholders’ meeting.  We are not required to create a special reserve for the repurchase of shares and we do not need the approval of our board of directors to effect share repurchases.  However, we are required to obtain shareholder approval as described below.  In addition, our board of directors must appoint an individual or group of individuals responsible for effecting share repurchases.  These repurchases must be made subject to the provisions of the Mexican Securities Market Law, and carried out, reported, and disclosed in the manner established by the CNBV.

 

If we intend to repurchase more than 1% of our outstanding common shares at a single trading session, we must inform the public of this intention at least 10 minutes before submitting our bid.  If we intend to repurchase 3% or more of our outstanding common shares during a period of 20 trading days, we must conduct a public tender offer for those common shares.

 

We may not submit bids for repurchase during the first and the last 30 minutes of each trading session and we must inform the Mexican Stock Exchange of the results of any share repurchase no later than the following business day.

 

The amount allocated to share repurchases is determined annually by our shareholders at a general ordinary shareholders’ meeting and cannot exceed the aggregate amount of our net profits, including retained profits.

 

**Delisting**

 

If we decide to cancel the registration of our shares with the Mexican Securities Registry or if the CNBV orders such deregistration, we will be required to make a tender offer to purchase the shares held by minority

 

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shareholders prior to such cancellation.  Shareholders deemed to have “control” will be secondarily responsible for making such tender offer.  The price of the offer to purchase will be the higher of:

 

·                                          the average trading price on the Mexican Stock Exchange during the last 30 days on which the shares were quoted prior to the date on which the tender offer is made; and

 

·                                          the book value of the shares as reflected in our latest quarterly report filed with the CNBV and the Mexican Stock Exchange.

 

In order to make the repurchase, we must form a trust and contribute to it the amount required to secure payment of the purchase price offered pursuant to the tender offer to all of our shareholders that did not sell their shares pursuant to the tender offer.  The trust must be in force for a period of at least six months from the date of delisting.

 

No later than 10 business days following the commencement of an offering, our board of directors must issue an opinion on the offering price reflecting the opinion of our audit committee and disclosing any potential conflicts of interest that any of the board members may have.  The board’s resolution may be accompanied by a fairness opinion issued by an expert selected by us.

 

**Ownership of Share Capital by Subsidiaries**

 

Our subsidiaries may not, directly or indirectly, purchase our shares.

 

**Redemption**

 

Pursuant to the Mexican Securities Market Law, shareholders are entitled to the redemption of their variable common shares, pro rata, by resolution of the shareholders’ meeting.

 

**Liquidation**

 

Upon our dissolution, one or more liquidators must be appointed at an extraordinary shareholders’ meeting to wind-up our affairs.  All shares will be entitled to participate equally in any distribution upon liquidation.

 

**Appraisal Rights and Other Minority Protections**

 

If shareholders approve a change in our corporate purpose, nationality, or corporate form, any voting shareholder who voted against these matters is entitled to the redemption of its common shares at book value pursuant to the last financial statements approved by our shareholders at a shareholders’ meeting.  These redemption rights must be exercised within 15 days after the shareholders’ meeting at which the matter was approved.

 

Pursuant to the Mexican Securities Market Law and the Mexican General Business Corporations Law, our bylaws include a number of minority shareholder protections.  These minority protections include provisions that permit:

 

·                                          holders of at least 5% of our outstanding share capital to bring an action for civil liabilities against our directors and members of our senior management, provided that any recovery is for our benefit and not the benefit of the plaintiffs;

 

·                                          holders of at least 10% of our shares who are entitled to vote (including in a limited or restricted manner) to request that a shareholders’ meeting be called in certain limited situations;

 

·                                          holders of at least 10% of our shares who are entitled to vote (including in a limited or restricted manner) at any shareholders’ meeting to request that resolutions with respect to any matter on which they were not sufficiently informed to be postponed;

 

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·                                          holders of at least 10% of our outstanding share capital to appoint one member of our board of directors; and

 

·                                          holders of at least 20% of our outstanding share capital to contest and suspend any shareholder resolution, subject to certain requirements under Mexican law.

 

In addition, pursuant to the Mexican Securities Market Law, we are also subject to certain corporate governance requirements, including the requirement to maintain an audit committee and a corporate governance committee and that at least 25% of our directors qualify as independent.  The CNBV is empowered to verify their independence.

 

The protections afforded to minority shareholders under Mexican law are generally different from those in the United States and other jurisdictions, although we believe the Mexican Securities Market Law has introduced higher corporate governance standards including director fiduciary duties with a comprehensive description of duties of care and loyalty.  Mexican civil procedure does not provide for class-action lawsuits.

 

Notwithstanding the foregoing, it is anticipated to be more difficult for our minority shareholders to enforce rights against us or our directors or principal shareholders than it is for shareholders of a U.S.  issuer.

 

**Information to Shareholders**

 

The Mexican General Business Corporations Law establishes that companies, acting through their board of directors, must annually present a report to shareholders at a shareholders’ meeting that includes:

 

·                                          a report of the directors on the operations of the company and its subsidiaries during the preceding year, as well as on the policies followed by the directors and management;

 

·                                          an opinion on the Chief Executive Officer’s report on the principal accounting and information policies and criteria followed in the preparation of the financial information;

 

·                                          a statement of the financial condition of the company at the end of the fiscal year;

 

·                                          a statement showing the results of operations of the company during the preceding year, as well as changes in the company’s financial condition and share capital during the preceding year; and

 

·                                          the notes which are required to complete or clarify the above-mentioned information.

 

In addition, the Mexican Securities Market Law requires that information relating to matters to be discussed at shareholders’ meetings be made available to shareholders from the date on which the notice for the relevant meeting is published.

 

**Restrictions Affecting Non-Mexican Shareholders**

 

Foreign investment in capital stock of Mexican corporations is regulated by the 1993 Foreign Investment Law and by the 1998 Foreign Investment Regulations to the extent they are not inconsistent with the Foreign Investment Law.  The Ministry of Economy and the National Foreign Investment Commission (*Comisión Nacional Reguladora de la Inversión Extranjera*) are responsible for the administration of the Foreign Investment Law and the Foreign Investment Regulations.

 

Our bylaws do not restrict the participation of non-Mexican investors in our capital stock.  However, approval of the National Foreign Investment Commission must be obtained for foreign investors to acquire a direct or indirect participation in excess of 49% of the capital stock of a Mexican company that has an aggregate asset value that exceeds, at the time of filing the corresponding notice of acquisition, an amount determined annually by the National Foreign Investment Commission.

 

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As required by Mexican law, our bylaws provide that non-Mexican shareholders agree to be considered Mexican citizens with respect to:

 

·                                          shares held by them;

 

·                                          property rights;

 

·                                          concessions;

 

·                                          participations or interests we own; and

 

·                                          rights and obligations derived from any agreements we have with the Mexican government.

 

As required by Mexican law, our bylaws also provide that non-Mexican shareholders agree to refrain from invoking the protection of their governments in matters relating to their ownership of our shares.  Therefore, a non-Mexican shareholder may not ask its government to introduce a diplomatic claim against the government of Mexico with respect to its rights as a shareholder.  If the shareholder invokes such governmental protection, its shares could be forfeited to the Mexican government.  Notwithstanding these provisions, shareholders do not forfeit any rights they may have under U.S. securities laws.

 

**Summary of Differences between Mexican and U.S.  Corporate Law**

 

You should be aware that the Mexican General Business Corporations Law and the Mexican Securities Market Law, which apply to us, differ in material respects from laws generally applicable to U.S.  corporations and their shareholders.  In order to highlight these differences, set forth below is a summary of provisions applicable to us (including modifications adopted pursuant to our bylaws) which differ in material respects from provisions of the corporate law of the State of Delaware.

 

*Duties of Directors*

 

Under the Mexican Securities Market Law, directors now have fiduciary duties of care and loyalty specified therein.  The duties of directors of public companies are more extensive than the duties of directors of private companies.  Actions against directors may be initiated by holders of at least 5% of our outstanding share capital, although any damages recovered from directors are awarded solely to the company.

 

Under the Mexican Securities Market Law, the business and affairs of a corporation are managed by or under the direction of its board of directors.  In exercising their powers, directors are charged with a fiduciary duty of care to protect the interests of the corporation and a fiduciary duty of loyalty to act in the best interests of its shareholders.

 

The duty of care requires that directors act in an informed and deliberate manner, and inform themselves, prior to making a business decision, of all relevant material information reasonably available to them.  The duty of care also requires that directors exercise care in overseeing and investigating the conduct of corporate employees.  The duty of loyalty may be summarized as the duty to act in good faith, not out of self-interest, and in a manner which the director reasonably believes to be in the best interests of the shareholders.

 

Under the “business judgment rule,” courts generally do not question the business judgment of directors and officers.  A party challenging the propriety of a decision of a board of directors bears the burden of rebutting the presumption afforded to directors by the business judgment rule.  If the presumption is not rebutted, the business judgment rule attaches to protect the directors from liability for their decisions.  Where, however, the presumption is rebutted, the directors bear the burden of demonstrating the fairness of the relevant transaction.  However, when the board of directors takes defensive actions in response to a threat to corporate control and approves a transaction resulting in a sale of control of the corporation, Delaware courts subject directors’ conduct to enhanced scrutiny.

 

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Under the Mexican Securities Market Law, directors are exempted from liability for their decisions when they act in good faith and in compliance with all legal and bylaw requirements, and based on information provided by management, having selected the best alternative, according to their best judgment and after considering the foreseeable negative effects.  Mexican courts have not yet interpreted these new standards of conduct for directors.

 

*Interested Directors*

 

The Mexican Securities Market Law requires that our corporate governance committee issue an opinion with regard to transactions and arrangements with related parties, including directors.  These transactions and arrangements must be approved by our board of directors, except for immaterial transactions or transactions with affiliates in the normal course of business and at market prices.  Mexican law provides that a member of the board of directors can be liable for failing to disclose a conflict of interest and for voting on a transaction in which he or she has a conflict of interest.

 

Under Delaware law, a transaction entered into with regard to which a director has an interest would not be avoidable if:

 

·                                          the material facts with respect to such interested director’s relationship or interests are disclosed or are known to the board of directors, and the board of directors in good faith authorizes the transaction by the affirmative vote of a majority of the disinterested directors;

 

·                                          the material facts are disclosed or are known to the shareholders entitled to vote on the transaction, and the transaction is specifically approved in good faith by vote of the majority of shares entitled to vote thereon; or

 

·                                          the transaction is fair to the corporation as of the time it is authorized, approved or ratified.  Under Delaware law, an interested director could be held liable for a transaction in which the director derived an improper personal benefit.

 

*Dividends*

 

Under Mexican law, prior to paying dividends a company must reserve at least 5% of its profits every year until it establishes a legal reserve equal to 20% of its capital share.  Dividends may only be paid from retained earnings and only if losses for prior fiscal years have been paid.  Dividends may also be subject to additional restrictions contained in the company’s bylaws.  The payment of dividends must be approved at an annual general shareholders’ meeting.  We do not currently expect to pay dividends.

 

Under Delaware law, subject to any restrictions contained in the company’s certificate of incorporation, a company may pay dividends out of surplus or, if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and for the preceding fiscal year.  Delaware law also provides that dividends may not be paid out of net profits at any time when capital is less than the capital represented by the outstanding stock of all classes having a preference upon the distribution of assets.

 

*Mergers, Consolidations, and Similar Arrangements*

 

A Mexican company may merge with another company only if a majority of the shares representing its outstanding share capital approves the merger at a duly convened extraordinary shareholders’ meeting.  Dissenting shareholders are not entitled to appraisal rights.  Creditors have 90 days to oppose a merger judicially, provided they have a legal interest to oppose the merger.

 

Under Delaware law, with certain exceptions, a merger, consolidation, or sale of all or substantially all the assets of a corporation must be approved by the board of directors and a majority of the outstanding shares entitled to vote thereon.  Under Delaware law, a shareholder of a corporation participating in certain major corporate transactions may, under certain circumstances, be entitled to appraisal rights pursuant to which the shareholder may receive payment in the amount of the fair market value of the shares held by the shareholder (as determined by a

 

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court) in lieu of the consideration the shareholder would otherwise receive in the transaction.  Delaware law also provides that a parent corporation, by resolution of its board of directors and without any shareholder vote, may merge with any subsidiary of which it owns at least 90% of each class of capital share.  Upon any such merger, dissenting shareholders of the subsidiary would have appraisal rights.

 

*Anti-Takeover Provisions*

 

Our bylaws do not include anti-takeover provisions.  The Mexican Securities Market Law permits public companies to include anti-takeover provisions in their bylaws that restrict the ability of third parties to acquire control of the company; provided, however, that:

 

·                                          adoption of such provisions is not opposed by holders of 5% or more of our share capital;

 

·                                          no shareholder is excluded from the benefits that may derive from such provisions;

 

·                                          takeovers cannot be absolutely banned and any required approval from the company’s board of directors must be subject to established criteria and a deadline not to exceed three months; and

 

·                                          takeover procedures conform to compulsory tender offering rules.

 

Under Delaware law, corporations can implement shareholder rights plans and other measures, including staggered terms for directors and super-majority voting requirements, to prevent takeover attempts.  Delaware law also prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested shareholder for a period of three years after the date of the transaction in which the shareholder became an interested shareholder unless:

 

·                                          prior to the date of the transaction in which the shareholder became an interested shareholder, the board of directors of the corporation approves either the business combination or the transaction that resulted in the shareholder becoming an interested shareholder;

 

·                                          upon consummation of the transaction that resulted in the shareholder becoming an interested shareholder, the interested shareholder owns at least 85% of the voting stock of the corporation, excluding shares held by directors, officers, and employee stock plans; or

 

·                                          at or after the date of the transaction in which the shareholder became an interested shareholder, the business combination is approved by the board of directors and authorized at a shareholders’ meeting by at least 66 2/3 % of the voting stock which is not owned by the interested shareholder.

 

*Transactions with Significant Shareholders*

 

Under Mexican law, a company’s board of directors must approve any potential transaction to be undertaken with any shareholders of the company or other companies affiliated with shareholders of the company.  The board of directors must take the recommendation of the corporate governance committee into consideration in granting its approval and may also require an independent fairness opinion.  In addition, pursuant to Mexican law, any shareholder who votes on a transaction in which the shareholder has a conflict of interest may be liable for damages if the transaction would not have been approved without the shareholder’s vote.

 

As a Mexican company, we may enter into business transactions with our significant shareholders, including asset sales, in which the significant shareholder receives a greater financial benefit than other shareholders with prior approval from our board of directors.  Prior approval from our shareholders is not required for this kind of transaction.

 

No similar provision relating to transactions with significant shareholders exists under Delaware law.

 

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*Shareholders’ Suits*

 

As mentioned above, holders of at least 5% of our outstanding share capital may bring derivative actions for civil liabilities against our directors, members of the audit committee, and the corporate governance committee.  However, the grounds for shareholder derivative actions under Mexican law are limited, which effectively bars most of these suits in Mexico.  In addition, subject to certain requirements, holders of at least 20% of a company’s outstanding share capital may contest and suspend any shareholder resolution that violates Mexican law or our bylaws.  Class-action lawsuits are not permitted under Mexican law.

 

Class-actions and derivative actions are generally available to shareholders under Delaware law for, among other things, breach of fiduciary duty, corporate waste and actions not taken in accordance with applicable law.  In these kinds of actions, the court generally has discretion to permit the winning party to recover attorneys’ fees incurred in connection with the action.

 

*Indemnification of Directors and Officers*

 

Under Mexican law, a company may indemnify directors or members of any committee of the board of directors, for actions taken within the scope of their duties, against expenses (including attorneys’ fees), judgments, fines and settlement amounts, reasonably incurred in defense of an action, suit or proceeding, except for breach of the duty of loyalty or unlawful acts.

 

Under Delaware law, a corporation may indemnify a director or officer of the corporation against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in defense of an action, suit or proceeding by reason of a director’s or officer’s position if:

 

·                                          the director or officer acted in good faith and in a manner the director or officer reasonably believed to be in or not opposed to the best interests of the corporation; and

 

·                                          with respect to any criminal action or proceeding, the director or officer had no reasonable cause to believe his or her conduct was unlawful.

 

*Inspection of Corporate Records*

 

Under Mexican law, at the time that a notice of shareholders’ meeting is published, shareholders are entitled to all information related to the matters to be discussed at the meeting.

 

Delaware law permits any shareholder to inspect or obtain copies of a corporation’s shareholder list and its other books and records for any purpose reasonably related to a person’s interest as a shareholder.

 

*Shareholder Proposals*

 

Under Mexican law and our bylaws, holders of at least 10% of our outstanding share capital are entitled to appoint one member of our board of directors.

 

Delaware law does not include a provision restricting the manner in which nominations for directors may be made by shareholders or the manner in which business may be brought before a meeting.

 

*Calling of Special Shareholders’ Meetings*

 

Under Mexican law and our bylaws, a shareholders’ meeting may be called by the board of directors, the chairman of the board of directors or of the audit committee or the corporate governance committee.  Any shareholder or group of shareholders with voting rights representing at least 10% of our share capital may request in writing that the board of directors call a shareholders’ meeting to discuss the matters indicated in the written request.  If the board of directors fails to call a meeting within 15 calendar days following the date of the written request, the shareholder or group of shareholders may request that a competent court call the meeting.  A single shareholder may call a shareholders’ meeting if no meeting has been held for two consecutive years or if matters to be dealt with at an ordinary shareholders’ meeting have not been considered.

 

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Delaware law permits the board of directors or any person who is authorized under a corporation’s certificate of incorporation or bylaws to call a special meeting of shareholders.

 

*Cumulative Voting*

 

Under Mexican law, cumulative voting for the election of directors is not permitted.

 

Under Delaware law, cumulative voting for the election of directors is permitted only if expressly authorized in the certificate of incorporation.

 

*Approval of Corporate Matters by Written Consent*

 

Mexican law permits shareholders to take action by unanimous written consent of the holders of all shares entitled to vote.  These resolutions have the same legal effect as those adopted in a general or special shareholders’ meeting.  The board of directors may also approve matters by unanimous written consent.

 

Delaware law permits shareholders to take action by written consent of holders of outstanding shares having more than the minimum number of votes necessary to take the action at a shareholders’ meeting at which all voting shares were present and voted.

 

*Amendment of Certificate of Incorporation*

 

Under Mexican law, it is not possible to amend a company’s certificate of incorporation (*acta constitutiva*).  However, the provisions that govern a Mexican company are contained in its bylaws, which may be amended as described below.

 

Under Delaware law, amending a company’s certificate of incorporation, which is equivalent to a memorandum of association, must be made by a resolution of the board of directors setting forth the amendment, declaring its advisability, and either calling a special meeting of the shareholders entitled to vote or directing that the amendment proposed be considered at the next annual meeting of the shareholders.  Delaware law requires that, unless a different percentage is provided for in the certificate of incorporation, a majority of the outstanding shares entitled to vote thereon is required to approve the amendment of the certificate of incorporation at the shareholders’ meeting.  If the amendment would alter the number of authorized shares or otherwise adversely affect the rights or preference of any class of a company’s stock, Delaware law provides that the holders of the outstanding shares of such affected class should be entitled to vote as a class upon the proposed amendment, regardless of whether such holders are entitled to vote by the certificate of incorporation.  However, the number of authorized shares of any class may be increased or decreased, to the extent not falling below the number of shares then outstanding, by the affirmative vote of the holders of a majority of the stock entitled to vote, if so provided in the company’s certificate of incorporation or any amendment that created such class or was adopted prior to the issuance of such class or that was authorized by the affirmative vote of the holders of a majority of such class of stock.

 

*Amendment of Bylaws*

 

Under Mexican law, amending a company’s bylaws requires shareholder approval at an extraordinary shareholders’ meeting.  Mexican law requires that at least 75% of the shares representing a company’s outstanding share capital be present at the meeting upon the first call (unless the bylaws require a higher threshold) and that the resolutions be approved by shares representing one-half of the company’s outstanding capital share.

 

Under Delaware law, holders of a majority of the voting rights of a corporation and, if so provided in the certificate of incorporation, the directors of the corporation, have the power to adopt, amend and repeal the bylaws of a corporation.

 

*Staggered Board of Directors*

 

Mexican law does not permit companies to have a staggered board of directors.

 

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Delaware law permits corporations to have a staggered board of directors.

 

**MATERIAL CONTRACTS**

 

For further discussion of our material contracts, see “Item 5.  Operating and Financial Review and Prospects—Liquidity and Capital Resources” and Item 7.  Major Shareholders and Related Party Transactions.”

 

**EXCHANGE CONTROLS**

 

Mexican law does not restrict our ability to remit dividends and interest payments, if any, to non-Mexican holders of our securities.  Payments of dividends to equity holders, to the extent made, generally will not be subject to Mexican withholding tax.  Mexico has had a free market for foreign exchange since 1991, and the government has allowed the peso to float freely against the U.S. dollar since December 1994.

 

**TAXATION**

 

The following summary contains a description of:

 

·                                          the material anticipated Mexican federal income tax consequences of the purchase, ownership and disposition of the ADSs or common shares by non-resident holders, or holders that

 

·                                          are not residents of Mexico for tax purposes; and

 

·                                          will not hold the ADSs or common shares or a beneficial interest therein in connection with the conduct of a trade or business through a permanent establishment, for tax purposes, in Mexico; and

 

·                                          the material anticipated U.S. federal income tax consequences of the purchase, ownership, and disposition of the ADSs or common shares by non-resident holders that are “U.S. holders,” or beneficial owners of the ADSs or common shares that, for U.S. federal income tax purposes:

 

·                                          are citizens or residents of the United States;

 

·                                          are corporations, or other entities taxable as corporations, organized under the laws of the United States or any state thereof or the District of Columbia; or

 

·                                          are trusts if (a) a court within the United States is able to exercise primary supervision over the administration of the trusts and one or more U.S. persons have the authority to control all substantial decisions of the trusts or (b) they have valid elections in effect under applicable United States Treasury regulations to be treated as U.S. persons.

 

For purposes of Mexican taxation:

 

·                                          individuals are residents of Mexico if they have established their principal place of residence in Mexico or, if they have established their principal place of residence outside Mexico, if their core of vital interests (*centro de intereses vitales*) is located in Mexico.  An individual’s core of vital interests will be deemed to be located in Mexico if, among other things,

 

·                                          at least 50% of the individual’s aggregate annual income derives from Mexican sources, or

 

·                                          the individual’s principal center of professional activities is located in Mexico;

 

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·                                          individuals are residents of Mexico if they are state employees, regardless of the location of the individual’s core of vital interests; and

 

·                                          legal entities are residents of Mexico if they maintain their principal place of business or their place of effective management in Mexico.

 

If non-residents of Mexico are deemed to have a permanent establishment in Mexico for tax purposes, all income attributable to the permanent establishment will be subject to Mexican taxes, in accordance with applicable Mexican tax law.

 

In general, for U.S. federal income tax purposes, U.S. holders beneficially owning ADSs will be treated as the beneficial owners of the common shares represented by those ADSs.

 

The following summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to purchase the ADSs or common shares.  In particular, the summary of U.S. federal income tax consequences only addresses U.S. holders that will hold the ADSs or common shares as capital assets and does not address the tax treatment of U.S. holders that own or are treated as owning 10% or more of our outstanding voting shares.  Further, this summary does not discuss all aspects of U.S. federal income taxation that may be relevant to a particular investor or applicable to certain categories of U.S. holders such as financial institutions (including banks), dealers, traders who elect to mark-to-market, tax-exempt entities, insurance companies, partnerships (or entities treated as partnerships for U.S. federal income tax purposes) or investors therein, regulated investment companies, real estate investment trusts, dealers in securities or currencies, expatriates, persons who hold the ADSs or common shares as part of a hedge, straddle, synthetic security, conversion or integrated transaction, U.S. holders who have a functional currency other than the U.S. dollar, or U.S. holders liable for the alternative minimum tax.  Potential U.S. holders should realize that the tax consequences for persons described in the preceding sentence may differ materially from those applicable to other U.S. holders.  Furthermore, the summary does not address any U.S. federal tax consequences other than U.S. federal income tax consequences, such as the estate and gift tax or the Medicare tax on net investment income.  Finally, the summary does not address any U.S. or Mexican state or local tax considerations that may be relevant to non-resident holders and to U.S. holders.

 

The discussion of U.S. federal income tax considerations below assumes that we are not a passive foreign investment company, or “PFIC” for U.S. federal income tax purposes.  Based on our audited financial statements and relevant market and shareholder data, we believe that we were not treated as a PFIC for U.S. federal income tax purposes with respect to our 2011 taxable year.  Furthermore, based on our audited financial statements and our current expectations regarding the value and nature of our assets, the sources and nature of our income and relevant market and shareholder data, we do not anticipate being a PFIC for our 2012 taxable year.  However, this determination is made annually and it is possible that our status could change. If we are or become a PFIC, you could be subject to additional U.S. federal income taxes on gain recognized with respect to the ADSs or common shares and on certain distributions, plus an interest charge on certain taxes treated as having been deferred under the PFIC rules.

 

This summary is based upon the federal income tax laws of the U.S. and Mexico as in effect on the date of this annual report and the provisions of the income tax treaty between the U.S. and Mexico and the protocol thereto (the “Tax Treaty”), all of which are subject to change, possibly with retroactive effect.  However, this summary does not address all aspects of the federal income tax laws of the U.S. and Mexico.  Prospective investors in the ADSs or common shares should consult their own tax advisors as to the U.S., Mexican, or other tax consequences of the purchase, ownership, and disposition of the ADSs or common shares, including, in particular, the effect of any foreign, state or local tax laws and their entitlement to the benefits, if any, afforded by the Tax Treaty.

 

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**Taxation of Dividends**

 

*Mexican Tax Considerations*

 

Under the provisions of the Mexican Income Tax Law (*Ley del Impuesto Sobre la Renta*), dividends paid to non-resident holders with respect to the common shares or the ADSs will not be subject to Mexican withholding tax.

 

Dividends paid from distributable earnings that have not been subject to corporate income tax are subject to a corporate-level dividend tax at a rate of 39.72% (gross-up of 30%).  According to the tax reform bill approved on December, 7 2009, during 2011, 2012 and 2013 the rate will be 39.72% (gross-up of 30%) and during 2014, 35.52% (gross-up of 29%).  From 2015 going forward, the rate will be 37.66% again.  The corporate-level dividend tax on the distribution of earnings is not final and may be credited against income tax payable during the fiscal year in which the dividend tax was paid and for the following two years.  Dividends paid from distributable earnings, after corporate income tax has been paid with respect to these earnings, are not subject to this corporate-level dividend tax.

 

*U.S. Federal Income Tax Considerations*

 

The gross amount of any dividend distributions paid with respect to the common shares (including the common shares represented by the ADSs), to the extent paid out of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes, generally will be includible in the gross income of a U.S. holder as ordinary income on the date on which the distributions are received by such U.S. holder (or, in the case of the ADSs, the depositary) and will not be eligible for the dividends received deduction allowed to certain corporations under the U.S. Internal Revenue Code of 1986, as amended (the “Code”).  To the extent that a distribution exceeds our current and accumulated earnings and profits, it will be treated as a non-taxable return of basis to the extent thereof, and thereafter as capital gain from the sale of ADSs or common shares.  We do not currently maintain, and do not intend to maintain, calculations of our earnings and profits under U.S. federal income tax principles and, consequently, U.S. holders should treat the full amount of distributions with respect to the common shares (including the common shares represented by the ADSs) as taxable dividends for U.S. federal income tax purposes.

 

Distributions, which will be made in pesos, will be includible in the income of a U.S. holder in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date they are received by such U.S. holder (or, in the case of the ADSs, the depositary), whether or not they are converted into U.S. dollars.  U.S. holders should consult their own tax advisors regarding the treatment of foreign currency gain or loss, if any, on any pesos received that are converted into U.S. dollars on a date subsequent to receipt (including with respect to whether the disposition of pesos giving rise to any foreign currency loss constitutes a “reportable transaction” for U.S. federal income tax purposes).  Dividend income generally will constitute foreign source “passive income” or, “general” category income (depending on whether the U.S. holder is predominantly engaged in the active conduct of a banking, insurance, financing or similar business) for U.S. foreign tax credit purposes.

 

In the event that Mexican taxes are withheld from dividend distributions, the U.S. dollar value of any such withheld taxes would be treated as part of the gross amount of the dividend includible in income for a U.S. holder for U.S. federal income tax purposes (to the extent of current or accumulated earnings and profits).  U.S. holders may be entitled to credit such taxes against their U.S. federal income tax liability or, for those U.S. holders who so elect, to deduct such Mexican taxes in computing taxable income.  The calculation of foreign tax credits and, in the case of U.S. holders that elect to deduct foreign taxes, the availability of deductions, are subject to generally applicable limitations under U.S. federal income tax regulations and involve the application of rules that depend on U.S. holders’ particular circumstances.  U.S. holders should consult their own tax advisors regarding the potential availability of foreign tax credits and deductions.

 

Distributions of additional common shares to holders of common shares or ADSs with respect to their common shares or ADSs, as applicable, that are made as part of a pro rata distribution to all our shareholders (including the depositary) generally will not be subject to U.S. federal income tax.

 

Subject to certain exceptions, the current maximum rate of tax imposed on certain dividends received by U.S. shareholders that not corporations is generally 15%, provided that certain holding period requirements are met.  This reduced rate applies to dividends received before December 31, 2010 from “qualified foreign corporations” and is scheduled to increase for tax years beginning after December 31, 2012.  We believe we are a “qualified foreign corporation” with respect to our common shares and ADSs because our ADSs are listed on the New York Stock Exchange.  Therefore, we believe that dividends paid on our common shares and ADSs will constitute “qualified

 

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dividend income” and therefore qualify for the reduced rate.  It is possible, however, that we will not continue to be considered a “qualified foreign corporation” and that our dividends will not continue to be eligible for this rate.  Notwithstanding the previous rule, the term “qualified dividend income” will not include, among other dividends, any (i) dividends on any share of stock or ADS which is held by a taxpayer for 60 days or less during the 121-day period beginning on the date which is 60 days before the date on which such share or shares backing the ADS become ex-dividend with respect to such dividends (as measured under section 246(c) of the Code); or (ii) dividends to the extent that the taxpayer is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property.  U.S. holders should consult their own advisors regarding the applicability of the 15% dividend rate in their particular circumstances.

 

**Taxation of Dispositions of Shares or ADSs**

 

*Mexican Tax Considerations*

 

Gain on the sale or other disposition of ADSs by a non-resident holder will generally not be subject to Mexican tax.  Deposits and withdrawals of common shares in exchange for ADSs will not give rise to Mexican tax or transfer duties.

 

Gain on the sale of the common shares by a non-resident holder will not be subject to any Mexican tax if the transaction is carried out through the Mexican Stock Exchange or other stock exchange or securities markets approved by the Mexican Ministry of Finance and Public Credit.  The exemption is not available when a person or a group of people control a company or own 10% or more of the capital stock of a company and sell 10% or more of the company’s stock in a period of 24 months in one or more transactions involving such shares.

 

Gain on sales or other dispositions of the common shares made by non-Mexican residents in other circumstances generally would be subject to Mexican tax at a rate of 25% based on the total amount of the transaction or, subject to certain requirements applicable to the seller, at a rate of 30% (30% in 2011 and 2012, 29% in 2013 and 28% in 2014) on gains realized from the disposition, regardless of the nationality or residence of the transferor, provided that the transferor is not a resident of a country with a preferential or territorial tax regime.

 

Under the Tax Treaty, a holder that is eligible to claim the benefits of the Tax Treaty will be exempt from Mexican tax on gains realized on a sale or other disposition of the common shares, in a transaction that is not carried out through the Mexican Stock Exchange or such other approved securities markets, so long as the holder did not own, directly or indirectly, 25% or more of our share capital (including ADSs) during the twelve-month period preceding the sale or other disposition.

 

*U.S. Federal Income Tax Considerations*

 

Upon the sale or other disposition of the ADSs or common shares, a U.S. holder generally will recognize gain or loss in an amount equal to the difference between the amount realized on the sale or other disposition and such U.S. holder’s tax basis in the ADSs or common shares.  Gain or loss recognized by a U.S. holder on such sale or other disposition generally will be long-term capital gain or loss if, at the time of the sale or other disposition, the ADSs or common shares have been held for more than one year.  Currently, the top tax rate on adjusted net capital gains for sales and exchanges of capital assets for U.S. holders that are not corporations is 15% and is scheduled to increase after December 31, 2012.  The deduction of a capital loss is subject to limitations for U.S. federal income tax purposes.  Gain or loss generally will be treated as U.S. source gain or loss and a U.S. holder may be unable to credit any Mexican taxes imposed on these gains unless it has certain other income from foreign sources.  Deposits and withdrawals of common shares by U.S. holders in exchange for ADSs will not result in the realization of gain or loss for U.S. federal income tax purposes.

 

**Other Mexican Taxes**

 

There are no Mexican inheritance, gift, succession or value-added taxes applicable to the purchase, ownership or disposition of the ADSs or common shares by non-resident holders.  However, gratuitous transfers of

 

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the ADSs or common shares may result in a Mexican federal tax obligation for the recipient in certain circumstances.

 

There are no Mexican stamp, issue, registration or similar taxes or duties payable by non-resident holders of the ADSs or common shares.

 

**U.S. Backup Withholding Tax and Information Reporting Requirements**

 

A U.S. holder may, under certain circumstances, be subject to “backup withholding” with respect to some payments to the U.S. holder, such as dividends or the proceeds of a sale or other disposition of the common shares or the ADSs, unless the holder:

 

·                                          is a corporation or comes within certain exempt categories, and demonstrates this fact when so required; or

 

·                                          provides a correct taxpayer identification number, certifies that it is not subject to backup withholding and otherwise complies with applicable requirements of the backup withholding rules.

 

Any amount withheld under these rules will be creditable against the U.S. holder’s federal income tax liability.

 

Recently enacted legislation requires individual U.S. holders with an interest in any “specified foreign financial asset” to file a report to the IRS with information relating to the asset and the maximum value thereof during the taxable for any year in which the aggregate value of all such assets is greater than US$50,000 (or such higher dollar amount as prescribed by Treasury regulations).  Shares and ADSs would be treated as foreign financial assets unless held at a U.S. financial institution.  Depending on the aggregate value of a U.S. holder’s investment in all categories of specified foreign financial assets, the U.S. Holder may be obligated to file an annual report under this provision.  Penalties apply to any failure to file a required report.  Additionally, in the event a U.S. holder does not file the information report relating to disclosure of specified foreign financial assets, the statute of limitations on the assessment and collection of U.S. federal income taxes of such U.S. holder for the related tax year will not close before such information is filed.  U.S. holders should consult their own tax advisor as to the possible application of this information reporting requirement and related statute of limitations tolling provision.

 

**DOCUMENTS ON DISPLAY**

 

We are subject to the information requirements of the Exchange Act and, in accordance therewith, we are required to file reports and other information with the SEC.  These materials, including this Form 20-F and the exhibits thereto, may be inspected and copied at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549.

 

**ITEM 11.****Quantitative and Qualitative Disclosures about Market Risk.**

 

**Interest Rate Risk**

 

In connection with our business activities, we have issued and hold financial instruments that currently expose us to market risks related to changes in interest rates.  Interest rate risk exists principally with respect to our indebtedness that bears interest at floating rates.  On December 31, 2011, we had outstanding indebtedness of Ps.15,364.1 million, the majority of which bore interest at fixed interest rates.  The interest rate on our variable rate debt is determined primarily by reference to the 28-day Mexican Interbank Rate, or TIIE (*Tasa de Interés Interbancaria de Equilibrio*).  TIIE increases would, consequently, increase our interest payments.

 

The following table sets forth principal cash flows by scheduled maturity, average interest rates, and estimated fair market value of our debt obligation as of December 31, 2011.  Fair value is estimated using

 

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discounted cash flow analyses, based on our current incremental borrowing rates for similar types of borrowing arrangements.

 
| ** **              | ** ** | **Expected Maturity Dates as of December 31, (millions of dollars equivalent)** | ** ** | **Fair Value** | ** ** |
|-------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|
| ** **              | ** ** | **2012**                                                                                                                          | ** ** | **2013**            | ** ** | **2014** | ** ** | **2015** | ** ** | **After********2016** | ** ** | **Total** | ** ** | **Dec. 31,   ’11** | ** ** |
| **Long-term debt**      |       |                                                                                                                              |       |                | ** ** | ** ** |   |   |   |   |   |   |   |   |   |
| Fixed rate *            |       | —                                                                                                                            |       | —              |       | — |   | 250 |   | 250 |   | 500 |   | 500 |   |
| Average interest rate** |       | 8.5                                                                                                                               | %          | 8.5                 | %          | 8.5 | % | 8.5 | % | 8.5 | % |   |   |   |   |
| Variable rate           |       | 246                                                                                                                               |       | 233                 |       | — |   | — |   | 68 |   | 547 |   | 547 |   |
| Average interest rate   |       | 7.7                                                                                                                               | %          | 9.7                 | %          | 17.4 | % | 17.4 | % | 17.4 | % |   |   |   |   |

 

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*  Until July 5, 2008 our outstanding US$250 million Senior Guaranteed Notes included the principal-only swap effect, whereby at maturity date we were to pay pesos at a contractual fixed exchange rate of Ps.10.83 per dollar and receive U.S. dollars equivalent to the notional amount of US$250 million.  This principal-only swap was cancelled on the aforementioned date.

 

** The average interest rate is calculated by the 7.5% interest rate related to the Senior Guaranteed Notes due 2015 and the 9.5% interest rate related to the Senior Guaranteed Notes due 2019.

 

A hypothetical, instantaneous, and unfavorable change of 100 basis points in the average interest rate applicable to floating-rate liabilities held at December 31, 2011 would have increased our interest expense in 2010 by approximately Ps. 77 million, over a twelve-month period.

 

Concurrently with the issuance of the Senior Guaranteed Notes due 2015, we entered into a principal-only swap in an attempt to hedge and cover the economic and cash flow principal U.S. dollar exposure bearing a six-month weighted fixed rate of 2.92% exposed to U.S. dollar currency fluctuations.  The underlying notes bear interest at a rate of 7.5% payable semi-annually and are exposed to U.S. dollar currency fluctuation.  We accounted for this swap at fair value in our consolidated financial statements.  Because the agreement did not meet the requirements for hedge accounting, periodic mark-to-market measurement was made through the income statement.  This principal-only swap was cancelled on July 5, 2008.  In addition, we entered into an interest-only swap to hedge the foreign exchange risk in respect of the interest payable on this debt at an average rate of Ps.13.95 per U.S. dollar from 2010 through 2012.

 

Concurrently with the issuance of the Senior Guaranteed Notes due 2019, we entered into a principal-only swap in an attempt to hedge and cover the economic and cash flow principal U.S. dollar exposure bearing a six-month weighted fixed rate in Mexican pesos of 3.87% exposed to U.S. dollar currency fluctuations. In order to increase the amount of thresholds of these financial instruments and to avoid collateral margin calls, in May 2011 we changed our PO Swap rate from 3.87% to 4.39%.  The underlying notes bear interest at a rate of 9.5% payable semi-annually and are exposed to U.S. dollar currency fluctuations.  We accounted for this swap at fair value in our consolidated financial statements. Because the agreement met the requirements for hedge accounting, periodic mark-to-market measurement was made.  In addition, on the same date we entered into an interest-only swap to hedge the foreign exchange risk in respect of the interest payable on the first six interest payments on this debt.

 

In connection with the Credit Suisse Credit Agreement, we entered into an interest-only swap to hedge the foreign exchange risk in respect of the interest payable on this debt.

 

We manage our exposure to changes in interest rates by efficiently timing construction and delivery of our homes and payments to our suppliers, thereby allowing us to reduce our borrowing needs for working capital.  Our capital expenditures are financed either through our own resources or leveraging their return through operating leases.

 

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**Foreign Currency Risk**

 

Because substantially all of our revenues are and will continue to be denominated in pesos, if the value of the peso decreases against the U.S. dollar, our cost of financing will increase.  Severe depreciation of the peso may also result in disruption of the international foreign exchange markets.  This may limit our ability to transfer or convert pesos into U.S. dollars and other currencies for the purpose of making timely payments of interest and principal on our securities and any U.S. dollar-denominated debt that we may incur in the future.

 

The exchange rates in effect at December 31, 2011, 2010 and 2009 were Ps.13.9787, Ps.12.3817 and Ps.13.0437, respectively, per U.S. dollar.

 

**ITEM 12.****Description of Securities other than Equity Securities.**

 

**Fees and Charges Our ADS Holders May Have to Pay**

 

Citibank, N.A. (“Citibank”), the depositary of our ADS program, collects fees directly from investors (or brokers or other intermediaries acting on behalf of investors) for depositing shares or surrendering ADSs for the purpose of withdrawal.  The depositary also collects fees for making distributions to investors, by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees.  In addition, the depositary collects an annual fee for depositary services, by deducting from cash distributions, by directly billing investors, or by charging the book-entry system accounts of investors (or brokers or other intermediaries acting on behalf of investors).  The depositary may generally refuse to provide services until its fees for those services are paid, and may sell securities or other property to pay any such fees.  The following table summarizes the fees and charges that a holder of our ADSs may have to pay, directly or indirectly, pursuant to the Deposit Agreement, which was filed with the SEC as an exhibit to our Registration Statement on Form F-6 filed on July 6, 2011:

 
| **Fee** | ** **                                                                                                                                                    | **Service** | ** **                                                                                                                        | **Paid by** |
|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------|-----------------------------------------------------------------------------------------------------------------------------------|------------------|
|    |                                                                                                                                                          |        |                                                                                                                              |             |
| (1)     | Issuance of ADSs upon deposit of Shares   (excluding issuances as a result of distributions described in paragraph   (4) below).                         |        | Up to U.S. $5.00 per 100 ADSs (or fraction   thereof) issued.                                                                     |             | Person depositing Shares or person receiving   ADSs. |
|    |                                                                                                                                                          |        |                                                                                                                              |             |   |
| (2)     | Delivery of Deposited Securities against   surrender of ADSs.                                                                                                 |        | Up to U.S. $5.00 per 100 ADSs (or fraction   thereof) surrendered.                                                                |             | Person surrendering ADSs for the purpose of   withdrawal of Deposited Securities or person to whom Deposited Securities are   delivered. |
|    |                                                                                                                                                          |        |                                                                                                                              |             |   |
| (3)     | Distribution of cash dividends or other cash   distributions ( i.e. , sale of rights and other entitlements).                                                 |        | Up to U.S. $5.00 per 100 ADSs (or fraction   thereof) held.                                                                       |             | Person to whom distribution is made. |
|    |                                                                                                                                                          |        |                                                                                                                              |             |   |
| (4)     | Distribution of ADSs pursuant to   (i) stock dividends or other free stock distributions, or   (ii) exercise of rights to purchase additional ADSs. |        | Up to U.S. $5.00 per 100 ADSs (or fraction   thereof) held.                                                                       |             | Person to whom distribution is made. |
|    |                                                                                                                                                          |        |                                                                                                                              |             |   |
| (5)     | Distribution of securities other than ADSs   or rights to purchase additional ADSs (i.e. spin-off shares).                                                    |        | Up to U.S. $5.00 per 100 ADSs (or fraction   thereof) held.                                                                       |             | Person to whom distribution is made. |
|    |                                                                                                                                                          |        |                                                                                                                              |             |   |
| (6)     | Depositary Services.                                                                                                                                          |        | Up to U.S. $5.00 per 100 ADSs (or fraction   thereof) held on the applicable record date(s) established by the   Depositary. |             | Person holding ADSs on the applicable record   date(s) established by the Depositary. |

 

**PART II**

 

**ITEM 13.****Defaults, Dividend Arrearages and Delinquencies.**

 

Not applicable.

 

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**ITEM 14.****Material Modifications to the Rights of Security Holders and Use of Proceeds.**

 

Not applicable.

 

**ITEM 15.****Controls and Procedures.**

 

(a)                                  *Disclosure controls and procedures.*

 

We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2011.

 

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures.  Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.  Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

(b)                                 *Management’s annual report on internal controls over financial reporting.*

 

Our management is responsible for establishing and maintaining adequate internal controls over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Under the supervision and with the participation of our management, including our board of directors, Chief Executive Officer, Chief Financial Officer and other personnel, we conducted an evaluation of the effectiveness of our internal controls over financial reporting based on the framework governing Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Mexican Financial Reporting Standards, including the reconciliation to U.S. GAAP in accordance with Item 18 of Form 20-F. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with Mexican FRS, including the reconciliation to US GAAP in accordance with Item 18 of Form 20-F, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Based on our evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2011.

 

Mancera, S.C., a member practice of Ernst & Young Global, an independent registered public accounting firm, our independent auditor, issued an attestation report on our internal control over financial reporting on April 29, 2012.

 

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(c)                                  *Attestation Report of the registered public accounting firm.*

 

The Board of Directors and Shareholders of

Desarrolladora Homex, S.A.B. de C.V.

 

We have audited Desarrolladora Homex, S.A.B. de C.V. and subsidiaries’ internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Desarrolladora Homex, S.A.B. de C.V. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Mexican Financial Reporting Standards, including the reconciliation to U.S. GAAP in accordance with Item 18 of Form 20-F. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with Mexican Financial Reporting Standards, including the reconciliation to U.S. GAAP in accordance with Item 18 of Form 20-F, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, Desarrolladora Homex, S.A.B. de C.V. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Desarrolladora Homex, S.A.B. de C.V. and subsidiaries at December 31, 2011 and 2010, and the statements of income, changes in equity and cash flows for each of the three years ended December 31, 2011, and our report dated April 29, 2012, expressed an unqualified opinion thereon.

 
|                                | Mancera, S.C.                       |
|-------------------------------------|-------------------------------------|
|                                | A member practice of                |
|                                | Ernst & Young Global       |
|                                |                                |
|                                |                                |
|                                | /s/ C.P.C. Alejandro Valdez Mendoza |
|                                | C.P.C. Alejandro Valdez Mendoza     |
| Culiacán, Sinaloa, México |                                |
| April 29, 2012                 |                                |

 

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(d)                                 *Changes in internal control over financial reporting.*

 

There has been no change in our internal control over financial reporting during 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

**ITEM 16A. Audit Committee Financial Expert.**

 

Our audit committee consists of Wilfrido Castillo Sánchez-Mejorada (Chairman), Z. Jamie Behar and Edward Lowenthal.  Our board of directors has determined that Mr. Castillo has the attributes of an “audit committee financial expert” as defined by the SEC and that each member of the audit committee satisfies the financial literacy requirements of the New York Stock Exchange. Our board of directors has also determined that Mr. Castillo is independent, as that term is defined in the listing rules of the New York Stock Exchange.

 

**ITEM 16B. Code of Ethics.**

 

We have adopted a code of ethics, as defined in Item 16B of Form 20-F under the Securities Exchange Act of 1934, as amended.  Our code of ethics applies to our Chief Executive Officer, Chief Financial Officer and persons performing similar functions, as well as to our directors and other officers and employees.  Our code of ethics is available on our web site at www.homex.com.mx.  If we amend the provisions of our code of ethics that apply to our Chief Executive Officer, Chief Financial Officer and persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our web site at the same address.

 

**ITEM 16C. Principal Accountant Fees and Services.**

 

**Audit and Non-Audit Fees**

 

For the fiscal years ended December 31, 2011, 2010 and 2009, our auditors continued to be Mancera, S.C., a member practice of Ernst & Young Global.

 

The following table summarizes the aggregate fees billed to us by Mancera, S.C., a member practice of Ernst & Young Global, during the fiscal years ended December 31, 2011, 2010 and 2009, respectively:

 
| ** **         | ** ** | **Years Ended December 31**              | ** ** |
|--------------------|------------|---------------------------------------------------------|------------|
| ** **         | ** ** | **2011**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **         | ** ** | **(in thousands of Mexican pesos)** | ** ** |
| Audit fees         |       | Ps.                                                     | 19,460     |   | Ps. | 20,269 |   | Ps. | 16,972 |   |
| Audit Related fees |       |                                                    | —     |   |   | — |   |   | 3,807 |   |
| Tax fees           |       |                                                    | —     |   |   | — |   |   | 21 |   |
| Total fees         |       | Ps.                                                     | 19,460     |   | Ps. | 20,269 |   | Ps. | 20,800 |   |

 

*Audit fees*.  Audit fees in the above table are the aggregate fees billed by Mancera, S.C. and other Ernst & Young affiliated firms in connection with the audit of our annual financial statements and statutory and regulatory audits in Mexico, Brazil and India.  This caption also includes Sarbanes-Oxley Section 404 attestation services.

 

*Audit-related fees*.  2009 audit-related fees in the above table are fees billed by Mancera, S.C. for work performed in connection with the offering of the US$250 million bond maturing in 2019 and filing of a shelf registration statement.

 

*Tax fees*.  Tax fees in the above table include the aggregate fees billed by Mancera, S.C. for the review of 2008’s reports on our transfer pricing study and fees paid to Mancera, S.C. and other Ernst & Young affiliated firms for international tax services.

 

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**Audit Committee Pre-Approval Policies and Procedures.**

 

We have adopted pre-approval policies and procedures under which all audit and non-audit services provided by our external auditors must be pre-approved by the audit committee.  Any service proposals submitted by external auditors need to be discussed and approved by the audit committee during its meetings, which take place at least four times a year.  Once the proposed service is approved, we or our subsidiaries formalize the engagement of services.  The approval of any audit and non-audit services to be provided by our external auditors is specified in the minutes of our audit committee.  In addition, the members of our board of directors are briefed on matters discussed in the meetings of the audit committee.

 

**ITEM 16D. Exemptions from the Listing Standards for Audit Committees.**

 

Not applicable.

 

**ITEM 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.**

 

We did not purchase any of our equity securities during 2011.

 

**ITEM 16F. Change in Registrant’s Certifying Accountant**

 

During the years ended December 31, 2010 and 2011 and through the date of this Annual Report, the principal independent accountant engaged to audit our financial statements, Mancera S.C., a member practice of Ernst & Young Global, has not resigned, has not indicated that it has declined to stand for re-election after the completion of its current audit and has not been dismissed.  For each of the years ended December 31, 2010 and 2011, Mancera S.C., a member practice of Ernst & Young Global, has not expressed reliance on another accountant or accounting firm in its report on our audited annual financial statements for such periods.

 

**ITEM 16G. Corporate Governance**

 

As a foreign private issuer with shares listed on the NYSE, we are subject to different corporate governance requirements than a U.S. company under the NYSE listing standards.  Pursuant to Rule 303.A11 of the NYSE-listed company manual, we are required to provide a summary of the significant ways in which our corporate governance practices differ from those required for U.S. companies under the NYSE listing standard.

 

It is our intention, however, to follow NYSE corporate governance standards to the extent we deem appropriate given the different regulatory framework to which we are subject in Mexico and in the United States and the different business environment in which we operate.  Compliance with these higher standards of governance is not mandatory for us; however, we believe we are in substantial compliance with the majority of these requirements, thereby demonstrating our commitment to high standards of governance.

 

We are a Mexican corporation with shares listed on the *Bolsa Mexicana de Valores*, or “Mexican Stock Exchange”.  Our corporate governance practices are governed by our bylaws, the Mexican Securities Market Law, and the general dispositions issued by the CNBV and the Mexican Stock Exchange.  Although compliance is not mandatory, we also substantially comply with the Mexican Code of Best Corporate Practices (*Código de Mejores Prácticas Corporativas*), as amended in 2006.

 

The table below sets forth a description of the significant differences between corporate governance practices required for U.S. companies under the NYSE listing standards and our regulations:

 
| **NYSE Rules**                                                                                                    | ** ** | **Mexican Rules**                                                                                                       |
|------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                   |       |                                                                                                                         |
| Listed companies must have a majority of   independent directors.                                                      |       | While not required under Mexican law, a   majority of our directors are independent as defined under NYSE standards.         |
|                                                                                                                   |       |                                                                                                                         |
| Listed companies must have a   nominating/corporate governance committee composed entirely of independent   directors. |       | Pursuant to Mexican law, we have a   nominating/corporate governance committee composed entirely of independent   directors. |

 

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| Listed companies must have a compensation   committee composed entirely of independent directors.                                                                                                              |   | Under Mexican law, we are not required to   have a compensation committee. However, we have a compensation committee   composed entirely of independent directors. Our compensation committee does   not issue a compensation report as contemplated by the NYSE standards, as we   operate in Mexico where this practice is neither required nor customary. |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                           |   |                                                                                                                                                                                                                                                                                                                                                         |
| Listed companies must have an audit   committee with a minimum of three members who are independent directors.                                                                                                 |   | Under Mexican law, we are required to have   an audit committee with independent members within the meaning of the NYSE   standards with a charter that complies with applicable Mexican statutes, and   substantially complies with the NYSE standards applicable to domestic   companies where appropriate for us.                                         |
|                                                                                                                                                                                                           |   |                                                                                                                                                                                                                                                                                                                                                         |
| Audit committees are required to prepare an   audit committee report as required by the SEC to be included in the listed   company’s annual proxy statement.                                              |   | As a foreign private issuer, we are not   required by the SEC to prepare and file proxy statements. In this regard, we   are subject to Mexican securities law requirements. We have chosen to follow   Mexican law and practice in this regard.                                                                                                             |
|                                                                                                                                                                                                           |   |                                                                                                                                                                                                                                                                                                                                                         |
| Non-management directors must meet at   executive sessions without management.                                                                                                                                 |   | Our non-management directors meet at   executive sessions. This is not required by either Mexican law or the Mexican   Code of Best Corporate Practices.                                                                                                                                                                                                     |
|                                                                                                                                                                                                           |   |                                                                                                                                                                                                                                                                                                                                                         |
| Listed companies must adopt and disclose a   code of business conduct and ethics for directors, officers and employees,   and promptly disclose any waivers of the code for directors or executive   officers. |   | Companies listed on the Mexican Stock   Exchange are not required to adopt a code of ethics. However, we have adopted   a code of ethics.                                                                                                                                                                                                                    |

 

**ITEM 16H Mine Safety Disclosures**

 

Not applicable.

 

**PART III**

 

**ITEM 17.****Financial Statements.**

 

Not applicable.

 

**ITEM 18.****Financial Statements.**

 

See pages F-1 through F-93, incorporated herein by reference.

 

**ITEM 19.****Exhibits.**

 
| **Exhibit No.** |   |                                                                                                                                                                                                                                                                                                             |
|----------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1(1)                 |   | Our articles of incorporation (*estatutos sociales*) as amended through March 30,   1998, together with an English translation.*                                                                                                                                                                            |
|                 |   |                                                                                                                                                                                                                                                                                                             |
| 1(2)                 |   | Our bylaws (*estatutos   sociales*) as amended through April 26, 2006, together with an   English translation. +                                                                                                                                                                                            |
|                 |   |                                                                                                                                                                                                                                                                                                             |
| 2(a)(1)              |   | Form of Deposit Agreement, as amended,   by and among us, JPMorgan Chase Bank as Depositary and the Holders and   Beneficial Holders from time to time of American Depositary Shares evidenced   by American Depositary Receipts issued thereunder, including form of American   Depositary Receipt.**      |
|                 |   |                                                                                                                                                                                                                                                                                                             |
| 2(a)(2)              |   | Form of Amended and Restated Deposit   Agreement, by and among us, Citibank, N.A. as Depositary and the Holders and   Beneficial Holders from time to time of American Depositary Shares evidenced   by American Depositary Receipts issued thereunder, including form of American   Depositary Receipt.*** |

 

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| 2(b)(1)  |   | Indenture relating to 7.50% Senior   Guaranteed Notes, dated September 28, 2005 by and between us, as Issuer,   and the Bank of New York, as Trustee. ****                                  |
|----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                                             |
| 2(b)(2)  |   | Form of First Supplemental Indenture to   the Indenture Relating to the 7.50% Senior Guaranteed Exchange Notes, by and   between us, as Issuer, and the Bank of New York, as Trustee. ***** |
|     |   |                                                                                                                                                                                             |
| 2(b)(3)  |   | Form of 7.50% Senior Guaranteed   Exchange Note. *****                                                                                                                                      |
|     |   |                                                                                                                                                                                             |
| 2(b)(4)  |   | Registration Rights Agreement dated September 28,   2005 by and among us, Credit Suisse First Boston LLC and certain financial   institutions named therein. ****                           |
|     |   |                                                                                                                                                                                             |
| 2(b)(5)  |   | Indenture relating to 9.5% Senior Guaranteed   Notes dated December 8, 2009 by and between us, as Issuer, and the Bank   of New York, as Trustee. ++                                        |
|     |   |                                                                                                                                                                                             |
| 2(b)(6)  |   | Indenture relating to 9.750% Senior   Guaranteed Notes dated February 2, 2012 by and between us, as Issuer,   and The Bank of New York, as Trustee.                                         |
|     |   |                                                                                                                                                                                             |
| 8        |   | List of Principal Subsidiaries.                                                                                                                                                                  |
|     |   |                                                                                                                                                                                             |
| 12(a)(1) |   | CEO Certification pursuant to   Section 302 of the Sarbanes-Oxley Act of 2002, dated April 29,   2012.                                                                                 |
|     |   |                                                                                                                                                                                             |
| 12(a)(2) |   | CFO Certification pursuant to   Section 302 of the Sarbanes-Oxley Act of 2002, dated April 29 2012.                                                                                    |
|     |   |                                                                                                                                                                                             |
| 13       |   | Officer Certifications pursuant to   Section 906 of the Sarbanes-Oxley Act of 2002, dated April 29,   2012.                                                                            |

 

----

| *      |   | Previously filed in Registration Statement   on Form F-1/A (File No. 333-116257), originally filed with the SEC   on June 23, 2004. Incorporated herein by reference.     |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                     |
| **     |   | Previously filed in Registration Statement   on Form F-6 (File No. 333-116278), originally filed with the SEC on   June 8, 2004. Incorporated herein by reference.        |
|   |   |                                                                                                                                                                                     |
| ***    |   | Previously filed in Registration Statement   on Form F-6 (File No. 333-175380), originally filed with the SEC on   July 6, 2011. Incorporated herein by reference.        |
|   |   |                                                                                                                                                                                     |
| ****   |   | Previously filed in Registration Statement   on Form F-4 (File No. 333-129100), originally filed with the SEC on   October 18, 2005. Incorporated herein by reference.    |
|   |   |                                                                                                                                                                                     |
| *****  |   | Previously filed in Registration Statement   on Form F-4/A (File No. 333-129100), originally filed with the SEC   on November 25, 2005. Incorporated herein by reference. |
|   |   |                                                                                                                                                                                     |
| +      |   | Previously filed in the report on   Form 20-F (File No. 001-32229), originally filed with the SEC on   June 29, 2006. Incorporated herein by reference.                   |
|   |   |                                                                                                                                                                                     |
| ++     |   | Previously filed in the report on   Form 20-F (File No. 001-32229), originally filed with the SEC on   June 30, 2010. Incorporated herein by reference.                   |

 

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**SIGNATURE**

 

The registrant, Desarrolladora Homex, S.A.B. de C.V., hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 
|                         | DESARROLLADORA HOMEX, S.A.B. DE C.V. |
|------------------------------|--------------------------------------|
|                         |                                 |
|                         |                                 |
|                         | /s/   Carlos Moctezuma Velasco       |
|                         | Name:   Carlos Moctezuma Velasco     |
|                         | Title:   Chief Financial Officer     |
|                         |                                 |
| Dated:   April 29, 2012 |                                 |

 

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** **

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors and Stockholders of

Desarrolladora Homex, S.A.B. de C.V.

 

We have audited the accompanying consolidated balance sheets of Desarrolladora Homex, S.A.B. de C.V. and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of income, changes in equity and cash flows for each of the three years ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Desarrolladora Homex, S.A.B. de C.V. and subsidiaries at December 31, 2011 and 2010, and the consolidated results of their operations, changes in equity and cash flows for each of the three years ended December 31, 2011, in conformity with Mexican Financial Reporting Standards, which differ in certain respects from accounting principles generally accepted in the United States of America (see Notes 28, 29 and 30 to the consolidated financial statements).

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Desarrolladora Homex, S.A.B. de C.V.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 29, 2012, expressed an unqualified opinion on the effectiveness of internal control over financial reporting.

 

 
|   | Mancera,   S.C.                       |
|--------|---------------------------------------|
|   | A   member practice of                |
|   | Ernst &   Young Global       |
|   |                                  |
|   |                                  |
|   | /s/   C.P.C. Alejandro Valdez Mendoza |
|   | C.P.C.   Alejandro Valdez Mendoza     |

 

Culiacán, Sinaloa, México

April 29, 2012

 

F-1

----

Table of Contents

 

**DESARROLLADORA HOMEX, S.A.B. DE C.V.**

**AND SUBSIDIARIES**

 

**Consolidated Balance Sheets**

 

(Figures in thousands of Mexican pesos (Ps.))

 
| ** **                                                              | ** ** | **2011 Convenience   Translation** | ** **    | **As of December 31,** | ** **         |
|-------------------------------------------------------------------------|------------|-----------------------------------------|---------------|---------------------------------------|--------------------|
| ** **                                                              | ** ** | **(Note 2a)**                      | ** **    | **2011**                              | ** **         | **2010** | ** ** |
| **Assets**                                                              |       |                                    |          |                                  |               |   |   |
| Current assets:                                                         |       |                                    |          |                                  |               |   |   |
| Cash and cash   equivalents (Note 5)                                    | ** ** | **$**                                   | **285,624**   | ** **                            | **Ps.**            | **3,992,653** |   | Ps. | 3,435,222 |   |
| Trade accounts   receivable, net (Note 6)                               | ** ** | **142,576**                             | ** **    |                                  | **1,993,023**      |   |   | 1,975,203 |   |
| Due from related   parties (Note 7)                                     | ** ** | **12,453**                              | ** **    |                                  | **174,073**        |   |   | — |   |
| Inventories (Note 8)                                                    | ** ** | **1,317,189**                           | ** **    |                                  | **18,412,586**     |   |   | 17,121,857 |   |
| Prepaid expenses and   other current assets, net (Note 9)               | ** ** | **71,562**                              | ** **    |                                  | **1,000,347**      |   |   | 742,191 |   |
| Total current assets                                                    | ** ** | **1,829,404**                           | ** **    |                                  | **25,572,682**     |   |   | 23,274,473 |   |
|                                                                    |       |                                    |          |                                  |               |   |   |   |   |
| Land held for future   development and construction-in-process (Note 8) | ** ** | **919,923**                             | ** **    |                                  | **12,859,328**     |   |   | 10,591,499 |   |
| Property and equipment,   net (Note 10)                                 | ** ** | **56,238**                              | ** **    |                                  | **786,137**        |   |   | 1,002,572 |   |
| Goodwill (Note 3k)                                                      | ** ** | **52,355**                              | ** **    |                                  | **731,861**        |   |   | 731,861 |   |
| Other assets, net (Note 11)                                             | ** ** | **39,691**                              | ** **    |                                  | **554,822**        |   |   | 261,811 |   |
| Deferred income taxes (Note 24)                                         | ** ** | **62,056**                              | ** **    |                                  | **867,471**        |   |   | 779,268 |   |
| Total assets                                                            | ** ** | **$**                                   | **2,959,667** | ** **                            | **Ps.**            | **41,372,301** |   | Ps. | 36,641,484 |   |
|                                                                    |       |                                    |          |                                  |               |   |   |   |   |
| **Liabilities   and equity**                                            |       |                                    |          |                                  |               |   |   |   |   |
| Current liabilities:                                                    |       |                                    |          |                                  |               |   |   |   |   |
| Current debt and   current portion of long-term debt (Note 12)          | ** ** | **$**                                   | **261,996**   | ** **                            | **Ps.**            | **3,662,357** |   | Ps. | 1,728,513 |   |
| Current portion of long-term   capital leases (Note 14)                 | ** ** | **13,516**                              | ** **    |                                  | **188,937**        |   |   | 169,604 |   |
| Trade accounts payable   (Note 16)                                      | ** ** | **22****0,007**                         | ** **    |                                  | **3,075,409**      |   |   | 3,410,579 |   |
| Land suppliers (Note 17)                                                | ** ** | **83,863**                              | ** **    |                                  | **1,172,293**      |   |   | 778,141 |   |
| Advances from customers                                                 | ** ** | **47,919**                              | ** **    |                                  | **669,851**        |   |   | 624,644 |   |
| Taxes other than income   taxes                                         | ** ** | **75,587**                              | ** **    |                                  | **1,056,606**      |   |   | 754,264 |   |
| Income taxes                                                            | ** ** | **6,551**                               | ** **    |                                  | **91,586**         |   |   | 37,531 |   |
| Employee statutory profit-sharing                                       | ** ** | **4,823**                               | ** **    |                                  | **67,420**         |   |   | 1,540 |   |
| Provision for uncertain   tax positions (Note 24f)                      | ** ** | **114,434**                             | ** **    |                                  | **1,599,642**      |   |   | 775,946 |   |
| Total current liabilities                                               | ** ** | **828,696**                             | ** **    |                                  | **11,584,101**     |   |   | 8,280,762 |   |
|                                                                    |       |                                    |          |                                  |               |   |   |   |   |
| Long-term debt (Note 12)                                                | ** ** | **812,515**                             | ** **    |                                  | **11,357,909**     |   |   | 10,787,601 |   |
| Long-term capital   leases (Note 14)                                    | ** ** | **11,084**                              | ** **    |                                  | **154,933**        |   |   | 235,430 |   |
| Financial derivative instruments (Note 13)                              | ** ** | **875**                                 | ** **    |                                  | **12,226**         |   |   | 508,160 |   |
| Long-term land   suppliers (Note 17)                                    | ** ** | **—**                              | ** **    |                                  | **—**         |   |   | 41,441 |   |
| Employee benefits obligations (Note 15)                                 | ** ** | **5,302**                               | ** **    |                                  | **74,115**         |   |   | 90,478 |   |
| Deferred income taxes (Note 24)                                         | ** ** | **322,029**                             | ** **    |                                  | **4,501,539**      |   |   | 4,377,101 |   |
| Total liabilities                                                       | ** ** | **1,980,501**                           | ** **    |                                  | **27,684,823**     |   |   | 24,320,973 |   |
|                                                                    |       |                                    |          |                                  |               |   |   |   |   |
| Equity (Note 18):                                                       |       |                                    |          |                                  |               |   |   |   |   |
| Common stock                                                            | ** ** | **37,773**                              | ** **    |                                  | **528,011**        |   |   | 528,011 |   |
| Additional paid-in capital                                              | ** ** | **235,420**                             | ** **    |                                  | **3,290,861**      |   |   | 3,290,861 |   |
| Treasury stock, at cost                                                 | ** ** | **(7,301**                              | **)**         |                                  | **(102,053**       | **)** |   | (98,412 | ) |
| Retained earnings                                                       | ** ** | **712,674**                             | ** **    |                                  | **9,962,265**      |   |   | 8,657,851 |   |
| Financial derivative   instruments, net of deferred taxes (Note 13)     | ** ** | **1,123**                               | ** **    |                                  | **15,701**         |   |   | (330,709 | ) |
| Other equity accounts                                                   | ** ** | **(14,791**                             | **)**         | ** **                            | **(206,760**       | **)** |   | 82,984 |   |
| Equity of controlling interest                                          | ** ** | **964,898**                             | ** **    |                                  | **13,488,025**     |   |   | 12,130,586 |   |
| Non-controlling   interest in consolidated subsidiaries                 | ** ** | **14,268**                              | ** **    |                                  | **199,453**        |   |   | 189,925 |   |
| Total equity                                                            | ** ** | **979,166**                             | ** **    |                                  | **1****3,687,478** |   |   | 12,320,511 |   |
|                                                                    |       |                                    |          |                                  |               |   |   |   |   |
| Total liabilities and equity                                            | ** ** | **$**                                   | **2,959,667** | ** **                            | **Ps.**            | **41,372,301** |   | Ps. | 36,641,484 |   |

 

See accompanying notes to these consolidated financial statements.

 

F-2

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Table of Contents

 

**DESARROLLADORA HOMEX, S.A.B. DE C.V.**

**AND SUBSIDIARIES**

 

**Consolidated Statements of Income**

(Figures in thousands of Mexican pesos (Ps.) except earnings per share)

 
| ** **                                                             | ** ** | **2011 Convenience   Translation** | ** **    | **For the years ended December 31,** | ** **     |
|------------------------------------------------------------------------|------------|-----------------------------------------|---------------|---------------------------------------------------------------|----------------|
| ** **                                                             | ** ** | **(Note 2a)**                      | ** **    | **2011**                                                      | ** **     | **2010** | ** ** | **2009** | ** ** |
|                                                                   |       |                                    |          |                                                          |           |   |   |   |   |
| Revenues                                                               | ** ** | **$**                                   | **1,563,327** | ** **                                                    | **Ps.**        | **21,853,279** |   | Ps. | 19,652,309 |   | Ps. | 17,476,489 |   |
| Cost of sales                                                          | ** ** | **1,156,456**                           | ** **    |                                                          | **16,165,752** |   |   | 13,727,484 |   |   | 12,285,836 |   |
| Gross profit                                                           | ** ** | **406,871**                             | ** **    |                                                          | **5,687,527**  |   |   | 5,924,825 |   |   | 5,190,653 |   |
| Operating expenses (Note 21)                                           | ** ** | **198,014**                             | ** **    |                                                          | **2,767,974**  |   |   | 2,980,379 |   |   | 2,471,680 |   |
|                                                                   |       |                                    |          |                                                          |           |   |   |   |   |   |   |   |
| Income from operations                                                 | ** ** | **208,857**                             | ** **    |                                                          | **2,919,553**  |   |   | 2,944,446 |   |   | 2,718,973 |   |
|                                                                   |       |                                    |          |                                                          |           |   |   |   |   |   |   |   |
| Other (expenses)   income, net (Note 22)                               | ** ** | **(24,671**                             | **)**         |                                                          | **(344,867**   | **)** |   | (142,765 | ) |   | 5,320 |   |
|                                                                   |       |                                    |          |                                                          |           |   |   |   |   |   |   |   |
| Net comprehensive   financing cost (Note 8):                           |       |                                    |          |                                                          |           |   |   |   |   |   |   |   |
| Interest expense (Note 23)                                             | ** ** | **27,944**                              | ** **    |                                                          | **390,618**    |   |   | 340,115 |   |   | 325,710 |   |
| Interest income                                                        | ** ** | **(13,879**                             | **)**         |                                                          | **(194,009**   | **)** |   | (162,887 | ) |   | (184,140 | ) |
| Exchange loss (gain), net                                              | ** ** | **19,015**                              | ** **    |                                                          | **265,811**    |   |   | 97,860 |   |   | (59,510 | ) |
| Valuation effects of   financial derivative instruments, net (Note 13) | ** ** | **(4,837**                              | **)**         | ** **                                                    | **(67,616**    | **)** |   | 39,654 |   |   | 66,451 |   |
|                                                                   | ** ** | **28,243**                              | ** **    |                                                          | **394,804**    |   |   | 314,742 |   |   | 148,511 |   |
|                                                                   |       |                                    |          |                                                          |           |   |   |   |   |   |   |   |
| Income before income taxes                                             | ** ** | **155,943**                             | ** **    |                                                          | **2,179,882**  |   |   | 2,486,939 |   |   | 2,575,782 |   |
|                                                                   |       |                                    |          |                                                          |           |   |   |   |   |   |   |   |
| Income taxes (Note 24)                                                 | ** ** | **61,947**                              | ** **    |                                                          | **865,940**    |   |   | 906,997 |   |   | 994,389 |   |
|                                                                   |       |                                    |          |                                                          |           |   |   |   |   |   |   |   |
| Consolidated net income                                                | ** ** | **$**                                   | **93,996**    | ** **                                                    | **Ps.**        | **1,313,942** |   | Ps. | 1,579,942 |   | Ps. | 1,581,393 |   |
|                                                                   |       |                                    |          |                                                          |           |   |   |   |   |   |   |   |
| Net income of   controlling interest                                   | ** ** | **$**                                   | **93,314**    | ** **                                                    | **Ps.**        | **1,304,414** |   | Ps. | 1,511,763 |   | Ps. | 1,565,869 |   |
| Net income of   non-controlling interest                               | ** ** | **682**                                 | ** **    |                                                          | **9,528**      |   |   | 68,179 |   |   | 15,524 |   |
|                                                                   |       |                                    |          |                                                          |           |   |   |   |   |   |   |   |
| Consolidated net income                                                | ** ** | **$**                                   | **93,996**    | ** **                                                    | **Ps.**        | **1,313,942** |   | Ps. | 1,579,942 |   | Ps. | 1,581,393 |   |
|                                                                   |       |                                    |          |                                                          |           |   |   |   |   |   |   |   |
| Weighted average shares   outstanding (in thousands)                   | ** ** | **334,700**                             | ** **    |                                                          | **334,700**    |   |   | 334,748 |   |   | 334,830 |   |
|                                                                   |       |                                    |          |                                                          |           |   |   |   |   |   |   |   |
| Basic and diluted   earnings per share of controlling interest         | ** ** | **$**                                   | **0.28**      | ** **                                                    | **Ps.**        | **3.90** |   | Ps. | 4.52 |   | Ps. | 4.68 |   |

 

See accompanying notes to these consolidated financial statements.

 

F-3

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Table of Contents

 

**DESARROLLADORA HOMEX, S.A.B. DE C.V.**

**AND SUBSIDIARIES**

 

**Consolidated Statements of Changes in Equity**

 

For the years ended December 31, 2011, 2010 and 2009

 

(Figures in thousands of Mexican pesos (Ps.))

 
| ** **                                          | ** ** | **Common   stock** | ** **  | **Additional   paid-in   capital** | ** ** | **Treasury stock, at   cost  (Note 18)** | ** ** | **Retained   earnings** | ** **   | **Financial********derivative   instruments** | ** ** | **Other   equity   accounts** | ** ** | **Equity   of controlling   interest** | ** ** | **Equity   of non-   controlling   interest** | ** ** | **Total   equity   (Note 18)** | ** ** |
|-----------------------------------------------------|------------|--------------------|-------------|------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------|--------------|-----------------------------------------------|------------|-------------------------------|------------|---------------------------------------------|------------|----------------------------------------------------|------------|-------------------------------------|------------|
|                                                |       |               |        |                               |       |                                                              |       |                    |         |                                          |       |                          |       |                                        |       |                                               |       |                                |       |
| Balances as of   January 1, 2009               |       | Ps.                | 528,011     |                               | Ps.        | 3,280,223                                                         |       | Ps.                     | (99,342      | )                                             | Ps.        | 5,580,219                     |       | Ps.                                         | —     |                                               | Ps.        | 53,307                              |       | Ps. | 9,342,418 |   | Ps. | 106,222 |   | Ps. | 9,448,640 |   |
| Shares repurchased for   stock option plan          |       |               |        |                               |       |                                                              |       |                    | (3,188       | )                                             |       |                          |       |                                        |       |                                               |       |                                |       |   | (3,188 | ) |   |   |   |   | (3,188 | ) |
| Shares repurchased   (Note 18e)                     |       |               |        |                               |       |                                                              |       |                    | (1,398       | )                                             |       |                          |       |                                        |       |                                               |       |                                |       |   | (1,398 | ) |   |   |   |   | (1,398 | ) |
| Share-based   compensation transactions (Note 18d)  |       |               |        |                               |       | 10,638                                                            |       |                    | —       |                                          |       |                          |       |                                        |       |                                               |       |                                |       |   | 10,638 |   |   |   |   |   | 10,638 |   |
| Comprehensive income                                |       |               |        |                               |       |                                                              |       |                    |         |                                          |       | 1,565,869                     |       |                                        | (87,872    | )                                                  |       | (42,401                             | )          |   | 1,435,596 |   |   | 15,524 |   |   | 1,451,120 |   |
| Balances as of   December 31, 2009 as restated |       |               | 528,011     |                               |       | 3,290,861                                                         |       |                    | (103,928     | )                                             |       | 7,146,088                     |       |                                        | (87,872    | )                                                  |       | 10,906                              |       |   | 10,784,066 |   |   | 121,746 |   |   | 10,905,812 |   |
| Share-based options   exercised (Note 18d)          |       |               |        |                               |       |                                                              |       |                    | 5,516        |                                          |       |                          |       |                                        |       |                                               |       |                                |       |   | 5,516 |   |   |   |   |   | 5,516 |   |
| Comprehensive income                                |       |               |        |                               |       |                                                              |       |                    |         |                                          |       | 1,511,763                     |       |                                        | (242,837   | )                                                  |       | 72,078                              |       |   | 1,341,004 |   |   | 68,179 |   |   | 1,409,183 |   |
| Balances as of December 31, 2010               |       |               | 528,011     |                               |       | 3,290,861                                                         |       |                    | (98,412      | )                                             |       | 8,657,851                     |       |                                        | (330,709   | )                                                  |       | 82,984                              |       |   | 12,130,586 |   |   | 189,925 |   |   | 12,320,511 |   |
|                                                |       |               |        |                               |       |                                                              |       |                    |         |                                          |       |                          |       |                                        |       |                                               |       |                                |       |   |   |   |   |   |   |   |   |   |
| Share-based options   exercised (Note 18d)          |       |               |        |                               |       |                                                              |       |                    | 2,796        |                                          |       |                          |       |                                        |       |                                               |       |                                |       |   | 2,796 |   |   |   |   |   | 2,796 |   |
| Shares repurchased   (Note 18e)                     |       |               |        |                               |       |                                                              |       |                    | (6,437       | )                                             |       |                          |       |                                        |       |                                               |       |                                |       |   | (6,437 | ) |   |   |   |   | (6,437 | ) |
| Comprehensive income                                |       |               |        |                               |       |                                                              |       |                    |         |                                          |       | 1,304,414                     |       |                                        | 346,410    |                                               |       | (289,744                            | )          |   | 1,361,080 |   |   | 9,528 |   |   | 1,370,608 |   |
| **Balances as of December 31,   2011**         | ** ** | **Ps.**            | **528,011** | ** **                         | **Ps.**    | **3,290,861**                                                     | ** ** | **Ps.**                 | **(102,053** | **)**                                         | **Ps.**    | **9,962,265**                 | ** ** | **Ps.**                                     | **15,701** | ** **                                         | **Ps.**    | **(206,760**                        | **)**      | **Ps.** | **13,488,025** | ** ** | **Ps.** | **199,453** | ** ** | **Ps.** | **13,687,478** | ** ** |

 

See accompanying notes to these consolidated financial statements.

 

F-4

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Table of Contents

 

**DESARROLLADORA HOMEX, S.A.B. DE C.V.**

**AND SUBSIDIARIES**

 

**Consolidated Statements of Cash Flows**

(Figures in thousands of Mexican pesos (Ps.))

 
| ** **                                                      | ** ** | **2011   Convenience   Translation** | ** **  | **For the years ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------|-------------|---------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **(Note 2a)**                   | ** **  | **2011**                                                      | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Operating   activities**                                      |       |                                 |        |                                                          |       |   |   |   |   |
| Income before income tax                                        | ** ** | **$**                                | **155,943** | ** **                                                    | **Ps.**    | **2,179,882** |   | Ps. | 2,486,939 |   | Ps. | 2,575,782 |   |
| Items related to   investing activities:                        |       |                                 |        |                                                          |       |   |   |   |   |
| Depreciation and amortization                                   | ** ** | **30,921**                           | ** **  | **432,237**                                                   |       | 465,614 |   | 483,409 |   |
| Loss (gain) on sale of   property and equipment                 | ** ** | **155**                              | ** **  | **2,170**                                                     |       | (4,246 | ) | 26,706 |   |
| Interest income                                                 | ** ** | **(13,879**                          | **)**       | **(194,009**                                                  | **)**      | (162,887 | ) | (184,140 | ) |
| Gain on sale of other   investment                              | ** ** | **—**                           | ** **  | **—**                                                    | ** ** | **—** |   | (11,676 | ) |
| Equity earnings in   associate                                  | ** ** | **(1,358**                           | **)**       | **(18,979**                                                   | )          | **—** | ** ** | **—** | ** ** |
| Items related to   financing activities:                        |       |                                 |        |                                                          |       |   |   |   |   |
| Interest                                                        | ** ** | **124,163**                          | ** **  | **1,735,639**                                                 |       | 1,290,903 |   | 886,149 |   |
| Share-based payment transactions                                | ** ** | **—**                           | ** **  | **—**                                                    | ** ** | **—** |   | 10,638 |   |
| Valuation effects of   financial derivative instruments         | ** ** | **(4,837**                           | **)**       | **(67,616**                                                   | **)**      | 39,654 |   | 66,451 |   |
| Deferred profit-sharing                                         | ** ** | **—**                           | ** **  | **—**                                                    | ** ** | **—** |   | 26,606 |   |
| Exchange loss (gain)                                            | ** ** | **55,735**                           | ** **  | **779,108**                                                   |       | (170,830 | ) | (184,346 | ) |
|                                                            | ** ** | **346,843**                          | ** **  | **4,848,432**                                                 |       | 3,945,147 |   | 3,695,579 |   |
|                                                            |       |                                 |        |                                                          |       |   |   |   |   |
| (Increase) decrease in   trade accounts receivable              | ** ** | **(1,274**                           | **)**       | **(17,820**                                                   | **)**      | (1,455,729 | ) | 756,012 |   |
| Increase in inventories   and land held for future developments | ** ** | **(254,570**                         | **)**       | **(3,558,558**                                                | **)**      | (4,061,504 | ) | (1,974,028 | ) |
| (Increase) decrease in   prepaid expenses and other assets      | ** ** | **(35,790**                          | **)**       | **(500,304**                                                  | **)**      | 546,533 |   | (318,835 | ) |
| Interest income collected                                       | ** ** | **13,879**                           | ** **  | **194,009**                                                   |       | 162,887 |   | 184,140 |   |
| (Decrease) increase in   trade accounts payable                 | ** ** | **(23,977**                          | **)**       | **(335,170**                                                  | **)**      | 1,210,498 |   | (1,665,751 | ) |
| Increase (decrease) in   accounts payable to land suppliers     | ** ** | **25,232**                           | ** **  | **352,711**                                                   |       | (593,303 | ) | (1,318,577 | ) |
| Increase (decrease) in   other liabilities                      | ** ** | **43,565**                           | ** **  | **608,988**                                                   |       | (813,374 | ) | 1,246,549 |   |
| (Decrease) increase in   employee benefits obligations          | ** ** | **(1,171**                           | **)**       | **(16,363**                                                   | **)**      | (7,709 | ) | 13,037 |   |
| Termination payments   for financialderivative contracts        | ** ** | **(1,778**                           | **)**       | **(24,863**                                                   | )          | **—** |   | (123,271 | ) |
| Income tax (paid) recovered                                     | ** ** | **(13,322**                          | **)**       | **(186,221**                                                  | **)**      | (33,658 | ) | 43,272 |   |
| Net cash flows from   operating activities                      | ** ** | **97,637**                           | ** **  | **1,364,841**                                                 |       | (1,100,212 | ) | 538,127 |   |
|                                                            |       |                                 |        |                                                          |       |   |   |   |   |
| **Investing   activities**                                      |       |                                 |        |                                                          |       |   |   |   |   |
| Increase in the   investment in associate                       | ** ** | **(1,288**                           | **)**       | **(18,000**                                                   | **)**      | — |   | — |   |
| Increase in notes   receivable from related parties             | ** ** | **(12,453**                          | **)**       | **(174,073**                                                  | **)**      | — |   | — |   |
| Business acquisition                                            |       | —                               |        | —                                                        |       | (290,478 | ) | — |   |
| Acquisition of property   and equipment                         | ** ** | **(2,757**                           | **)**       | **(38,547**                                                   | **)**      | (279,644 | ) | (89,352 | ) |
| Proceeds from sale of   property and equipment                  | ** ** | **675**                              | ** **  | **9,436**                                                     |       | 81,192 |   | 30,625 |   |
| Net cash flows from   investing activities                      | ** ** | **(15,823**                          | **)**       | **(221,184**                                                  | **)**      | (488,930 | ) | (58,727 | ) |
|                                                            |       |                                 |        |                                                          |       |   |   |   |   |
| **Financing   activities**                                      |       |                                 |        |                                                          |       |   |   |   |   |
| Proceeds from new borrowings                                    | ** ** | **3,128,520**                        | ** **  | **43,732,641**                                                |       | 20,969,560 |   | 15,749,151 |   |
| Payments of notes payable                                       | ** ** | **(3,045,958**                       | **)**       | **(42,578,524**                                               | **)**      | (17,912,788 | ) | (13,337,871 | ) |
| Interest paid                                                   | ** ** | **(124,076**                         | **)**       | **(1,734,417**                                                | **)**      | (1,265,649 | ) | (874,911 | ) |
| Shares repurchased                                              | ** ** | **(460**                             | **)**       | **(6,437**                                                    | **)**      | **—** |   | (4,586 | ) |
| Share-based payments exercised                                  | ** ** | **200**                              | ** **  | **2,796**                                                     |       | 5,516 | ** ** | **—** | ** ** |
| Net cash flows from   financing activities                      | ** ** | **(41,774**                          | **)**       | **(583,941**                                                  | **)**      | 1,796,639 |   | 1,531,783 |   |
| Net increase of cash   and cash equivalents                     | ** ** | **40,040**                           | ** **  | **559,716**                                                   |       | 207,497 |   | 2,011,183 |   |
| Adjustment to cash   flows due to exchange rate fluctuation     | ** ** | **(163**                             | **)**       | **(2,285**                                                    | **)**      | (23,691 | ) | (27,952 | ) |
| Cash and cash   equivalents at the beginning of the year        | ** ** | **245,747**                          | ** **  | **3,435,222**                                                 |       | 3,251,416 |   | 1,268,185 |   |
| Cash and cash   equivalents at the end of the year              | ** ** | **Ps.**                              | **285,624** | ** **                                                    | **Ps.**    | **3,992,653** |   | Ps. | 3,435,222 |   | Ps. | 3,251,416 |   |
|                                                                 |            |                                      |             |                                                               |            |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to these consolidated financial statements.

 

F-5

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Table of Contents

 

**DESARROLLADORA HOMEX, S.A.B. DE C.V.**

**AND SUBSIDIARIES**

 

**Notes to Consolidated Financial Statements**

 

For the years ended December 31, 2011, 2010 and 2009

 

(Figures in thousands of Mexican pesos (Ps.), except as otherwise indicated)

 

**1. Nature of business**

 

Desarrolladora Homex, S.A.B. de C.V. and its subsidiaries (the “Company”) is comprised of a group of companies engaged primarily in the promotion, design, development, construction and sale of affordable entry level and middle income residential housing.  Substantially all sales are made in Mexico.

 

To carry out its activities, the Company engages in land acquisition, obtaining permits and licenses, designing, constructing, marketing and selling homes, obtaining individual financing for its customers and developing communities to satisfy housing needs in Mexico.

 

The Company participates in housing supply offers from the main housing funds in Mexico, such as the National Workers’ Housing Fund, or Instituto Nacional del Fondo de Ahorro para la Vivienda de los Trabajadores (“INFONAVIT”), the Social Security and Services Institute Public-Segment Workers’ Housing Fund, or Fondo de la Vivienda del Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado (“FOVISSSTE”) and the governmental mortgage providers such as the Federal Mortgage Society, or Sociedad Hipotecaria Federal (“SHF”). Additionally, the Company participates in the market, where mortgage financing is provided by commercial banks and cash transactions.

 

For the years ended December 31, 2011, 2010 and 2009, revenues obtained through INFONAVIT mortgage financing accounted for 75%, 75% and 76% respectively, of the Company’s total revenues, with other sources accounting for 25%, 25% and 24%, respectively.

 

Homex’s operations include 142 developments in 35 cities located in 22 Mexican states. In 2011, 30.09% of Homex’s revenues originated in the Mexico City Metropolitan Area, the largest city in Mexico, and 13.84% in the state of Jalisco. The remaining revenues were originated throughout 31 cities.

 

Approximately, Ps. 598,678 and Ps. 173,272 of the Company’s 2011 and 2010 revenues, respectively, originated in Brazil.  For its Brazilian operations, the Company participates in housing supply offers with the governmental institution Caixa Economica Federal (“Caixa”) that is similar in nature to the INFONAVIT in Mexico in that it provides financing to lower income homebuyers.

 

The Company’s operations are on a seasonal basis: normally, the highest volume of sales takes place in the second half of the year. Construction times of real-estate developments vary depending on the type of housing: entry-level, middle-income or upper-income.

 

As disclosed in Notes 3b and 25b, in 2010 the Company signed a contract to build and then subsequently operate a prison for the Mexican Government.

 

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On April 26, 2012, the Financial Director (CFO), Carlos Moctezuma Velasco, and the Administrative and Accounting Officer, Ramón Lafarga Bátiz, authorized the issuance of the Company’s consolidated Mexican Financial Reporting Standards (Mexican FRS) financial statements its and notes as of December 31, 2011 and 2010 and for each of the three years in the period ended December 31, 2011. Those consolidated financial statements have been approved by the Audit Committee and, the Board of Directors on April 26, 2012, and by the Company’s stockholders at its meeting held on April 27, 2012.

 

The accompanying consolidated financial statements which consist of those Mexican FRS consolidated financial statements and notes, as supplemented by the accompanying US GAAP disclosures presented in Notes 28 through 30, were authorized for issuance herein by Gerardo de Nicolás (CEO), the CFO and the Controlling Director on April 29, 2012, with subsequent events for the entire consolidated financial statements having been considered through such date.

 

**2. Basis of preparation**

 

**a)****             ****Convenience translation**

 

The consolidated financial statements are stated in Mexican pesos, the currency of the country in which the Company is incorporated and operates. The convenience translation of Mexican pesos into US dollar amounts are included solely for the convenience of readers in the United States of America and have been made at the rate of Ps. 13.9787 per one US dollar as of December 31, 2011.  Such translations should not be construed as representations that the Mexican peso amounts have been, could have been, or could in the future be, converted into US dollars at this or any other exchange rate.

 

**b)****             ****Consolidation of financial statements**

 

The consolidated financial statements include those of Desarrolladora Homex, S.A.B. de C.V. and its subsidiaries, whose shareholding percentage in their capital stock is shown below:

 
| ** **                                                                   | ** ** | **Ownership percentage** | ** ** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------|------------|------------|
| **Company**                                                                  | ** ** | **2011**                      | ** ** | **2010**   | ** ** | **Activity** |
| Proyectos   Inmobiliarios de Culiacán, S.A. de C.V. (“PICSA”) | ** ** | **100**                       | **%**      | 100        | % | Promotion, design, construction and sale of   entry-level, middle-income and upper-income housing. |
| Nacional   Financiera, S.N.C. Fid. del Fideicomiso AAA Homex 80284           | ** ** | **100**                       | **%**      | 100        | % | Financial   services. |
| Administradora   Picsa, S.A. de C.V.                                         | ** ** | **100**                       | **%**      | 100        | % | Administrative services and promotion related to   construction industry. |
| Altos Mandos de   Negocios, S.A. de C.V.                                     | ** ** | **100**                       | **%**      | 100        | % | Administrative   services. |
| Aerohomex, S.A. de   C.V.                                                    | ** ** | **100**                       | **%**      | 100        | % | Air transportation and lease services. |
| Desarrolladora de   Casas del Noroeste, S.A. de C.V. (DECANO)                | ** ** | **100**                       | **%**      | 100        | % | Construction and development of housing   complexes. |
| Homex Atizapán,   S.A. de C.V.                                          | ** ** | **67**                        | **%**      | 67         | % | Promotion, design, construction and sale of   entry-level and middle-income. |
| Casas Beta del   Centro, S. de R.L. de C.V. (1)                         | ** ** | **100**                       | **%**      | 100        | % | Promotion, design, construction and sale of   entry-level and middle-income. |
| Casas Beta del   Norte, S. de R.L. de                                        | ** ** | **100**                       | **%**      | 100        | % | Promotion, design, construction and sale of   entry- |

 

F-7

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| C.V.                                                           | ** ** | ** ** | ** ** |   |   | level.                                                                               |
|----------------------------------------------------------------|------------|------------|------------|--------|--------|--------------------------------------------------------------------------------------|
| Casas Beta del   Noroeste, S. de R.L. de C.V.                  | ** ** | **100**    | **%**      | 100    | %      | Promotion, design, construction and sale of   entry-level.                           |
| Hogares del   Noroeste, S.A. de C.V. (2)                       | ** ** | **50**     | **%**      | 50     | %      | Promotion, design, construction and sale of   entry-level and middle-income housing. |
| Opción Homex, S.A.   de C.V.                              | ** ** | **100**    | **%**      | 100    | %      | Sale, lease and acquisition of properties.                                           |
| Homex Amuéblate,   S.A. de C.V.                           | ** ** | **100**    | **%**      | 100    | %      | Sale of housing related products.                                                    |
| Homex Global, S.A.   de C.V. (3)                               | ** ** | **100**    | **%**      | 100    | %      | Holding company for foreign investments.                                             |
| Sofhomex, S.A. de C.V. S.F.O.M. E.R.                           | ** ** | **100**    | **%**      | 100    | %      | Financial   services.                                                                |
| Nacional   Financiera, S.N.C. Fid. del Fideicomiso Homex 80584 |       | **100**    | **%**      | 100    | %      | Employee stock option plan administration.                                           |
| HXMTD, S.A. de   C.V.                                          |       | **100**    | **%**      | 100    | %      | Promotion, design, construction and sale of   upper-income tourism housing.          |
| Homex Central   Marcaria, S.A. de C.V.                         |       | **100**    | **%**      | 100    | %      | Administration of industrial and intellectual   property.                            |
| Homex   Infraestructura, S.A. de C.V. (4)                      |       | **100**    | **%**      | 100    | %      | Design and construction services for public or   private services.                   |
| CRS Morelos, S.A.   de C.V.                                    |       | **100**    | **%**      | 100    | %      | Construction   services to government.                                               |
| CT Prop, S. de R.L   de C.V. (5)                               |       | **100**    | **%**      | 100    | %      | Promotion, design, construction and sale of   tourism housing.                       |
| CT Loreto, S. de   R.L. de C.V. (5)                            |       | **100**    | **%**      | 100    | %      | Promotion, design, construction and sale of   tourism housing.                       |

 

Significant intercompany balances and transactions have been eliminated during the consolidation of these entities.

 

----

(1)                      Casas Beta del Centro, S. de R.L. de C.V. (CBC) owns 100% of the outstanding stock of Super Abastos Centrales y Comerciales, S.A. de C.V. and 50% of the outstanding stock of Promotora Residencial Huehuetoca, S.A. de C.V. (Huehuetoca), which are engaged in the promotion, design, construction and sale of entry-level housing. Huehuetoca is fully consolidated in accordance MFRS B-8 *Consolidated or Combined Financial Statements*, since the Company has control over this subsidiary. Through October 20, 2009, CBC owned 100% of the outstanding stock of Comercializadora Cántaros, S.A. de C.V. That company was sold to a third party on that date.

 

(2)                      Hogares del Noroeste, S. A. de C.V. is a 50% owned and controlled subsidiary of Desarrolladora Homex, S.A.B. de C.V., which is engaged in the promotion, design, construction and sale of entry-level and middle-income housing. This entity is fully consolidated in accordance with MFRS B-8, since the Company has control over this subsidiary.

 

(3)                      Homex Global, S.A. de C.V, (Homex Global) owns the outstanding stock of the following companies:

 

(a)                      Homex Global owns 100% of the outstanding stock of Homex India Private Limited, a subsidiary located in India and that is to perform the construction and development of entry-level and middle-income housing in India. This company has had no significant operations to date.

 

(b)                     Homex Global owned 15% of the outstanding stock of Orascom Housing Communities S.A.E., a company located in Cairo, Egypt that performs the construction and development of entry-level and middle-income housing in Egypt. Pursuant the application of MFRS C-7, *Investments in Associates and Other Permanent Investments*, effective January 1, 2009, this company was no longer considered an associate but another permanent investment. On December 31, 2009 the Company sold its total investment in this company to a third party.

 

(c)                      Homex Global owns 100% of the outstanding stock of Desarrolladora de Sudamérica, S.A. de C.V., a Mexican company that had no significant operations during the periods presented herein.

 

 

F-8

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Table of Contents

 

(d)                     Homex Global owns 100% of the outstanding common stock of Homex Brasil Participacoes Limitada (Homex Brasil), through its subsidiaries Éxito Construcoes e Participacoes Limitada, HMX Empreendimentos Imobiliarios Limitada and MCA Incorporacoes S.A.. Through twenty three subsidiaries, Homex Brasil performs construction and development of entry-level housing in Sao Paulo, Brazil. During 2009, Homex Brasil started operations in Brazil with a 1,300-unit affordable entry-level development in San Jose dos Campos, northeast of Sao Paulo. During the years ended December 31, 2011 and 2010 the Company recognized revenues from its Brazilian operations of Ps. 598,678 and Ps. 173,272, respectively.

 

(e)                 Effective June 2011, Homex Global owns 100% of the outstanding stock of MCA Incorporacoes, S.A., a subsidiary located in Brazil that entered into a line of credit with Deutsche Bank S.A. (See Note 12).

 

(f)                        In December 2011, Homex Global acquired 55% of the outstanding stock of Homex Alesayi Company Limited, a subsidiary located in Saudi Arabia and that is to perform the construction and development of entry-level and middle-income housing in Saudi Arabia.   This company had no operations during 2011.

 

(4)                      Homex Infraestructura, S.A. de C.V. owns 100% of the outstanding common stock of Homex Infraestructura Concesiones, S.A. de C.V. and Homex Infraestructura Obras, S.A. de C.V., which are engaged to design and construction for public or private services.

 

(5)                      These companies were acquired in 2010 through the Loreto Bay business combination explained in Note 4 to the consolidated statements. CT Prop, S. de R.L. de C.V, owns 100% of the outstanding stock of CT Commercial Properties, S. de R.L. de C.V.

 

**c)  Incorporation of Foreign Subsidiaries.**

 

The accounting records of foreign subsidiaries are maintained in the local currency and in accordance with MFRS. For incorporation into the Company’s consolidated financial statements, each foreign subsidiary’s individual financial statements are as of the same period as the Company’s consolidated financial statements and also are restated into Mexican pesos, as described as follows:

 

·                        For inflationary economic environments- the inflation effects of the country of origin are recognized, and the financial statements are subsequently translated into Mexican pesos using the year-end exchange rate.

 

·                        For non-inflationary economic environments- assets and liabilities are translated into Mexican pesos using the period-end exchange rate, shareholders’ equity is translated into Mexican pesos using the historical exchange rate, and the income statement is translated using the average exchange rate of each month.

 

F-9

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Table of Contents

 

Average exchange rates were as follows:

 
| **Country**  | ** ** | **Functional / Recording   Currency** | ** ** | **2011** | ** ** | **2010** | ** ** | **2009** | ** ** |
|--------------|------------|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Mexico       |       | Mexican peso                                    |       | Ps.      | 1.0000     |     | Ps.        | 1.0000   |       | Ps. | 1.0000 |   |
| Brazil  |       | Reals                                           |       | 7.5155   |       | 7.4366   |       | 7.5183   |       |
| India   |       | Rupees                                          |       | 0.2579   |       | 0.2714   |       | 0.2788   |       |
|              |            |                                                 |            |          |            |          |            |          |            |  |  |  |

 

Variances in the net investment in foreign subsidiaries generated in the translation process are included in the cumulative translation adjustment, which is recorded in equity as a cumulative other comprehensive income item.

 

The translation of assets and liabilities denominated in foreign currencies into Mexican pesos is for consolidation purposes and does not indicate that the Company could realize or settle the reported value of those assets and liabilities in Mexican pesos. Additionally, this does not indicate that the Company could return or distribute the reported Mexican peso value equity to its shareholders.

** **

**3. Summary of significant accounting policies**

 

The accompanying consolidated financial statements were prepared in conformity with Mexican Financial Reporting Standards (MFRS).

 

**a) New accounting standards**

 

**Effective in 2011:**

 

**MFRS B-5, Reporting Financial Information by Segment**

 

This MFRS replaces MFRS B-5, *Reporting Financial Information by Segment*and establishes the criteria to identify the entity’s segments to disclose as well as the disclosures about those segments. In addition, MFRS B-5 establishes certain other disclosure requirements.

 

The main changes of this MFRS are as follows: (a) MFRS B-5 includes a managerial approach, while previous MFRS B-5, although it referred to managerial approach, required that the information to disclose were referred to identified segments based on the products or services, geographical areas and customers homogenous groups, also requiring that that information would be segregated in primary and secondary information; (b) new MFRS does not require that business areas are subject to different risks amongst them, in order to qualify as operative segments, while previous MFRS B-5 did; (c) in accordance to new MFRS B-5, business areas in development stage could be catalogued as operative segment, while previous MFRS B-5 required operative segments to generate revenues; (d) MFRS B-5  requires disclosure of segments interest income and interest expense, as well as other comprehensive financial cost items to the extent that those items are part of the financial information relied upon by the Chief Operating Decision Maker, while previous MFRS B-5 did not require this information; and (e) MFRS B-5 requires to disclose the amounts of liabilities that are included in the usual information of an operative segment that the Company normally uses to make decisions, while previous MFRS B-5 did not require this and let management the option to do so or not.

 

The adoption of this MFRS did not significantly change the periodic segment disclosures made by the Company.

 

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Table of Contents

 

**MFRS C-4, Inventories**

 

In November 2010, the CINIF issued MFRS C-4, effective for fiscal years beginning on or after January 1, 2011 and replaced Mexican accounting Bulletin C-4, *Inventories*. Accounting changes resulting from the adoption of this standard related to changes in the formula for assigning inventory costs are recognized retrospectively. Changes in valuation methods must be recognized prospectively.

 

The principal difference between Mexican accounting Bulletin C-4 and MFRS C-4 is that the new standard does not allow using direct costs as the inventory valuation method nor does it allow using the LIFO cost method as the formulas (former method) for the assignment of unit cost to the inventories. MFRS C-4 establishes that inventories must be valued at the lower of either acquisition cost or net realizable value. Such standard also establishes that advances to suppliers for the acquisition of merchandise must be classified as inventories provided the risks and benefits are transferred to the Company. Lastly, MFRS C-4 includes guidelines for the valuation of the inventories of service suppliers.

 

This MFRS was adopted as of January 1, 2011, with retrospective application to prior accounting periods presented with these 2011 consolidated financial statements as required by MFRS B-1 *Accounting Changes and Error Corrections*. The application of MFRS C-4 to the consolidated financial statements had the following effects with respect to the year ended December 31, 2010 consolidated balance sheet:

 
| ** **                                     | ** ** | **As originally issued** | ** ** | **Adjustment** | ** ** | **As adjusted********2010** | ** ** |
|------------------------------------------------|------------|------------------------------------|------------|----------------|------------|----------------------------------|------------|
| Assets:                                        |       |                               |       |           |       |                             |       |
| Cash and cash equivalents                      |       | Ps.                                | 3,435,222  |           | Ps.        | —                           |       | Ps. | 3,435,222 |   |
| Trade accounts receivable                      |       | 1,975,203                          |       | —         |       | 1,975,203                        |       |
| Inventories and land held for development      |       | 17,236,366                         |       | (114,509       | )          | 17,121,857                       |       |
| Prepaid expenses and other current assets, net |       | 627,682                            |       | 114,509        |       | 742,191                          |       |
| Total current assets                           |       | Ps.                                | 23,274,473 |           | Ps.        | —                           |       | Ps. | 23,274,473 |   |

 

Consolidated statement of cash flow information related to 2010 and 2009 has also been adjusted to reflect the change in classifications disclosed above.

 

**MFRS C-5, Prepaid Expenses**

 

In November 2010, the CINIF issued MFRS C-5, which is effective for fiscal years beginning on or after January 1, 2011. MFRS C-5 replaces Mexican accounting Bulletin B-5. Any accounting changes resulting from the adoption of this standard must be recognized retrospectively.

 

This standard establishes that the main characteristic of a prepaid expense is that it does not result in the transfer to the entity of the benefits and risks inherent to the goods or services to be received. Consequently, prepaid expenses must be recognized in the balance sheet as either current or non-current assets, depending on the item classification in the statement of financial position. Moreover, MFRS C-5 establishes that prepaid expenses made for good or services whose inherent benefits and risks have already been transferred to the entity must be carried to the appropriate caption.

 

The adoption of this MFRS required the Company to reclassify certain amounts in the December 31, 2010 balance sheet, from inventories to other current assets. The impact of the adoption of this MFRS is presented above.

 

F-11

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Table of Contents

 

**MFRS C-6, Property, Plant and Equipment**

 

MFRS C-6 was issued by the CINIF in December 2010 to replace Mexican accounting Bulletin C-6, Property, Machinery and Equipment, and is effective for fiscal years beginning on or after January 1, 2011, except for the changes related to the segregation of property, plant and equipment into separate components for those assets with different useful lives. For entities that have not performed this component segregation, the provisions of this new standard will be effective as of January 1, 2012. As of December 31, 2011 the Company had not yet adopted the component segregation elements of MFRS C-6.

 

The new standard establishes that for acquisitions of free-of-charge assets, the cost of the assets must be null, thus eliminating the option of performing appraisals. In the case of asset exchanges, MFRS C-6 requires entities to determine the commercial substance of the transaction and the amount to be depreciated is the cost of acquisition less the asset’s residual value. Prepaid expenses for the acquisition of assets are to be recognized as a component of the asset as of the time the benefits and risks inherent to such assets are transferred. In the case of retirement of assets, income is recognized when the requirements for income recognition outlined under the standard have been met. MFRS C-6 also outlines specific new disclosures for public entities presented in Note 10.

 

The adoption of this MFRS did not have any effects on the Company’s consolidated financial statements.

 

**Effective in 2010:**

 

**Interpretation to Mexican Financial Reporting Standards (IMFRS) 14, Construction, Sales and Services Agreements related to Real Estate**

 

In December 2008 IMFRS 14 was issued by the Consejo Mexicano de Normas de Información Financiera, A.C. (the Mexican Financial Information Standards Board or “CINIF”) to complement Bulletin’s D-7, *Construction Agreements and Manufacturing of Certain Capital Assets*. This Interpretation is applicable to the recognition of revenues, costs and expenses for all entities that undertake the construction of capital assets directly or through sub contractors.

 

Due to the application of this Interpretation, effective January 1, 2010, the Company stopped recognizing its revenues, costs and expenses based on the percentage-of-completion method. At that date, the Company began to recognize them based on methods mentioned in this Interpretation. Revenue and cost recognition will then more closely approximate what is often referred to as a “completed contract method” (or “deposited accounting method”) in which revenues, costs and expenses should be recognized, when all of the following conditions are fulfilled:

 

a)              the Company has transferred the control to the homebuyer, in other words, the significant risks and benefits due to the property or the assets ownership.

b)             the Company does not retain any continued participation of the actual management of the sold assets, in the usual grade associated with the property, nor does retain the effective control of the sold assets;

c)              the revenues amount can be estimated reliably;

d)             it is probable that the Company will receive the economic benefits associated with the transaction; and

e)              the costs and expenses incurred or to be incurred related to the transaction can be estimated reliably.

 

The above conditions are typically met upon the completion of construction, and signing by the Company, the customer and (if applicable) the lender the legal contracts and deeds of ownership (escritura) over the property. At that time, the customer would have the legal right to take possession of the home.

 

This Interpretation was adopted as of January 1, 2010, with retrospective application to prior accounting periods as required by MFRS B-1 *Accounting Changes and Error Corrections.*

 

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Table of Contents

 

**MFRS C-1, Cash and cash equivalents**

 

Mexican FRS C-1 was issued by the CINIF in November 2009 to replace Mexican accounting Bulletin C-1, *Cash*, and is effective for fiscal years beginning on or after January 1, 2010.  The main differences between Mexican FRS C-1 and Mexican accounting Bulletin C-1 lie in the presentation of restricted cash and the substitution of the term “short-term investments” by the new term “liquid investments”, which are those investments whose maturities do not exceed three months.

 

The adoption of this MFRS did not have significant effects on the Company’s consolidated financial statements, except for the reclassification of restricted cash to cash and cash equivalents in the consolidated balance sheet,with related effects on the consolidated statement of cash flows.

 

**Effective in 2009:**

 

The most relevant standards that came into force in 2009 are described below:

 

**MFRS B-7, Business Acquisitions**

 

This MFRS substitutes Bulletin B-7 *Business Acquisitions* and was issued by the CINIF to replace Mexican accounting Bulletin B-7 *Business Acquisitions*. This standard establishes general rules for the initial recognition of net assets, non-controlling interests and other items, as of the acquisition date.

 

According to this statement, purchase and restructuring expenses resulting from acquisition process, should not be part of the consideration, because these expenses are not an amount being shared by the business acquired.

 

In addition, MFRS B-7 requires a company to recognize non-controlling interests in the acquiree at fair value as of the acquisition date.

 

**MFRS B-8, Consolidated or Combined Financial Statements**

 

The CINIF issued in December 2008, MFRS B-8 *Consolidated or Combined Financial Statements* which replaces Mexican Bulletin B-8 *Consolidated Financial Statements* and describes general rules for the preparation, presentation and disclosure of consolidated and combined financial statements.

 

The main changes of this MFRS are as follows: (a) this rule defines “Specific-Purpose Entity” (SPE), establishes the cases in which an entity has control over a SPE, and when a company should consolidate this type of entity; (b) addresses that potential voting rights should be analyzed when evaluating the existence of control over an entity;  and, (c) set new terms for “controlling interest” instead of “majority interest,” and “non-controlling interest” instead of “minority interest.”

 

The adoption of this MFRS did not have any effect on the Company’s consolidated financial statements.

 

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Table of Contents

 

**MFRS C-7, Investments in Associates and Other Permanent Investments**

 

MFRS C-7 was issued by CINIF in December 2008 and describes the accounting treatment for investments in associates and “other permanent investments”, which were previously treated within Bulletin B-8 *Consolidated Financial Statements*. This MFRS requires the recognition of a Specific-Purpose Entity, through equity method. Also, this MFRS establishes that potential voting rights should be considered when analyzing the existence of significant influence.

 

In addition, this rule defines a procedure and a limit for the recognition of losses in an associate.

 

The adoption of this MFRS required the Company to consider the associate in Egypt as another permanent investment effective January 1, 2009, and no longer as an associate, and therefore to stop applying the equity method of accounting to this company.

 

**MFRS C-8, Intangible Assets**

 

This rule substitutes Bulletin C-8 *Intangible Assets*. The new rule defines intangible assets as non-monetary items and broadens the criteria of identification, indicating that an intangible asset must be separable; this means that such asset could be sold, transferred, or used by the entity. In addition, intangible asset arises from legal or contractual rights, whether those rights are transferable or separable from the entity.

 

This standard also establishes that preoperative costs should be eliminated from the capitalized balance (derecognized), affecting retained earnings, and without restating prior financial statements.

 

The adoption of this MFRS did not have any effect on the Company’s consolidated financial statements.

 

**MFRS D-8, Share-Based Payments**

 

MFRS D-8 establishes the recognition of share-based transactions. When an entity purchases goods or pay services through share-based transactions, the entity is required to recognize those goods or services at fair value and the corresponding increase in equity.  According with MFRS D-8, if share-based payments cannot be settled with equity instruments, they have to be settled using an indirect method considering MFRS D-8 parameters, and thus recorded as a liability.

 

The adoption of this MFRS did not have a material effect on the Company’s consolidated financial statements.

 

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Table of Contents

 

**IMFRS 18, Effects on Recognition from the 2010 Tax Reform Bill in Income Taxes**

 

On December 15, 2009 the CINIF published the Interpretation 18 of Mexican Financial Reporting Standards with the objective to provide guidance in regards to the 2010 Tax Reform Bill about the accounting recognition that should be completed in the companies’ financial statements.

 

This IMFRS establishes certain parameters for the recognition of changes to the new Tax Reform, mainly in regards to Income Tax rates changes, changes to the consolidation regime (fundamentally related to tax losses), losses on stock transfers, special consolidation terms, distributed dividends not from Net Tax Profit Account (CUFIN), consolidation tax benefits and differences between CUFIN. The effects of the application of IMFRS 18 are disclosed in Note 24.

 

**b) Revenue and cost recognition**

 

**Home sales**

 

Revenues, costs and expenses from the Company’s homes sales are recognized when all of the following conditions are fulfilled:

 

a)              the Company has transferred the control to the homebuyer, in other words, the significant risks and benefits due to the property or the assets ownership.

b)             the Company does not retain any continued participation of the actual management of the sold assets, in the usual grade associated with the property, nor does retain the effective control of the sold assets;

c)              the revenues amount can be estimated reliably;

d)             it is probable that the Company will receive the economic benefits associated with the transaction; and

e)              the costs and expenses incurred or to be incurred related to the transaction can be estimated reliably.

 

The above conditions are typically met upon the completion of construction, and signing by the Company, the customer and (if applicable) the lender, the legal contracts and deeds of ownership (escritura) over the property. At that time, the customer would have the legal right to take possession of the home.

 

The cost of sales represents the cost incurred in the development of housing revenues by the Company during the year. These costs include land, direct materials, labor and all the indirect costs related to the development of the project such as indirect labor, equipment, repairs, depreciation and the capitalization of the comprehensive financing costs.

 

**Construction services**

 

Construction services revenues and costs are recorded pursuant to the percentage-of-completion method, measured by the percentage of actual costs incurred to total estimated costs for each development and each project, in accordance to Bulletin D-7. Under this method, the estimated revenue for each development and project is multiplied by such percentage to determine the amount of revenue to be recognized. Management periodically evaluates the fairness of estimates used to determine the percentage of completion. If, as a result of such evaluation, it becomes apparent that estimated costs on uncompleted projects exceed expected revenues, a provision for estimated costs is recorded in the period in which such costs are determined.

 

During the years ended December 31, 2011 and 2010 the Company provided construction services only to Mexican Government entities.

 

F-15

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Table of Contents

 

**Concession arrangement**

 

During 2011, the Company entered into the CRS Morelos Facility Contract with the Mexican Government to build and then subsequently assist in the operation of a prison facility in Mexico.  Construction service revenues and related costs are recorded pursuant the percentage-of-completion method of accounting as described above. Once the project has begun operations, the services revenues will be recognized on a monthly basis (See Note 25b).

 

**c) Recognition of the effects of inflation**

 

Beginning January 1, 2008 the Company discontinued inflationary accounting in accordance MFRS B-10, *Effects of Inflation*. Based on this Standard, the Company operates in a non-inflationary economy, and accordingly did not recognize the effects of inflation in the financial information for the years ended December 31, 2011, 2010 and 2009.

 

Cumulative inflation in Mexico over 2009, 2010 and 2011 is less than 26% and therefore, in conformity with MFRS B-10, Mexico’s current economic environment is considered non-inflationary. Furthermore, the three year cumulative inflation in both of the Company’s foreign locations (Brazil and India) is also less than 26% through December 31, 2011. Accordingly, the Company’s financial information for 2011, 2010 and 2009 was prepared without recognizing the effects of inflation.

 

The 2011, 2010 and 2009 inflation, based on the Mexican National Consumer Price Index was 3.81%, 4.40% and 3.57%, respectively. The cumulative inflation for the last three years was 12.26%,.   Regarding Brazil, the 2011, 2010 and 2009 inflation was 6.5%, 5.91% and 4.31% respectively, the cumulative inflation for the last three years was 17.50% that in accordance to MFRS is considered a non-inflationary environment.

 

**d) Use of estimates**

 

In conformity with MFRS, the preparation of financial statements requires the use of estimates and assumptions in certain areas.  Actual results could differ from these estimates.

 

**e) Cash and cash equivalents**

 

Cash and cash equivalents consist basically of bank deposits and highly liquid investments with purchased maturities of less than three months. These investments are stated at cost plus accrued interest, which is similar to their market value.

 

**f) Allowance for doubtful accounts**

 

The Company’s policy is to provide for doubtful accounts based on balances of uncollected accounts receivable, applying several percentages based on their aging status.

 

F-16

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Table of Contents

 

**g) Inventories and costs of sales**

 

Construction-in-process, construction materials and land for development and future development are recorded at acquisition cost.

 

Land for future developments refers to land reserves to be developed by the Company beyond 2012. The Company’s policy is to locate and acquire land each year, classifying land currently being developed and land planned to be developed within the next year as part of current assets, and classifying all remaining land as non-current assets.

 

MFRS D-6 establishes the determination of the amount from the comprehensive financing cost (CFC) that shall be capitalized. The land under development inventories and construction-in-process include the capitalized CFC. The Company capitalizes the CFC that results from the application of the weighted average rate of the debt to the weighted average of the construction-in-process investment and the land under development during the acquisition period. In regards to debt in foreign currency, the capitalized CFC includes the corresponding exchange gains and losses (see Note 8).

 

The Company reviews the carrying amounts of its inventories annually or earlier when an impairment indicator suggests that such amounts might not be recoverable.  If events or changes in circumstances indicate that the carrying value may not be recoverable an assessment is undertaken to determine whether carrying values are in excess of their net realizable value.   Net realizable value is the estimated sales price in the ordinary course of business, less estimated costs for completion and effecting a sale.

 

During the year ended December 31, 2011, the Company adjusted the value of its inventory in-process at each of its three Brazilian projects whereby total inventory balances were written down by approximately Ps. 131,079. The carrying value of the Brazilian inventory is Ps. 994,539 after such write-down.

 

Net realizable value for development properties is based on internal project evaluations where assumptions are made about the project’s expected revenues and expenses. Valuation of these projects is performed according to lower cost of market principle. If the carrying amount of a project exceeds the net realizable value, a provision is recorded to reflect the inventory at the recoverable amount in the balance sheet.

 

F-17

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Table of Contents

 

**h) Prepaid expenses**

 

Prepaid expenses are recognized by the amount paid in the moment that is realized, only if an estimated future benefit is associated with the Company. Once that the service or good is received, the Company recognizes the amount related to the prepaid expense as an asset or expense in the period, depending how certain is that the service or good will provide benefits to the Company.

 

The Company reviews the prepaid expenses capacity to generate future benefits, as well as its recoverability; the amount considered as not recoverable is recognized as an impairment loss.

 

**i) Property and equipment**

 

Property and equipment is recorded at acquisition cost. Depreciation is calculated using the straight-line method based on the useful lives of the related assets, as follows:

 
| ** **                     | ** ** | **Years**  | ** ** |
|--------------------------------|------------|------------|------------|
| Buildings                      |       | 20         |       |
| Machinery and equipment        |       | 4   and 10 |       |
| Transportation equipment       |       | 4          |       |
| Air transportation equipment   |       | 10         |       |
| Office furniture and equipment |       | 10         |       |
| Computers                      |       | 4          |       |
| Communication equipment        |       | 4          |       |

 

The value of property and equipment is reviewed whenever there are impairment indicators. When the recovery value of an asset, which is the greater of its selling price and value in use (the present value of future cash flows), is lower than its net carrying value, the difference is recognized as an impairment loss.  At December 31, 2011 and 2010, no impairment losses have been recognized with respect to the Company’s property and equipment.

 

**j) Leases**

 

The Company classifies agreements to lease property and equipment as operating or capital, in conformity with the guidelines of Bulletin D-5, *Leases*.

 

Lease arrangements are recognized as capital leases if they meet at least one of the following conditions:

 

a)              Under the agreement, the ownership of the leased asset is transferred to the lessee upon termination of the lease.

 

b)             The agreement includes an option to purchase the asset at a reduced price.

 

c)              The term of the lease is basically the same as the remaining useful life of the leased asset.

 

d)             The present value of minimum lease payments at the inception of the lease is substantially equal to the market value of the leased asset, net of any residual value (90% or more).

 

When the lessor retains the risks or benefits inherent to the ownership of the leased asset, the agreements are classified as operating leases and rent is charged to results of operations.

 

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**k) Goodwill**

 

Goodwill represents the excess over the purchase price paid in a business acquisition and the fair value of the net assets acquired at the date of acquisition in accordance with the purchase method of accounting.

 

Goodwill is recorded at acquisition cost.

 

Goodwill is not amortized; however, it is subject to annual impairment tests, and when circumstances indicate that the carrying value may be impaired and is adjusted for any impairment losses. Goodwill is allocated to the cash generating unit in order to test for impairment losses. The Company allocated the goodwill to the affordable entry-level segment, which is considered the cash generating unit.

 

Goodwill as of December 31, 2011 and 2010 was Ps. 731,861.

 

**l) Impairment of indefinite lived assets**

 

The Company reviews the carrying amounts of assets with indefinite useful life annually or earlier when an impairment indicator suggests that such amounts might not be recoverable, considering the greater of the present value of future net cash flows using an appropriate discount rate, or the net sales price upon disposal. Impairment is recorded when the carrying amounts exceed the greater of the amounts mentioned above. The impairment indicators considered for these purposes are, among others, the operating losses or negative cash flows in the period if they are combined with a history or projection of losses; depreciation and amortization charged to results, which in percentage terms in relation to revenues are substantially higher than that of previous years; obsolescence; reduction in the demand for the products manufactured; competition; and other legal and economic factors.

 

As of December 31, 2011 and 2010, no impairment has been recognized with respect to the Company’s assets with indefinite lives.

 

**m) Other assets**

 

Expenses related to the placement of the various borrowings disclosed in Note 12 are recorded at cost. These amounts are amortized under the straight-line method over the respective loan terms and disclosed in Note 11.

 

**n) Investment in associate**

 

The investment in an associate company is initially recognized at acquisition cost and is subsequently accounted for using the equity method, by which the Company recognizes its participation in the results of operation and the associate’s equity. Associate is considered the investment on which the Company has significant influence.

 

The associate’s financial statements are prepared under the same accounting policies and periods of the Company.

 

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**o) Employee retirement obligations**

 

The Company grants seniority premiums and termination pay, covering all its employees. The related calculations are based on the provisions of the Mexican Federal Labor Law (FLL).  Under FLL, workers are entitled to certain benefits at the time of their separation from the Company under certain circumstances. Seniority premiums and termination payments are recognized using the projected unit-credit method and financial assumptions.

 

**p) Financial derivative instruments**

 

Financial derivative instruments are used for hedging purposes. At December 31, 2011 and 2010, all derivative instruments were recognized in the balance sheet at fair value, initially represented by the amount of consideration agreed between the parties (both assets and liabilities). Transaction costs and cash flow received or delivered to adjust these instruments to fair value at the beginning of the transaction, not related to premiums on options, are amortized during the respective term.

 

The changes in the fair value of financial derivative instruments that do not qualify as hedging instruments for accounting purposes are recognized in the consolidated statements of income as part of the “valuation effects of financial derivative instruments” caption. The valuation of financial derivative instruments that qualify as hedging instruments for accounting purposes are recognized in equity as part of other comprehensive income.

 

**q) Liabilities, provisions and contingent assets and liabilities**

 

Liabilities and provisions are recognized whenever (i) the Company has a present obligation (legally binding or assumed) derived from past events, (ii) is probable than a future cash disbursement will be required for its settlement and (iii)  can be reasonably estimated.

 

The Company recognizes a liability for a loss contingency when it is probable (i.e. the probability that the event will occur is greater than the probability that it will not). That certain effects related to past events, will materialize and can be reasonably quantified. These events and the financial impact are also disclosed as lost contingencies in the consolidated financial statements when the risk of loss is deemed to be other than remote. The Company does not recognize an asset for a gain contingency until the gain is realized.

 

The Company evaluates its income tax positions to determine whether they meet the more-likely-than-not threshold to be recognized in the financial statements at the largest amount of benefit that is more likely than not of being realized upon ultimate settlement with the tax authority. The Company accrues interest, and penalties related to its balance of unrecognized tax benefits.

 

**r) Deferred taxes**

 

The Company recognizes deferred taxes using the liability method.  Under this method, deferred taxes are recognized on all temporary differences between the book and tax values of assets and liabilities, using the enacted income tax or flat rate business tax (IETU) rate at the time the financial statements are issued, which is the enacted rate that will be in effect at the time the temporary differences giving rise to deferred tax assets and liabilities are expected to be recovered or settled.

 

Deferred tax assets are evaluated periodically in order to determine their recoverability.

 

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Deferred tax consequences on unremitted foreign earnings are accounted for as temporary differences, except to the extent that the Company is able to control the timing of the reversal of the temporary difference; and it is probable that the temporary difference will not reverse in the foreseeable future.  Taxes paid on remitted foreign earnings are able to be offset against Mexican taxes, thus to the extent that a remittance is to be made, the deferred tax would be limited to the incremental difference between the Mexican tax rate and the rate of the remitting country.   As of December 31, 2011 and 2010, the Company has not provided any deferred taxes related to unremitted foreign earnings given that its foreign subsidiaries have not recognized profits to date.

 

**s) Deferred employee statutory profit sharing**

 

The Company uses MFRS D-3, *Employee Benefits* that considers the accounting treatment for Employee Statutory Profit-Sharing. This Standard establishes the Companies to use the liability method to compute and recognize the deferred liability or asset for profit-sharing, in a similar manner as the deferred income tax computation.

 

The current year deferred employee profit-sharing expense is presented as an part of other expenses in the consolidated statement of income rather than as part of taxes on profits.

 

The deferred asset effect generated during 2011 and 2009 was Ps. 77,723 and Ps. 52,392 respectively. The Company created a valuation allowance to full reserve the balance for both years, which according with the Company’s projections were more likely than not to not be recovered. At December 31, 2010, there was not deferred profit-sharing to be recognized.

 

**t) Foreign currency balances and transactions**

 

Foreign currency transactions are recorded at the applicable exchange rate in effect at the transaction date. Monetary assets and liabilities denominated in foreign currency are translated into Mexican pesos at the applicable exchange rate in effect at the balance sheet date. Exchange fluctuations are recorded as a component of net comprehensive financing cost (income) in the consolidated statements of income.

 

See Note 19 for the Company’s consolidated foreign currency position at the end of each year and the exchange rates used to translate foreign currency denominated balances.

 

**u) Stock option plan**

 

The Company has implemented different plans through which certain of its executives and company officials receive remuneration in the form of share-based payments,whereby these individuals render services as consideration for equity instruments.

 

Given the settlement feature contained within one of the plans, the awards were treated as “liability awards” from its implementation and through December 31, 2008. Compensation cost was measured by reference to the fair value of the awards at each balance sheet date. During 2009, and as a result of certain modifications made to the plan, the awards were modified so as to become equity-settled. The Company recognizes the fair value of the services received as an increase in equity.

 

During 2011 the Company implemented a new plan which awards are treated as liabilty awards. The fair value of share based compensation is determined using an appropriate pricing model (see Note 18d).

 

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**v) Earnings per share**

 

Earnings per share are calculated by dividing net income of controlling interest by the weighted average number of shares outstanding during the year. The Company does not have any dilutive securities beyond the stock options disclosed in Note 18d, the effects of which were immaterial in all periods. Accordingly basic and diluted earnings per share presented were the same during such periods presented herein.

 

**w) Comprehensive income**

 

Comprehensive income is represented by net income, the effect of the currency translation of the financial statements of the foreign subsidiaries and the effect of the change in the fair value of financial derivative instruments (and underlying instruments) that meet the criteria of hedge accounting. The effects of these concepts and the changes in financial derivative instruments and other equity accounts in equity (including the comprenhensive income for each period) are shown as follows:

 
| ** **                                                                             | ** ** | **Financial   derivative** | ** ** | **Other equity** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                                                                             | ** ** | **Instruments**            | ** ** | **Accounts**          | ** ** |
| Balance as of   December 31, 2008                                                 |       | Ps.                        | —     |                  | Ps.        | 53,307 |   |
| Changes in fair value   of financial derivative instrument                             |       | (125,531                   | )          | —                |       |
| Deferred tax related to   the changes in fair value of financial derivative instrument |       | 37,659                     |       | —                |       |
| Translation effects of   the foreign subsidiaries financial statements                 |       | —                     |       | (42,401               | )          |
| Balance as of December 31,   2009                                                 |       | (87,872                    | )          | 10,906                |       |
| Changes in fair value   of financial derivative instrument                             |       | (337,273                   | )          |                  |       |
| Deferred tax related to   the changes in fair value of financial derivative instrument |       | 94,436                     |       |                  |       |
| Exchange gain of the   Senior Guaranteed Notes due 2019                                |       | —                     |       | 137,075               |       |
| Deferred tax of the   exchange gain of the Senior Guaranteed Notes due 2019            |       | —                     |       | (38,381               | )          |
| Translation effects of   the foreign subsidiaries financial statements                 |       | —                     |       | (26,616               | )          |
|                                                                                   |       |                       |       |                  |       |
| Balance as of   December 31, 2010                                                 |       | (330,709                   | )          | 82,984                |       |
| Changes in fair value   of financial derivative instrument                             |       | 481,125                    |       | —                |       |
| Deferred tax related to   the changes in fair value of financial derivative instrument |       | (134,715                   | )          | —                |       |
| Exchange loss of the   Senior Guaranteed Notes due 2019                                |       | —                     |       | (399,250              | )          |
| Deferred tax of the   exchange loss of the Senior Guaranteed Notes due 2019            |       | —                     |       | 111,790               |       |
| Translation effects of   the foreign subsidiaries financial statements                 |       | —                     |       | (2,284                | )          |
|                                                                                   |       |                       |       |                  |       |
| Balance as of   December 31, 2011                                                 |       | Ps.                        | 15,701     |                  | Ps.        | (206,760 | ) |

 

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**x) Statement of income presentation**

 

The costs and expenses reflected in the statement of income are presented according to their function, since this classification allows an adequate analysis of gross profits and operating margins. The Company’s operating income is presented because it is an important indicator of its overall performance and results, and includes ordinary income, operating costs and expenses. Other ordinary income (expenses) is therefore excluded.

 

**y) Segment reporting**

 

Segment reporting is presented in accordance with the information used by the Company’s Chief Operating Decision Maker for decision making process. The information is presented according to the type of housing on sale by the Company and others.

 

**4. Business acquisition**

 

On December 22, 2009 the Company entered into an Equity Interest Purchase Agreement to acquire three companies: CT Prop, S. de R.L. de C.V, CT Commercial Properties, S. de R.L. de C.V, and CT Loreto, S. de R.L. de C.V. (all together referred as the Loreto Companies).  In accordance to the agreement, the Company was to deposit US $5 million into an escrow account. At December 31, 2009 the Company had deposited US $0.5 million (equivalent to Ps. 6,533); the rest was deposited on January 15, 2010.  Depending on the satisfaction of diverse legal requirements, of which the most relevant was to evidence that the title of the asset transferred to the entities that will own them, is free and clear from any encumbrance, the Company was going to acquire through the Loreto companies different assets (hotel, golf course and land). On July 20, 2010 the legal requirements for the majority of the assets were satisfied, and the Company was able to acquire 100% of the common shares of CT Prop, S. de R.L. de C.V., which owns 100% of the outstanding stock of CT Commercial Properties, S. de R.L. de C.V.  On December 31, 2010 the legal requirements for rest of the assets were fulfilled and the Company acquired the 100% of the common shares of CT Loreto, S. de R.L. de C.V.

 

As of December 31, 2010, the Company had fully paid the total purchase price of US$ 22.5 million (Ps. 290,478). Part of the payment was done through a credit line granted by Banco Nacional de México, S.A., of which the outstanding balance as of December 31, 2010 was Ps. 99,358 and was fully paid during 2011 (see Note 12).

 

The fair value of the net assets identified at the acquisition date is shown as follows:

 
| ** **                 | ** ** | **Fair value recognized   at the date of the   acquisition** | ** ** | **Adjustment to   purchase price** | ** ** | **Purchase price** | ** ** |
|----------------------------|------------|--------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|-------------------------|------------|
| Land inventory             |       | Ps.                                                                                        | 288,502    |                                         | Ps.        | —                  |       | Ps. | 288,502 |   |
| Golf course                |       | 242,066                                                                                    |       | (240,090                                     | )          | 1,976                   |       |
| Hotel                      |       | 119,073                                                                                    |       | (119,073                                     | )          | —                  |       |
| Other fixed assets         |       | 14,918                                                                                     |       | (14,918                                      | )          | —                  |       |
|                       |       |                                                                                       |       |                                         |       |                    |       |
| Net assets at fair   value |       | Ps.                                                                                        | 664,559    |                                         | Ps.        | (374,081                | )          | Ps. | 290,478 |   |

 

This business acquisition was recorded using the purchase method. Since net assets at fair value were greater than the purchase price, the Company adjusted the value of the acquired assets in accordance to the order established in MFRS B-7, allocating the adjustment to the non-monetary assets that were the hotel, golf course and other minor assets.

 

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The results of operations of the Loreto companies have been included in the Company’s consolidated financial statements since the date of the acquisition. Among the main reasons for the acquisition of these companies was the ability to construct a tourism development of 850 units including amenities such as a golf course and a hotel in the city of Loreto, Baja California Sur. The acquisition of these companies is expected to strength the Company’s position in the tourism domestic market, enhancing its presence in the Baja California Sur state.

 

Pro-forma financial information as if this business combination had been completed as of January 1, 2009 has not been presented as the pro-forma statement of operations figures for 2010 and 2009 would not be materially different from those presented in the consolidated financial statements.

 

**5. Cash and cash equivalents**

 
| ** **       | ** ** | **2011**      | ** **    | **2010**  | ** ** |
|------------------|------------|---------------|---------------|-----------|------------|
| Cash             | ** ** | **Ps.**       | **239,243**   |      | Ps.        | 121,593 |   |
| Cash equivalents | ** ** | **3,753,410** |          | 3,313,629 |       |
|             | ** ** | **Ps.**       | **3,992,653** |      | Ps.        | 3,435,222 |   |

 

Cash and cash equivalents consist of bank deposits and highly liquid investments. Cash equivalents include restricted cash as of December 31, 2011 and 2010 for Ps. 132,303 and Ps. 127,530, respectively.

 

**6. Trade accounts receivable**

 
| ** **                                                                  | ** ** | **2011**      | ** **    | **2010**  | ** ** |
|-----------------------------------------------------------------------------|------------|---------------|---------------|-----------|------------|
| As promoter:                                                                |       |          |          |      |       |
| Due from customers and   financing institutions (1) (2) (3)  | ** ** | **Ps.**       | **1,585,956** |      | Ps.        | 1,581,158 |   |
| Construction services (4)                                                   | ** ** | **632,341**   |          | 488,169   |       |
| Services and other                                                          | ** ** | **41,796**    |          | 46,894    |       |
|                                                                        | ** ** | **2,260,093** |          | 2,116,221 |       |
| Allowance for doubtful accounts                                             | ** ** | **(111,357**  | **)**         | (78,852   | )          |
|                                                                        | ** ** | **2,148,736** |          | 2,037,369 |       |
| Trade accounts   receivable, long-term (5) (6)                         | ** ** | **(155,713**  | **)**         | (62,166   | )          |
|                                                                        | ** ** | **Ps.**       | **1,993,023** |      | Ps.        | 1,975,203 |   |

 

The Company does not believe that it has a significant concentration of credit risk. While some of its receivables are from homebuyers, the majority are from entities in the home finance business, whose characteristics differ from other receivables.

 

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(1)          These amounts include balances due from INFONAVIT, FOVISSSTE, SOFOLES *(Sociedades Financieras de Objeto Limitado)*, commercial banks and homebuyers. With the exception of commercial banks, all such categories exceed 10% of accounts receivable balances as of December 31, 2011 and 2010.

 

(2)          The Company participates in a program referred to as “Programa de Entrega Anticipada de Vivienda INFONAVIT”. This program provides for factoring of INFONAVIT receivables without recourse, thereby providing for more timely collection.

 

(3)          The Company participates in a factoring program with Mexico’s National Development Bank (NAFIN), which provided FOVISSSTE with a funding source to complement its housing programs.  This program 

 

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provides for factoring of FOVISSSTE receivables without recourse, thereby providing for more timely collection.

 

(4)          This receivable is related to construction services provided by the Company to the Mexican Federal Government accounted using the percentage of completion method.

 

(5)          Ps. 41,525 and Ps. 62,166 of the long-term trade account receivable as of December 31, 2011 and 2010 is due to an agreement with the Housing Institute of the Federal District, or Instituto de Vivienda del Distrito Federal (“INVI”), on which it was agreed that the Company will receive monthly payments, including interest at a rate of TIIE plus 4%, during a five-year period, beginning June 2009, due to the sale of houses in Mexico City.

 

(6)          Ps. 114,188 of the long-term trade account receivable as of December 31, 2011 is due to the account receivable (financial asset) related to the CRS Morelos Facility Contract revenues recognized pursuant the percentage-of-completion method of accounting (See Note 3b).   Collection of such amounts will be as described in Note 25.

 

**7. Transactions and balances with related parties**

 

**Makobil**

 

The Company has a 24% equity interest in Makobil, S. de R.L. de C.V. (“Makobil”), a Mexican entity.  The other shareholder in Makobil is the Arendal Group, a well-known Mexican construction contractor.    Makobil has been granted a contract by the Mexican Government for the construction and subsequent operation of a prison facility in Chiapas, Mexico. The Company will be performing sub-contractor services to Makobil in connection with the construction and operation of the prison facility.  The Company has a note receivable of Ps. 174,073 from Makobil as of December 31, 2011.   This note receivable is due in August 2012 and bears interest at TIIE plus 1.6 %.. The Company is not a signatory to the Makobil prison contract with the Mexican Government, nor is it a guarantor on any of Makobil’s financing agreements.

 

As discussed in Note 26, during March 2012 the Company executed an amendment to its shareholders agreement whereby it will ultimately purchase the 76% equity interest in Makobil currently owned by Arendal.

 

**Employee Compensation**

 

During the years ended December 31, 2011, 2010 and 2010 compensation paid to the Company’s key managerial personnel or relevant directors is as follows:

 
| ** **                            | ** ** | **2011**  | ** **  | **2010** | ** ** | **2009** | ** ** |
|---------------------------------------|------------|-----------|-------------|----------|------------|----------|------------|
|                                  |       |      |        |     |       |     |       |
| Short and long-term   direct benefits | ** ** | **Ps.**   | **172,033** |     | Ps.        | 196,788  |       | Ps. | 201,058 |   |
| Termination benefits                  | ** ** | **4,206** |        | 2,422    |       | 6,508    |       |
| Stock option   compensation expense   | ** ** | **3,685** |        | —   |       | 10,638   |       |
|                                  | ** ** | **Ps.**   | **179,924** |     | Ps.        | 199,210  |       | Ps. | 218,204 |   |

 

Certain stock option benefits were granted to key employees as disclosed in Note 18d.

 

There were no post retirement benefits payments during the years presented herein.

 

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**8. Inventories**

 
| ** **                                                      | ** ** | **2011**        | ** **     | **2010**    | ** ** |
|-----------------------------------------------------------------|------------|-----------------|----------------|-------------|------------|
|                                                            |       |            |           |        |       |
| Titled land                                                     | ** ** | **Ps.**         | **9,195,467**  |        | Ps.        | 9,701,296 |   |
| Contracted land                                                 | ** ** | **2,181,989**   |           | 2,467,273   |       |
| Construction-in-process                                         | ** ** | **19,453,786**  |           | 14,968,289  |       |
| Construction materials                                          | ** ** | **440,672**     |           | 576,498     |       |
|                                                            | ** ** | **31,271,914**  |           | 27,713,356  |       |
| Land held for future   developmentand   construction-in-process | ** ** | **(12,859,328** | **)**          | (10,591,499 | )          |
| Total inventories                                               | ** ** | **Ps.**         | **18,412,586** |        | Ps.        | 17,121,857 |   |

 

The Company’s policy is to locate and acquire land each year, classifying land currently being developed and land planned to be developed within the next year as part of current assets, and classifying all remaining land as non-current assets.

 

Due to the application of MFRS D-6 during 2011, 2010 and 2009, the net comprehensive financing cost (CFC) related to qualified assets for the same periods was Ps. 2,289,540, Ps. 965,008 and Ps. 563,154, respectively. Total CFC related to inventories sold and applied to cost of sales was Ps. 1,363,295 during 2011 (of which Ps. 968,759 is related to the current year CFC and Ps. 394,536 is related to prior years), Ps. 758,332 during 2010 (of which Ps. 432,819 is related to the current year CFC and Ps. 325,513 is related to prior years) and Ps. 537,431 during 2009 (of which Ps. 239,597 is related to 2009 CFC and Ps. 297,834 is related to prior year), respectively. The average period for the amortization of the capitalized comprehensive financing cost is 15 months. The annual capitalization rates are 15.75%, 8.50% and 6.50%, during each of 2011, 2010 and 2009, respectively.

 

During the years ended December 31, 2011, 2010 and 2009, the net comprehensive financing cost capitalized in inventories was as follows:

 
| ** **                                                             | ** ** | **2011**       | ** **    | **2010** | ** ** | **2009**  | ** ** |
|------------------------------------------------------------------------|------------|----------------|---------------|----------|------------|-----------|------------|
| Total accrued net   comprehensive financing cost before capitalization | ** ** | **Ps.**        | **2,684,344** |     | Ps.        | 1,279,750 |       | Ps. | 711,665 |   |
| Comprehensive financing   cost capitalized in inventories              | ** ** | **(2,289,540** | **)**         | (965,008 | )          | (563,154  | )          |
| Comprehensive financing   cost after capitalization                    | ** ** | **Ps.**        | **394,804**   |     | Ps.        | 314,742   |       | Ps. | 148,511 |   |

 

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Table of Contents

 

**9. Prepaid expenses and other current assets**

 
| ** **                                 | ** ** | **2011**    | ** **    | **2010** | ** ** |
|--------------------------------------------|------------|-------------|---------------|----------|------------|
| Sales commissions paid   in advance        | ** ** | **Ps.**     | **265,206**   |     | Ps.        | 321,415 |   |
| Advances to suppliers   and land suppliers | ** ** | **198,899** |          | 141,542  |       |
| Refundable taxes                           | ** ** | **185,096** |          | 199,275  |       |
| Sundry debtors, net                        | ** ** | **345,405** |          | 73,555   |       |
| Insurance and bonds, net                   | ** ** | **5,741**   |          | 6,404    |       |
|                                       | ** ** | **Ps.**     | **1,000,347** |     | Ps.        | 742,191 |   |

 

**10. Property and equipment**

 
| ** **                   | ** ** | **Land and   buildings** | ** **  | **Machinery   and equipment** | ** ** | **Air   transportation   equipment** | ** ** | **Other fixed   assets** | ** **  | **Total**   | ** ** |
|------------------------------|------------|-------------------------------|-------------|------------------------------------|------------|--------------------------------------|------------|-------------------------------|-------------|-------------|------------|
| **Cost:**                    | ** ** | ** **                    | ** **  | ** **                         | ** ** | ** **                           | ** ** | ** **                    | ** **  | ** **  | ** ** |
| As of January 1, 2009   |       | Ps.                           | 285,305     |                               | Ps.        | 1,400,047                            |       | Ps.                           | 75,202      |        | Ps.        | 376,103 |   | Ps. | 2,136,657 |   |
| Additions                    |       | 1,528                         |        | 113,809                            | ** ** | **—**                           |       | 64,323                        |        | 179,660     |       |
| Disposals                    |       | —                        |        | (59,964                            | )          | **—**                           |       | (95,346                       | )           | (155,310    | )          |
| As of December 31, 2009 |       | Ps.                           | 286,833     |                               | Ps.        | 1,453,892                            |       | Ps.                           | 75,202      |        | Ps.        | 345,080 |   | Ps. | 2,161,007 |   |
| Additions                    |       | —                        |        | 248,056                            | ** ** | **—**                           |       | 83,507                        |        | 331,563     |       |
| Disposals                    |       | —                        |        | (75,063                            | )          | **—**                           |       | (7,268                        | )           | (82,331     | )          |
| As of December 31, 2010 |       | Ps.                           | 286,833     |                               | Ps.        | 1,626,885                            |       | Ps.                           | 75,202      |        | Ps.        | 421,319 |   | Ps. | 2,410,239 |   |
| Additions                    | ** ** | **—**                    | ** **  | **77,048**                         | ** ** | **57,969**                           | ** ** | **12,157**                    | ** **  | **147,174** | ** ** |
| Disposals                    | ** ** | **—**                    | ** **  | **(13,577**                        | **)**      | **—**                           | ** ** | **(14,629**                   | **)**       | **(28,206** | **)**      |
| As of December 31, 2011 | ** ** | **Ps.**                       | **286,833** | ** **                         | **Ps.**    | **1,690,356**                        | ** ** | **Ps.**                       | **133,171** | ** **  | **Ps.**    | **418,847** | ** ** | **Ps.** | **2,529,207** | ** ** |
| **Depreciation:**            | ** ** | ** **                    | ** **  | ** **                         | ** ** | ** **                           | ** ** | ** **                    | ** **  | ** **  | ** ** |
| As of January 1, 2009   |       | Ps.                           | 41,028      |                               | Ps.        | 528,497                              |       | Ps.                           | 18,065      |        | Ps.        | 146,139 |   | Ps. | 733,729 |   |
| Depreciation                 |       | 10,610                        |        | 283,095                            |       | 6,813                                |       | 70,884                        |        | 371,402     |       |
| Disposals                    |       | —                        |        | (16,412                            | )          | —                               |       | (38,293                       | )           | (54,705     | )          |
| As of December 31, 2009 |       | Ps.                           | 51,638      |                               | Ps.        | 795,180                              |       | Ps.                           | 24,878      |        | Ps.        | 178,730 |   | Ps. | 1,050,426 |   |
| Depreciation                 |       | 12,661                        |        | 286,927                            |       | 7,677                                |       | 55,086                        |        | 362,351     |       |
| Disposals                    |       | —                        |        | (1,571                             | )          | —                               |       | (3,539                        | )           | (5,110      | )          |
| As of December 31, 2010 |       | Ps.                           | 64,299      |                               | Ps.        | 1,080,536                            |       | Ps.                           | 32,555      |        | Ps.        | 230,277 |   | Ps. | 1,407,667 |   |
| Depreciation                 | ** ** | **12,661**                    | ** **  | **279,713**                        | ** ** | **9,453**                            | ** ** | **50,839**                    | ** **  | **352,666** | ** ** |
| Disposals                    | ** ** | **—**                    | ** **  | **(8,731**                         | **)**      | **—**                           | ** ** | **(8,532**                    | **)**       | **(17,263** | **)**      |
| As of December 31, 2011 | ** ** | **Ps.**                       | **76,960**  | ** **                         | **Ps.**    | **1,351,518**                        | ** ** | **Ps.**                       | **42,008**  | ** **  | **Ps.**    | **272,584** | ** ** | **Ps.** | **1,743,070** | ** ** |
| **Net:**                     | ** ** | ** **                    | ** **  | ** **                         | ** ** | ** **                           | ** ** | ** **                    | ** **  | ** **  | ** ** |
| As of December 31, 2011 | ** ** | **Ps.**                       | **209,873** | ** **                         | **Ps.**    | **338,838**                          | ** ** | **Ps.**                       | **91,163**  | ** **  | **Ps.**    | **146,263** | ** ** | **Ps.** | **786,137** | ** ** |
| As of December 31, 2010 |       | Ps.                           | 222,534     |                               | Ps.        | 546,349                              |       | Ps.                           | 42,647      |        | Ps.        | 191,042 |   | Ps. | 1,002,572 |   |
| As of December 31, 2009 |       | Ps.                           | 235,195     |                               | Ps.        | 658,712                              |       | Ps.                           | 50,324      |        | Ps.        | 166,350 |   | Ps. | 1,110,581 |   |

 

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The amount of assets acquired through capitalized leases during the years ended December 31, 2011, 2010 and 2009, was Ps. 109,290, Ps. 49,667 and Ps. 47,035, respectively.

 

Depreciation expense for the years ended December 31, 2011, 2010 and 2009 was Ps. 352,666, Ps. 362,351 and Ps. 371,402, respectively.

 

**11. Other assets**

 
| ** **                                            | ** ** | **2011**    | ** **  | **2010** | ** ** |
|-------------------------------------------------------|------------|-------------|-------------|----------|------------|
| Debt issuance costs, net                              | ** ** | **Ps.**     | **162,062** |     | Ps.        | 148,166 |   |
| Trade accounts   receivable, long-term (see Note 6)   | ** ** | **155,713** |        | 62,166   |       |
| Financial derivative   instruments (see Note 13)      | ** ** | **97,473**  |        | 19,804   |       |
| Guaranteed deposits (*)                               | ** ** | **88,079**  |        | 18,643   |       |
| Equity method   investment in associate (see Note 26) | ** ** | **36,979**  |        | —   |       |
| Other                                                 | ** ** | **14,516**  |        | 13,032   |       |
|                                                  | ** ** | **Ps.**     | **554,822** |     | Ps.        | 261,811 |   |

 

----

(*) As of December 31, 2011 Ps. 60,418 of these guaranteed deposits are related to restricted cash of a line of credit with Deutsche Bank AG Brazil (See Note 12b).

 

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Amortization expense, including amortization from the BETA trademark, for the years ended December 31, 2011, 2010 and 2009 was Ps. 79,571, Ps. 103,263 and Ps. 112,007, respectively. A roll-forward of the BETA trademark intangible asset is shown as follows:

 
| As of   January 1, 2009   |       | Ps.     | 136,581    |       |
|--------------------------------|------------|---------|------------|------------|
| Amortization                   |       | (91,054 | )          |
| As of   December 31, 2009 |       | Ps.     | 45,527     |       |
| Amortization                   |       | (45,527 | )          |
| As of   December 31, 2010 | ** ** | **Ps.** | **—** | ** ** |

 

The amortization of debt issuance of Ps. 79,571, Ps. 57,736 and Ps. 20,953 was allocated as interest expense as part of commissions and financing cost for the years ended December 31, 2011, 2010 and 2009 respectively (see Note 23(3)). The expected amortization of debt issuance costs for the years 2012 to 2016 is as follows:

 
| **Year**            | ** ** | **Amortization** | ** **  |
|---------------------|------------|------------------|-------------|
| 2012                | ** ** | **Ps.**          | **54,314**  | ** ** |
| 2013                | ** ** | **24,945**       | ** **  |
| 2014                | ** ** | **23,252**       | ** **  |
| 2015                | ** ** | **21,293**       | ** **  |
| 2016 and thereafter | ** ** | **38,258**       | ** **  |
|                | ** ** | **Ps.**          | **162,062** | ** ** |

 

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**12. Debt**

 

a) As of December 31, 2011 and 2010, the outstanding balances of short-term indebtedness with financial institutions consist of the following:

 
| ** **                                                                                                                                                                                                                                                                                                                                                  | ** ** | **2011**    | ** **          | **2010** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|---------------------|----------|------------|
| Credit Suisse AG

A credit line granted   by Credit Suisse AG on April 27, 2011 for U.S. 150 million. The   borrowing had an original maturity date on April 27, 2012 and bears   interest at LIBOR plus 3.50%. This credit line was prepaid in full in   February 2012. See Note 26.                                                   |       | **Ps.**     |  **2,096,805** |     | Ps.        | — |   |
| Deutsche Bank AG

A credit line granted   by Deutsche Bank AG on December 15, 2011 for U.S. 50 million. The   borrowing had an original maturity date on December 14, 2012 and bears   interest at LIBOR plus 6.375%. This credit line was prepaid in full in   February 2012. See Note 26.                                             |       | **698,935** |                | —   |       |
| IXE Banco, S.A.

A credit line granted   by Ixe Banco, S.A. on December 7, 2011 for Ps. 100,000. The borrowing   matures on March 6, 2012 and bears interest at TIIE plus 5.00%.                                                                                                                                                                  |       | **100,000** |                | —   |       |
| HSBC México, S.A.    A credit line granted by HSBC México, S.A. on October 12, 2010 for Ps.   50,000. The borrowing matured on January 10, 2011 and bore interest at   the Mexican interbank equilibrium interest rate (TIIE) plus 5.50%.  This credit line was renewed in November 2011   and matures in February 2012. |       | **50,000**  |                | 50,000   |       |
| Banco Nacional de México, S.A. A credit line granted by Banco Nacional de   México, S.A. on December 27, 2011 for Ps. 394,700. The borrowing matured   on January 2012 and bore interest at TIIE plus 5.00%.                                                                                                                            |       | **394,700** |                | —   |       |
| BBVA Bancomer, S.A.    Four credit lines granted by BBVA Bancomer, S.A. in December 2010 for   Ps. 300,000. The borrowings matured in April 2011 and bore interest at   TIIE plus 3.20%.                                                                                                                                                          |       | **—**  |                | 300,000  |       |
| Banco Nacional de México, S.A. Three credit lines granted by Banco   Nacional de México, S.A. in November and December 2010 for Ps.   78,000. The borrowings matured in January and February 2011 and   bore interest at TIIE plus 4.25% and 5.00%, respectively.                                                             |       | **—**  |                | 73,570   |       |
| Banco Nacional de México, S.A. A credit line granted by Banco Nacional de   México, S.A. on July 16, 2010 for Ps. 141,941. The borrowing matured on   July 15, 2011 and bore interest at TIIE plus 5.00%.  (see Note 4)                                                                                                       |       | **—**  |                | 99,358   |       |
| Banco Nacional de Mexico, S.A.  Three credit lines granted by Banco   Nacional de Mexico, S.A. for Ps. 95,000 in December 23, 2010. The   borrowings matured in February 21, 2011 and bore interest at TIIE plus   5.00%.                                                                                                                    |       | **—**  |                | 62,640   |       |
| Banco Nacional de México, S.A. Two credit lines granted by Banco Nacional   de México, S.A. on October 25 and December 8, 2010 for Ps. 71,966.   The borrowings matured on January 7 and September 23, 2011 and bore   interest at TIIE plus 1.00% and TIIE plus 5.00%, respectively.                                         |       | **—**  |                | 6,394    |       |
| Banco Itau BBA, S.A.

Seven credit lines   granted by Banco Itau BBA, S.A. (Brazilian financial institution) from March through   December 2010 for 11.7 million Brazilian Reals. The borrowings matured   from February through June 2011 and bore                                                                                     |       | **—**  |                | 86,723   |       |
|                                                                                                                                                                                                                                                                                                                                                             |            |             |                     |          |            |  |  |

 

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| interest at 6.68%.                                                                                                                                                                                                                                                                                                                                                                                      |   | ** ** |                |   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|---------------------|--------|--------|
| Banco Fibra, S.A.

Three credit lines   granted by Banco Fibra, S.A. (Brazilian financial institution) from January through   September 2010 for 5.8 million Brazilian Reals. The borrowings matured   in January, July and August 2011 and bore interest at 7.44%.                                                                                                                 |   | **—** |                | 24,737 |   |
| Banco ABC Brasil, S.A.

A revolving credit line   of credit granted by Banco ABC Brasil, S.A. (Brazilian financial institution)   on March 25, 2010 for 1 million Brazilian Reals. The borrowing matured   on October 21, 2011 and bore interest at 7.19%. This credit line was   prepaid in September 2011.                                                                             |   | **—** |                | 22,310 |   |
| Banco HSBC, S.A.

Two credit lines   granted by Banco HSBC, S.A. (Brazilian financial institution) for 11.5   million Brazilian Reals on February 4, 2010. One of the borrowings   matured in January 2011 and bore interest at 9.09%. The November 2011   credit line was prepaid in September 2011.                                                                               |   | **—** |                | 85,521 |   |
| Banco Industrial e Comercial, S.A.

A revolving credit line   granted by Banco Industrial e Comercial, S.A. (Brazilian financial   institution) for 5.0 million Brazilian Reals on May 7, 2010. The   borrowing matured on October 28, 2011 and bore interest at 10.03%. This   credit line was prepaid in September 2011.                                                               |   | **—** |                | 22,686 |   |
| Banco Pine, S.A.

Two credit lines   granted by Banco Pine, S.A. (Brazilian financial institution) for 10.0   million Brazilian Reals in March and April 2010. The borrowings   matured in March 2011 and bore interest at 8.41%.                                                                                                                                                        |   | **—** |                | 49,577 |   |
| Banco Votorantim, S.A.

A revolving credit line   granted by Banco Votorantim, S.A. (Brazilian financial institution) for 7.0   million Brazilian Reals on December 20, 2010. The borrowing matured on   December 20, 2011 and bore interest at 7.82%. This credit line was   prepaid in September 2011.                                                                                 |   | **—** |                | 52,056 |   |
| Banco Bradesco, S.A.

Three credit lines   granted by Banco Bradesco, S.A. (Brazilian financial institution) for 2.5   million Brazilian Reals in July, September and November 2010. Two   of borrowings matured in July, September and the November 2010   credit line matured in December 2011 and bore interest at 10.13%,   however it was prepaid in September 2011. |   | **—** |                | 17,623 |   |
| Interest payable                                                                                                                                                                                                                                                                                                                                                                                        |   | **2,335**  |                | 28,921 |   |
| Total                                                                                                                                                                                                                                                                                                                                                                                                   |   | **Ps.**    |  **3,342,775** |   | Ps.    | 982,116 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                         |        |            |                     |        |        |  |  |

 

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b) As of December 31, 2011 and 2010, the outstanding balances of long-term debt with financial institutions and bond issuances consist of the following:

 
| ** **                                                                                                                                                                                                                                                                                                                                                      | ** ** | **2011**      | ** **    | **2010**  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|---------------|-----------|------------|
| Bond issuance (“Senior   Guaranteed Notes due 2015”) by Credit Suisse First Boston and Merrill Lynch   for US $250 million, with a fixed annual interest rate of 7.5%, payable on   September 28, 2015. Interest is payable semiannually.  These obligations are guaranteed by PICSA,   DECANO and other subsidiary companies.              |       | **Ps.**       | **3,494,675** |      | Ps.        | 3,095,425 |   |
| Bond issuance (“Senior   Guaranteed Notes due 2019”) by Credit Suisse Securities LLC and HSBC   Securities Inc. for US $250 million, with a fixed annual interest rate of   9.5%, payable on December 11, 2019. Interest is payable   semiannually.  These obligations are   guaranteed by PICSA, DECANO and CBC.                           |       | **3,494,675** |          | 3,095,425 |       |
| Banco Nacional de México, S.A. A line of credit granted by Banco Nacional   de México, S.A. on July 16, 2009 for Ps.1,000 million and renewed to Ps.   1,500 million on March 25, 2010. The borrowing matures on July 16,   2013 and bears interest at the Mexican interbank equilibrium interest rate   (TIIE) plus 5.00%.            |       | **1,110,295** |          | 1,462,613 |       |
| Grupo Financiero Inbursa, S.A. A line of credit granted by Grupo   Financiero Inbursa, S.A. on June 26, 2008 for Ps. 2,078 million. The   borrowing matures on June 26, 2013 and bears interest at TIIE plus   1.50%.                                                                                                                                 |       | **2,078,000** |          | 2,078,000 |       |
| Ficade, S.A. de C.V., SOFOM, E.N.R.

A credit line granted   by Ficade, S.A. de C.V., SOFOM, E.N.R. for Ps. 400,000 on December 30,   2011. The borrowing matures on December 30, 2015 and bears interest with   a fixed annual interest rate of 15.00%.                                                                                              |       | **400,000**   |          | —    |       |
| Banco Mercantil del Norte, S.A.

A credit line granted   by Banco Mercantil del Norte, S.A. in July 2011 for Ps. 34,877. The   borrowing matures in February 2013 and bears interest at the TIIE plus   3.50%.                                                                                                                                        |       | **33,836**    |          | —    |       |
| Bancomer, S.A.     A credit line granted by Bancomer, S.A. for Ps. 833,333 on July 26,   2010. The borrowing matured on January 28, 2013 and bore interest at   TIIE plus 3.60%. The borrowing was prepaid in December 2011.                                                                                                                |       | **—**    |          | 833,333   |       |
| Deutsche Bank, S.A.    Line of credit granted by Deutsche Bank S.A. (Brazilian financial   institution) on May 31, 2011 for 127.3 million Brazilian Reals. The   borrowing matures on April 11, 2016 and bears interest at 5.25% (see   Note 5).                                                                                                      |       | **956,723**   | ** **    | —    |       |
| Banco BTG Pactual, S.A. Five lines of credit granted by Banco BTG   Pactual, S.A. (Brazilian financial institution) from May through   November 2010 for 50.0 million Brazilian Reals. The borrowings   ultimately matured from June through November 2013, and bore   interest at 8.73%. The borrowing was prepaid in September 2011. |       | **—**    |          | 369,576   |       |
| Banco ABC Brasil, S.A. Three lines of credit granted by Banco ABC   Brasil, S.A. (Brazilian financial institution) in October and   November 2010 for 16.5 million Brazilian Reals. The borrowings   ultimately                                                                                                                                       |       | **—**    |          | 122,704   |       |
|                                                                                                                                                                                                                                                                                                                                                                 |            |               |               |           |            |  |  |

 

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| matured in October 2012, and bore   interest at 7.35%. The borrowing was prepaid in September 2011.                                                                                                                                                                                                              |   | ** **     |           |       |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|----------------|------------|--------|
| Banco Bradesco, S.A.    Six lines of credit granted by Banco Bradesco, S.A. (Brazilian financial   institution) from June through December 2010 for 53.2 million   Brazilian Reals. The borrowings matured during 2012 and 2013, and bore   interest at 6.02%. The borrowing was prepaid in September 2011. |   | **—**     |           | 389,547    |   |
| Banco BNDES Brasil, S.A. Line of credit line granted by BNDES   Brasil, S.A. (Brazilian financial institution) on June 29, 2010 for 0.2   million Brazilian Reals. The borrowing ultimately matured on June 29,   2014 and bore interest at 12.12%. The borrowing was prepaid in September 2011.            |   | **—**     |           | 5,993      |   |
| Interest payable,   primarily Senior Guaranteed Notes                                                                                                                                                                                                                                                                      |   | **109,287**    |           | 81,382     |   |
| Total long-term debt                                                                                                                                                                                                                                                                                                       |   | **11,677,491** |           | 11,533,998 |   |
| Current portion of   long-term debt                                                                                                                                                                                                                                                                                        |   | **(319,582**   | **)**          | (746,397   | )      |
| Long-term debt balances                                                                                                                                                                                                                                                                                                    |   | **Ps.**        | **11,357,909** |       | Ps.    | 10,787,601 |   |
|                                                                                                                                                                                                                                                                                                                            |        |                |                |            |        |  |  |

 

**Covenants**

 

Loan covenants require the Company and its guarantor subsidiaries to meet certain obligations. These covenants cover changes in ownership control, restrictions on incurring additional debt that does not meet certain requirements established in the loan contracts, restrictions on the sale of assets and the sale of capital stock in subsidiaries, unless they meet certain requirements, and restricted payments where dividends cannot be paid or capital reimbursed to equity unless they are made between the guarantor subsidiaries.

 

Most significant financial covenants, contained within loan agreements, require the Company to maintain (based on MFRS financial information):

 

·                   A total of equity of at least Ps. 10,000,000;

 

·                   A ratio of interest coverage (EBITDA/net financing expense) over 3.0 times; and

 

·                   A ratio of leverage (liabilities with cost/EBITDA) of less than 3.75 to 1.0;

 

·                   A ratio of leverage (liabilities/equity) of less than 2.50 to 1.0;

 

·                   A ratio of leverage (liabilities with cost/equity) of less than 1.50 to 1.0;

 

·                   Additional debt based on assets;

 

·                   Consolidated fixed charge coverage;

 

There are also restrictions applicable to additional debt based on EBITDA levels. In the event the Company does not comply with any of the above provisions, it will be limited in its ability to pay dividends to its stockholders.  Furthermore, in the event that the Company does not comply with any of the above provisions such debt would become due and payable to the extent that the violation was not cured timely.

 

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As of December 31, 2011 and 2010, the Company was in compliance with the financial covenants contained within its debt agreements.

 

As discussed in Note 27, during 2012 the Company will be adopting IFRS.  The Company’s financial debt covenants are currently based on MFRS.   The Company is in the process of evaluating what (if any) changes might be required to its debt agreements so as to compute financial covenants prospectively based on IFRS.

 

**Debt maturities**

 

As of December 31, 2011, long-term debt matures as follows:

 
| **Year** | ** ** | **Amount**    | ** **     |
|----------|------------|---------------|----------------|
| 2013     | ** ** | **Ps.**       | **3,011,836**  | ** ** |
| 2015     | ** ** | **3,894,675** | ** **     |
| 2016     | ** ** | **956,723**   | ** **     |
| 2019     | ** ** | **3,494,675** | ** **     |
|     | ** ** | **Ps.**       | **11,357,909** | ** ** |

 

The TIIE rates published in the Federal Official Gazette as of December 31, 2011 and 2010 were 4.7900% and 4.8750%, respectively. The exchange rate used to convert debt denominated in US Dollars and Brazilian Reals for the year ended December 31, 2011 were 13.9787 Mexican pesos and 7.5155 Mexican pesos, respectively. The exchange rate used to convert debt denominated in US Dollars and Brazilian Reals for the year ended December 31, 2010 were 12.3817 Mexican pesos and 7.4366 Mexican pesos, respectively.

 

**CRS Morelos Project Financing**

 

The Company’s subsidiary CRS Morelos, on September 30, 2011, signed a project financing credit agreement with Banobras in an aggregate principal amount of Ps.3.9 billion to initiate the construction process of a federal correctional facility in the state of Morelos as disclosed in Note 25 below. This financing is non-recourse to the Company and its other subsidiaries, so the Company’s cash flow from the other divisions and projects will be not affected by the funding of the federal correctional facility.

 

This borrowing will be treated as a separate project financing line item in the Company’s consolidated financial statements that are prepared for periods after draw-downs are made. Certain of the Company’s debt agreements contain restrictions on the level of debt and contain requirements as to meeting certain financial ratios, based on defined terms. The Company has confirmed its view with the financial institutions that the prison project financings will be excluded from prospective debt covenant computations.

 

At December 31, 2011, no amounts have been borrowed under this financing, although Ps. 422.7 million was ultimately drawn on January 31, 2012.

 

**13.  Financial derivative instruments**

 

Financial Derivative Instruments Related to the Senior Guaranteed Notes due 2015

 

On July 6, 2008 the Company entered into financial derivative instruments in order to cover the possible changes in the exchange rate of future interest payments of the Senior Guaranteed Notes due in 2015 for US$250 million (“Interest-Only Swap”). On June 28, 2011 the Company cancelled its Interest-Only Swap and entered into a new Interest-Only Swap on the same date; for the Interest-Only Swap cancelled the Company paid Ps. 24,863 and was recognized in the consolidated net income as part of the ‘‘valuation effects of financial derivative instruments” caption. The Interest-Only Swap does not meet hedge accounting requirements, and thus changes in the fair value of the underlying derivative instrument have been and will be 

 

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recorded in the Company’s consolidated net income as a component of comprehensive financing cost within the “valuation effects of financial derivative instruments” caption.

 

As of December 31, 2011 and 2010 the fair value of this derivative was a liability position of Ps. 12,226 (US$ 0.9 million) and Ps. 60,917 (US$ 4.9 million), respectively. The net (income) expense in the consolidated statements of income of the Interest-Only Swap for the years ended December 31, 2011, 2010 and 2009 was Ps. (23,828), Ps. 68,572 and Ps. 61,600, respectively.

 

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Financial Derivative Instruments Related to the Senior Guaranteed Notes due 2019

 

As disclosed in Note 12, the Company’s Senior Guaranteed Notes due 2019 are U.S. dollar denominated. In order to decrease the risk of future changes in the exchange rate between U.S. dollar and Mexican pesos, in December 11, 2009 the Company entered into a “Principal-Only Swap” with a notional value of US$250 million, which entitled the Company to receive this amount in 2019 in return for a payment in Mexican pesos at a fixed exchange rate of 12.93 Mexican pesos per U.S. Dollar.  As part of this agreement, the Company will pay interest of 3.87% a year on the total notional amount of Ps. 3,232.5 million Mexican Pesos, in semiannual payments. In order to increase the amount of thresholds of these financial derivatives instruments and to avoid collateral margin calls, in May 2010 the Company changed its Principal Only Swap rate from 3.87% to 4.39%.

 

In addition, on December 11, 2009 the Company entered into an “Interest-Only Swap” in order to cover the possible changes in the exchange rate of the first six interest payments of the Senior Guaranteed Notes due 2019 for US$250 million (“Interest-Only Swap”).

 

The Principal-Only Swap transaction met hedge accounting requirements. As of December 31, 2011 the fair value of this financial derivative instrument was Ps. 33,881 (US$2.42 million) and represented a favorable asset position (see Note 11). As of December 31, 2010 the fair value of this derivative was Ps. 447,243 (US$ 36.1 million) and represented a liability position.

 

The Interest-Only Swap transaction did not meet hedge accounting requirements. As of December 31, 2011 and 2010, the fair value of this derivative was Ps. 59,949 (US$4.29 million) and Ps. 19,804 (US$1.6 million), respectively, and represented a favorable asset position (see Note 11). The net gain in the consolidated statements of income of the Interest-Only Swap for the years ended December 31, 2011 and 2010 were Ps. 40,145 and Ps. 28,918, respectively.

 

As of December 31, 2011, the Company has an Interest-Only Swap in order to hedge the monthly interest payment of the short-term credit line with Credit Suisse granted on April 27, 2011. The fair value of this instrument represented a favorable asset position of Ps. 3,643.

 

As of December 31, 2011 and 2010 the Company had the following financial derivatives instruments:

 

**As of December 31, 2011**

 
| **Financial derivative   instruments** | ** ** | **Type**              | ** ** | **Notional   (in US $)** | ** ** | **Fair value   asset (liability)   (in Ps.)** | ** **  | **Changes in   comprehensive   income, net of   taxes (in Ps.)** | ** ** | **Changes in   statement of   income (in Ps.)** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|------------------------------------|------------|--------------------------------------------------------------|-------------|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
|                                        |       |                  |       |                               |       |                                                         |        |                                                                                      |       |                                                                |       |
| Interest-only swap (“2019”)       |       | No hedge   accounting |       | 23.75   million                    |       | Ps.                                                          | 59,949      |                                                                                      | Ps.        | —                                                              |       | Ps. | (40,145 | ) |
| Principal-only swap (“2019”)      |       | Hedge accounting      |       | 250.00   million                   |       | 33,881                                                       |        | 346,410                                                                                   |       | —                                                              |       |
| Interest-only swap (“2012”)       |       | No hedge   accounting |       | 0.52   million                     |       | 3,643                                                        |        | —                                                                                    |       | (3,643                                                              | )          |
| ** **                                  | ** ** | ** **            | ** ** | ** **                         | ** ** | **Ps.**                                                      | **97,473**  | ** **                                                                                | **Ps.**    | **346,410**                                                         | ** ** | **Ps.** | **(43,788** | **)** |
|                                        |       |                  |       |                               |       |                                                         |        |                                                                                      |       |                                                                |       |
| Interest-only swap (“2015”)       |       | No hedge   accounting |       | 18.75 million                      |       | Ps.                                                          | (12,226     | )                                                                                         | Ps.        | —                                                              |       | Ps. | (23,828 | ) |
|                                        |       |                  |       |                               |       | Ps.                                                          | **(12,226** | **)**                                                                                     | **Ps.**    | **—**                                                          | ** ** | **Ps.** | **(23,828** | **)** |

 

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As of December 31, 2010

 
| **Financial derivative   instruments** | ** ** | **Type**              | ** ** | **Notional   (in US $)** | ** ** | **Fair value   asset (liability)   (in Ps.)** | ** ** | **Changes in   comprehensive   income, net of   taxes (in Ps.)** | ** ** | **Changes in   statement of   income (in Ps.)** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
|                                        |       |                  |       |                               |       |                                                         |       |                                                                                      |       |                                                                |       |
| Interest-only swap (“2019”)       |       | No hedge   accounting |       | 47.50   million                    |       | Ps.                                                          | 19,804     |                                                                                      | Ps.        | —                                                              |       | Ps. | (28,918 | ) |
|                                        |       |                  |       |                               |       |                                                         |       |                                                                                      |       |                                                                |       |
| Principal-only swap (“2019”)      |       | Hedge accounting      |       | 250.00   million                   |       | Ps.                                                          | (447,243   | )                                                                                         | Ps.        | (242,837                                                            | )          | Ps. | — |   |
| Interest-only swap (“2015”)       |       | No hedge   accounting |       | 37.50   million                    |       | (60,917                                                      | )          | —                                                                                    |       | 68,572                                                              |       |
|                                        |       |                  |       |                               |       | Ps.                                                          | (508,160   | )                                                                                         | Ps.        | (242,837                                                            | )          | Ps. | 39,654 |   |

 

The net valuation effects of the financial derivative instruments for the years ended December 31, 2011, 2010 and 2009, were Ps.(67,616), Ps. 39,654 and Ps. 66,451, respectively.

 

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**14. Leases**

 

**a) Capital leases**

 

As of December 31, 2011 there are contracts of capital leases of machinery and equipment for a 5 year period. The capital leases as of December 31, 2011 and 2010 are shown as follows:

 
| ** **                                                                                                                                                                                                                                                                                                                             | ** ** | **2011**     | ** **  | **2010** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|-------------|----------|------------|
| Financial leases   provided by Bancomer, S.A. in June 2007, with maturity in   January 2013 and an interest rate at TIIE plus 0.80%.                                                                                                                                                                                         |       | **Ps.**      | **69,021**  |     | Ps.        | 149,540 |   |
| Financial leases   provided by Bancomer, S.A. in September 2008, with maturity in   October 2013 and interest rate at TIIE plus 0.80%.                                                                                                                                                                                       |       | **23,505**   |        | 34,713   |       |
| Financial leases   provided by Bancomer, S.A. in December 2008, with maturity in January 2014   and interest rate at TIIE plus 3.50%.                                                                                                                                                                                        |       | **28,019**   |        | 39,141   |       |
| Financial leases   provided by Bancomer, S.A. in March 2009, with maturity in   April 2014 and interest rate at TIIE plus 3.50%.                                                                                                                                                                                             |       | **11,761**   |        | 15,928   |       |
| Leases provided by   Leasing Operations de México, S. de R.L. de C.V. in April, May and   August 2010, with maturities in April, May and October 2013 at   an discounted interest rate of 13.39%.                                                                                                             |       | **85,199**   |        | 100,578  |       |
| Financial leases   provided by GE Financial Mexico, S.A. de C.V. in September 2010, with   maturity in October 2013 and interest rate of 12.98%.                                                                                                                                                                             |       | **773**      |        | 554      |       |
| Financial lease   provided by GE Financial México, S.A. de C.V. in August 2011, with   maturity in September 2016 and interest rate of 7.18%                                                                                                                                                                            |       | **65,805**   |        | -        |       |
| Financial leases   provided by Banco Itau, S.A. (Brazilian financial institution) from   May through October 2009 and from May through   September 2010 with maturities from May through November 2013   at an average interest rate of 20.69%.                                                          |       | **6,217**    |        | 11,934   |       |
| Financial leases   provided by Banco Bradesco, S.A. (Brazilian financial institution) in   November and December 2009 as well as in November 2010 and January through   March 2011 with maturities from November and December 2012   through March 2014 at an average interest rate of 16.25%. |       | **49,371**   |        | 48,088   |       |
| Financial leases provided   by Banco Consorcio, S.A. (Brazilian financial institution) from   July through December 2010 with maturities from January 2014   through November 2016 at an average interest rate of 23.91%.                                                                                          |       | **1,111**    |        | 1,373    |       |
| Interest payable                                                                                                                                                                                                                                                                                                                       |       | **3,088**    |        | 3,185    |       |
| Total capital leases                                                                                                                                                                                                                                                                                                                   |       | **343,870**  |        | 405,034  |       |
| Current portion of   long-term capitalized leases                                                                                                                                                                                                                                                                                      |       | **(188,937** | **)**       | (169,604 | )          |
| Total long-term capital   leases                                                                                                                                                                                                                                                                                                       |       | **Ps.**      | **154,933** |     | Ps.        | 235,430 |   |

 

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Table of Contents

 

Minimum compulsory payments relating to these contracts as of December 31, 2011 are as follows:

 
| **Year**            | ** ** | **Total**  | ** **  |
|---------------------|------------|------------|-------------|
| 2012                | ** ** | **Ps.**    | **188,937** | ** ** |
| 2013                | ** ** | **97,110** | ** **  |
| 2014                | ** ** | **15,817** | ** **  |
| 2015                | ** ** | **8,023**  | ** **  |
| 2016 and thereafter | ** ** | **33,983** | ** **  |
| Total               | ** ** | **Ps.**    | **343,870** | ** ** |

 

**Covenants**

 

The most significant financial covenants of the leases require the Company and its subsidiaries to maintain (based on MFRS financial information):

 

·                 A liquidity ratio of current assets to short-term liabilities no less than 1.50 to 1.0;

 

·                 A financing ratio of total liabilities (excluding deferred income taxes) to equity (excluding deferred income taxes) no greater than 1.70 to 1.0;

 

·                 A relation of operational income to net comprehensive financing cost at a minimum level of 2.0;

 

As of December 31, 2011 and 2010, the Company was in compliance with these financial covenants.

 

As discussed in Note 27, during 2012 the Company will be adopting IFRS.   The Company’s lease agreement covenants are currently based on MFRS.   The Company is in the process of evaluating what (if any) changes might be required to its lease agreements so as to compute covenants prospectively based on IFRS.

 

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Table of Contents

 

**b) Operating leases**

 

As of December 31, 2011 the Company had entered into agreements for the operating lease of machinery and equipment for a period of 5 to 6 years. The minimum compulsory payments relating to these agreements are as follows:

 
| **Year** | ** ** | **Amount** | ** **  |
|----------|------------|------------|-------------|
| 2012     | ** ** | **Ps.**    | **52,389**  | ** ** |
| 2013     | ** ** | **29,398** | ** **  |
| 2014     | ** ** | **11,245** | ** **  |
| 2015     | ** ** | **9,120**  | ** **  |
| 2016     | ** ** | **224**    | ** **  |
| Total    | ** ** | **Ps.**    | **102,376** | ** ** |

 

Operating leases expensed for the years ended December 31, 2011, 2010 and 2009 amounted to Ps. 67,977, Ps. 64,982 and Ps. 50,426, respectively.

 

**15. Employee benefits obligations**

 

The Company has a plan for covering seniority premiums which consists of a lump sum payment of 12 days’ wages for each year worked, calculated using the most recent salary, not to exceed twice the legal minimum wage established by law. Since 2005, the Company has recognized a liability for personal severance pay. The related liability and net periodic cost of such benefits are calculated by an independent actuary on the basis of formulas defined in the plans using the projected unit credit method.

 

During 2010, the Company reduced its employee benefits obligations by canceling the non-statutory indemnity benefit contained in its retirement plan. This curtailment resulting in a reduction of the net period pension cost during the year ended December 31, 2010. The benefit obligation that remains recorded as of December 31, 2011 and 2010 corresponds to the legal indemnity benefit due to termination or severance as well as seniority premiums.

 

During 2011, the Company reduced the number of its employees which caused a curtailment of the benefit obligation during the year. This curtailment resulted in a reduction of the net period pension cost during the year ended December 31, 2011.

 

The net periodic cots for the years ended December 31, 2011, 2010 and 2009, is comprised as follows:

 
| ** **                                               | ** ** | **For the year ended December 31, 2011** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **Severance pay**                                                 | ** ** | **Seniority   premium** | ** ** | **Total** | ** ** |
| Integration of Net   Period Cost:                        |       |                                                                   |       |   |   |   |   |
| Labor cost                                               | ** ** | **Ps.**                                                                | **25,248** | ** ** | **Ps.** | **4,097** | ** ** | **Ps.** | **29,345** | ** ** |
| Financial cost                                           | ** ** | **7,931**                                                              | ** ** | **926** | ** ** | **8,857** | ** ** |
| Amortization of transition liability                     | ** ** | **1,421**                                                              | ** ** | **135** | ** ** | **1,556** | ** ** |
| Amortization of prior   services and changes to the plan | ** ** | **1,935**                                                              | ** ** | **160** | ** ** | **2,095** | ** ** |
| Aactuarial gains                                         | ** ** | **(19,699**                                                            | **)**      | **(2,904** | **)** | **(22,603** | **)** |
| Curtailment                                              | ** ** | **(13,352**                                                            | **)**      | **(2,134** | **)** | **(15,486** | **)** |
| Net period cost                                          | ** ** | **Ps.**                                                                | **3,484**  | ** ** | **Ps.** | **280** | ** ** | **Ps.** | **3,764** | ** ** |

 

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| ** **                                               | ** ** | **For the year ended December 31, 2010** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **Severance pay**                                                 | ** ** | **Seniority   premium** | ** ** | **Total** | ** ** |
| Integration of Net   Period Cost:                        |       |                                                                   |       |   |   |   |   |
| Labor cost                                               |       | Ps.                                                                    | 22,949     |   | Ps. | 1,875 |   | Ps. | 24,824 |   |
| Financial cost                                           |       | 10,964                                                                 |       | 562 |   | 11,526 |   |
| Amortization of transition liability                     |       | 4,512                                                                  |       | 139 |   | 4,651 |   |
| Amortization of prior   services and changes to the plan |       | 6,341                                                                  |       | 156 |   | 6,497 |   |
| Aactuarial losses                                        |       | 48,328                                                                 |       | 2,674 |   | 51,002 |   |
| Curtailment                                              |       | (86,507                                                                | )          | (1,802 | ) | (88,309 | ) |
| Net period cost                                          |       | Ps.                                                                    | 6,587      |   | Ps. | 3,604 |   | Ps. | 10,191 |   |

 
| ** **                                               | ** ** | **For the year ended December 31, 2009** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **Severance pay**                                                 | ** ** | **Seniority premium** | ** ** | **Total** | ** ** |
| Integration of Net   Period Cost:                        |       |                                                                   |       |   |   |   |   |
| Labor cost                                               |       | Ps.                                                                    | 23,428     |   | Ps. | 1,932 |   | Ps. | 25,360 |   |
| Financial cost                                           |       | 10,605                                                                 |       | 478 |   | 11,083 |   |
| Amortization of transition liability                     |       | 3,643                                                                  |       | 140 |   | 3,783 |   |
| Amortization of prior   services and changes to the plan |       | 6,341                                                                  |       | 156 |   | 6,497 |   |
| Actuarial gains                                          |       | (3,437                                                                 | )          | (825 | ) | (4,262 | ) |
| Net period cost                                          |       | Ps.                                                                    | 40,580     |   | Ps. | 1,881 |   | Ps. | 42,461 |   |

 

As of December 31, 2011 and 2010, the net projected liability of these obligations is as follows:

 
| ** **                                           | ** ** | **Balances as of December 31, 2011** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                           | ** ** | **Severance pay**                                        | ** ** | **Seniority   premium** | ** ** | **Total** | ** ** |
| Vested benefit obligations                           | ** ** | **Ps.**                                                       | **67,216** | ** ** | **Ps.** | **7,893** | ** ** | **Ps.** | **75,109** | ** ** |
| Unamortized transition liability                     | ** ** | **(687**                                                      | **)**      | **(76** | **)** | **(763** | **)** |
|                                                 | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Unamortized   prior services and changes to the plan | ** ** | **(41**                                                       | **)**      | **(190** | **)** | **(231** | **)** |
| Net projected liability                              |       | Ps.                                                           | **66,488** | ** ** | **Ps.** | **7,627** | ** ** | **Ps.** | **74,115** | ** ** |

 

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| ** **                                           | ** ** | **Balances as of December 31, 2010** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                           | ** ** | **Severance pay**                                        | ** ** | **Seniority   premium** | ** ** | **Total** | ** ** |
| Vested benefit obligations                           |       | Ps.                                                           | 87,002     |   | Ps. | 8,122 |   | Ps. | 95,124 |   |
| Unamortized transition liability                     |       | (2,108                                                        | )          | (211 | ) | (2,319 | ) |
| Unamortized prior   services and changes to the plan |       | (1,976                                                        | )          | (350 | ) | (2,326 | ) |
| Unamortized actuarial gain                           | ** ** | **—**                                                    |       | (1 | ) | (1 | ) |
| Net projected liability                              |       | Ps.                                                           | 82,918     |   | Ps. | 7,560 |   | Ps. | 90,478 |   |

 

The changes in the net projected liability for labor obligations for the years ended December 31, 2011 and 2010 are as follows:

 
| ** **                                               | ** ** | **For the year ended December 31, 2011** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **Severance pay**                                                 | ** ** | **Seniority   premium** | ** ** | **Total** | ** ** |
| Initial balance                                          | ** ** | **Ps.**                                                                | **82,918** | ** ** | **Ps.** | **7,560** | ** ** | **Ps.** | **90,478** | ** ** |
| Labor cost                                               | ** ** | **25,248**                                                             | ** ** | **4,097** | ** ** | **29,345** | ** ** |
| Financial cost                                           | ** ** | **7,931**                                                              | ** ** | **926** | ** ** | **8,857** | ** ** |
| Transition liability                                     | ** ** | **1,421**                                                              | ** ** | **135** | ** ** | **1,556** | ** ** |
| Amortization   of prior services and changes to the plan | ** ** | **1,935**                                                              | ** ** | **160** | ** ** | **2,095** | ** ** |
| Actuarial gains                                          | ** ** | **(19,699**                                                            | **)**      | **(2,904** | **)** | **(22,603** | **)** |
| Curtailment                                              | ** ** | **(13,352**                                                            | **)**      | **(2,134** | **)** | **(15,486** | **)** |
| Benefits paid                                            | ** ** | **(19,914**                                                            | **)**      | **(213** | **)** | **(20,127** | **)** |
| Ending balance                                           | ** ** | **Ps.**                                                                | **66,488** | ** ** | **Ps.** | **7,627** | ** ** | **Ps.** | **74,115** | ** ** |

 
| ** **                                               | ** ** | **For the year ended December 31, 2010** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **Severance pay**                                                 | ** ** | **Seniority   premium** | ** ** | **Total** | ** ** |
| Initial balance                                          |       | Ps.                                                                    | 93,812     |   | Ps. | 4,375 |   | Ps. | 98,187 |   |
| Labor cost                                               |       | 22,949                                                                 |       | 1,875 |   | 24,824 |   |
| Financial cost                                           |       | 10,964                                                                 |       | 562 |   | 11,526 |   |
| Transition liability                                     |       | 4,512                                                                  |       | 139 |   | 4,651 |   |
| Amortization of prior   services and changes to the plan |       | 6,341                                                                  |       | 156 |   | 6,497 |   |
| Actuarial losses                                         |       | 48,328                                                                 |       | 2,674 |   | 51,002 |   |
| Curtailment                                              |       | (86,507                                                                | )          | (1,802 | ) | (88,309 | ) |
| Benefits paid                                            |       | (17,481                                                                | )          | (419 | ) | (17,900 | ) |
| Ending balance                                           |       | Ps.                                                                    | 82,918     |   | Ps. | 7,560 |   | Ps. | 90,478 |   |

 

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Changes in the balance of obligations

 
| ** **                           | ** ** | **Severance pay** | ** ** | **Seniority   premium** | ** ** | **Total**   | ** ** |
|--------------------------------------|------------|------------------------|------------|-------------------------|------------|-------------|------------|
| Balance as of January 1, 2011   | ** ** | **Ps.**                | **87,002** | ** **              | **Ps.**    | **8,122**   | ** ** | **Ps.** | **95,124** | ** ** |
| Labor cost                           | ** ** | **25,248**             | ** ** | **4,097**               | ** ** | **29,345**  | ** ** |
| Financial cost                       | ** ** | **7,931**              | ** ** | **926**                 | ** ** | **8,857**   | ** ** |
| Actuarial gains                      | ** ** | **(19,699**            | **)**      | **(2,904**              | **)**      | **(22,603** | **)**      |
| Curtailment                          | ** ** | **(13,352**            | **)**      | **(2,135**              | **)**      | **(15,487** | **)**      |
| Benefits paid                        | ** ** | **(19,914**            | **)**      | **(213**                | **)**      | **(20,127** | **)**      |
| Balance as of December 31, 2011 | ** ** | **Ps.**                | **67,216** | ** **              | **Ps.**    | **7,893**   | ** ** | **Ps.** | **75,109** | ** ** |

 
| ** **                           | ** ** | **Severance pay** | ** ** | **Seniority   premium** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|------------------------|------------|-------------------------|------------|-----------|------------|
| Balance as of January 1, 2010   |       | Ps.                    | 116,356    |                    | Ps.        | 5,273     |       | Ps. | 121,629 |   |
| Labor cost                           |       | 22,949                 |       | 1,875                   |       | 24,824    |       |
| Financial cost                       |       | 10,964                 |       | 562                     |       | 11,526    |       |
| Actuarial losses                     |       | 48,328                 |       | 2,674                   |       | 51,002    |       |
| Curtailment                          |       | (94,114                | )          | (1,843                  | )          | (95,957   | )          |
| Benefits paid                        |       | (17,481                | )          | (419                    | )          | (17,900   | )          |
| Balance as of December 31, 2011 |       | Ps.                    | 87,002     |                    | Ps.        | 8,122     |       | Ps. | 95,124 |   |

** **
| ** **                                          | ** ** | **Balances as of December 31, 2011** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                          | ** ** | **Severance pay**                                        | ** ** | **Seniority   premium** | ** ** | **Total** | ** ** |
| Accruals to:                                   | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Vested benefit obligations                          | ** ** | **Ps.**                                                       | **—** | ** ** | **Ps.** | **67** | ** ** | **Ps.** | **67** | ** ** |
| Non-vested benefit Obligation                       | ** ** | **67,216**                                                    | ** ** | **7,826** | ** ** | **75,042** | ** ** |
| Defined benefit obligations                         | ** ** | **67,216**                                                    | ** ** | **7,893** | ** ** | **75,109** | ** ** |
| Fair value of the plan   assets                     | ** ** | **—**                                                    | ** ** | **—** | ** ** | **—** | ** ** |
| Unfunded situation                                  | ** ** | **67,216**                                                    | ** ** | **7,893** | ** ** | **75,109** | ** ** |
| Non-recognized prior   services for vested benefits | ** ** | **(728**                                                      | **)**      | **(266** | **)** | **(994** | **)** |
| Non-recognized   actuarial losses                   | ** ** | **—**                                                    | ** ** | **—** | ** ** | **—** | ** ** |
| Net projected liability                             | ** ** | **Ps.**                                                       | **66,488** | ** ** | **Ps.** | **7,627** | ** ** | **Ps.** | **74,115** | ** ** |

 
| ** **                                          | ** ** | **Balances as of December 31, 2010** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                          | ** ** | **Severance pay**                                        | ** ** | **Seniority   premium** | ** ** | **Total** | ** ** |
| Accruals to:                              | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Vested benefit obligations                          |       | Ps.                                                           | —     |   | Ps. | 57 |   | Ps. | 57 |   |
| Non-vested benefit Obligation                       |       | 87,002                                                        |       | 8,065 |   | 95,067 |   |
| Defined benefit obligations                         |       | 87,002                                                        |       | 8,122 |   | 95,124 |   |
| Fair value of the plan   assets                     | ** ** | **—**                                                    | ** ** | **—** | ** ** | **—** | ** ** |
| Non-recognized prior   services for vested benefits |       | (4,084                                                        | )          | (562 | ) | (4,646 | ) |
| Non-recognized   actuarial losses                   | ** ** | **—**                                                    | ** ** | **—** | ** ** | **—** | ** ** |
| Net projected liability                             |       | Ps.                                                           | 82,918     |   | Ps. | 7,560 |   | Ps. | 90,478 |   |

 

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The following is an analysis at December 31 of the Company’s liabilities that make up its labor obligations related to seniority premiums and employee termination payments for reasons other than corporate restructuring:

 
| ** ** | ** ** | **Seniority premium** | ** ** | **Severance pay** | ** ** |
|------------|------------|----------------------------|------------|------------------------|------------|
| ** ** | ** ** | **Defined**                | ** ** | **Plan**               | ** ** | **Pending** | ** ** | **Defined** | ** ** | **Plan** | ** ** | **Pending** | ** ** |
| ** ** | ** ** | **benefit**                | ** ** | **situation**          | ** ** | **amortized** | ** ** | **benefit** | ** ** | **situation** | ** ** | **amortized** | ** ** |
| **Year**   | ** ** | **obligations**            | ** ** | **deficit**            | ** ** | **Items** | ** ** | **obligations** | ** ** | **deficit** | ** ** | **Items** | ** ** |
| **2011**   | ** ** | **Ps.**                    | **7,893**  | ** **             | **Ps.**    | **7,893** | ** ** | **Ps.** | **266** | ** ** | **Ps.** | **67,216** | ** ** | **Ps.** | **67,216** | ** ** | **Ps.** | **728** | ** ** |
| 2010       |       | 8,122                      |       | 8,122                  |       | 562 |   | 87,002 |   | 87,002 |   | 4,084 |   |
| 2009       |       | 5,273                      |       | 5,273                  |       | 1,176 |   | 116,356 |   | 116,356 |   | 35,367 |   |
| 2008       |       | 4,122                      |       | 4,122                  |       | 1,156 |   | 112,617 |   | 112,617 |   | 30,443 |   |
| 2007       |       | 5,125                      |       | 5,125                  |       | 1,452 |   | 111,052 |   | 111,052 |   | 35,376 |   |
|            |            |                            |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The average long-term rates used in the actuarial analysis are as follow:

 
| ** **                     | ** ** | **2011** | ** ** | **2010** | ** ** | **2009** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discounts of labor obligations | ** ** | **8.10** | **%**      | 7.98     | %          | 8.50     | %          |
| Salary increases               | ** ** | **5.11** | **%**      | 4.79     | %          | 4.50     | %          |
| Inflation rates                | ** ** | **3.75** | **%**      | 3.75     | %          | 3.50     | %          |

 

At December 31, 2011 and 2010, the Company has recognized provisions for the short-term direct benefits related to compensated absences for vacation for Ps. 44,350 and Ps. 33,149, respectively; and vacation premium for Ps. 3,958 and Ps. 4,566, respectively. The provisions are included in the consolidated balance sheet as part of the trade accounts payable caption.

 

**16. Trade accounts payable**

 
| ** **                             | ** ** | **2011**        | ** **    | **2010** | ** ** |
|----------------------------------------|------------|-----------------|---------------|----------|------------|
| Suppliers                              | ** ** | **Ps.**         | **1,966,150** |     | Ps.        | 2,164,013 |   |
| Revolving credit lines   *             | ** ** | **711****,097** |          | 867,924  |       |
| Other creditors and   accrued expenses | ** ** | **398,162**     |          | 378,642  |       |
| Total accounts payable                 | ** ** | **Ps.**         | **3,075,409** |     | Ps.        | 3,410,579 |   |

 

----

* The Company established a trust that allows its suppliers and land suppliers to obtain financing from various financial institutions, in part through a factoring program sponsored by Nacional Financiera S.N.C. (“Nafinsa”). In relation to this program, the Company established a trust fund called Fideicomiso AAA-Homex with “Nafinsa”, which granted a line of credit for Ps.1,000,000 with a guarantee fund of Ps. 132,303 and Ps. 127,530, respectively (investment account). Under this program, the AAA-Homex trust can make use of the Nafinsa line of credit to finance a portion of the accounts receivable of the Company’s suppliers. As mentioned in Note 2, the AAA Homex trust is a consolidated subsidiary of the Company. As of December 31, 2011 and 2010, this factoring program encompassed approximately 4,718 and 4,542 suppliers and land suppliers, respectively, where the financing resources are covered by the suppliers themselves.

 

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**17. Land suppliers**

 
| ** **                           | ** ** | **2011**    | ** **    | **2010** | ** ** |
|--------------------------------------|------------|-------------|---------------|----------|------------|
| Short-term                           | ** ** | **Ps.**     | **885,059**   |     | Ps.        | 646,070 |   |
| Short-term revolving   credit line * | ** ** | **287,234** |          | 132,071  |       |
| Total short-term                     | ** ** | **Ps.**     | **1,172,293** |     | Ps.        | 778,141 |   |
|                                 |       |        |          |     |       |
| Long-term land suppliers             | ** ** | **Ps.**     | **—**    |     | Ps.        | 41,441 |   |

 

----

* See Note 16 above.

 

Land suppliers represent the outstanding balance payable to the Company’s suppliers of land currently in use or estimated to be developed. Long-term land suppliers represented payables with maturities of over twelve months.

 

**18. Equity**

 

a) Common stock issued at par value (historical Pesos) as of December 31, 2011 and 2010 is as follows:

 
| ** **     | ** ** | **Number of Shares** | ** ** | **Amount**  | ** ** |
|----------------|------------|--------------------------------|------------|-------------|------------|
| ** **     | ** ** | **2011**                       | ** ** | **2010**    | ** ** | **2011** | ** ** | **2010** | ** ** |
| Fixed capital: |       |                           |       |        |       |   |   |   |   |
| Sole series    | ** ** | **335,869,550**                |       | 335,869,550 | ** ** | **Ps.** | **425,443** |   | Ps. | 425,443 |   |
|                |            |                                |            |             |            |  |  |  |  |  |  |

 

b) Retained earnings include the statutory legal reserve. The General Corporate Law requires that at least 5% of net income of the year be transferred to the legal reserve until the reserve equals 20% of capital stock at par value. The legal reserve may be capitalized but may not be distributed unless the entity is dissolved. The legal reserve must be replenished if it is reduced for any reason. The legal reserve as of December 31, 2011 and 2010 amounted Ps. 105,602 and is included as part of the retained earnings.

 

c) The balances of the equity tax account as of December 31, 2011 and 2010 are:

 
| ** **                  | ** ** | **2011** | ** **    | **2010** | ** ** |
|-----------------------------|------------|----------|---------------|----------|------------|
| Contributed capital account | ** ** | **Ps.**  | **4,459,521** |     | Ps.        | 4,287,837 |   |
|                             |            |          |               |          |            |  |  |

 

Earnings distributed in excess of the balances of the Net Tax Profit Account (CUFIN) will be subject to income tax payable by the companies at the rate in force. At December 31, 2011 the Company’s CUFIN balance is Ps. 936,771.

 

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d)                  As of December 31, 2011 and 2010, the Company has stock option plans that consists of 897,868 and 945,741 approved stock options of the Company, respectively.

 

Stock option plans 2009 and 2007

 

A total of 978,298 stock options were initially granted to the key executives. During 2007 these grants were made at an exercise price of 98.08 Mexican pesos, which was in excess of the shares’ underlying fair value at the grant date. During 2008, a total of 29,929 options were exercised, and 335,853 options were cancelled upon separation of the related employees. In addition, during 2009 the Company increased the number of shares available in the stock option plan by 73,232 and granted 321,549 options at an exercise price of 43.54 Mexican pesos.

 

During 2011 and 2010, the Company did not increase any of the shares underlying its stock options plan, nor did it grant any new options. However a total of 47,873 and 126,691 stock options from the 2009 stock option plan were exercised in 2011 and 2010, respectively. Also during 2010 612,516 options from the 2007 stock option plan were forfeited as the right for them to be exercised concluded. In addition, during 2011, 32,637 options from the 2009 stock option plan were forfeited as the right for them to be exercised concluded.

 

The executives have the right to exercise one-third of their total options granted per year. The right to exercise the option expires after one year from the grant date or, in some cases, after 180 days from the departure of the executive from the Company.

 

During 2009, the Company also made changes to the underlying option grants made in 2007 and 2009 so as for them to now be ultimately settled with issuance of Company shares rather than with the payment of Company cash.  Both of these events were considered substantive changes to the underlying terms of the previous stock option grants, and compensation expense related to these changes has been re-measured accordingly.

 

The following information is an analysis of stock option activity during the years:

 
| ** **                                    | ** ** | **Options   available   for grant** | ** ** | **Stock options   outstanding** | ** ** | **Average   exercise price** | ** ** |
|-----------------------------------------------|------------|------------------------------------------|------------|--------------------------------------|------------|-----------------------------------|------------|
|                                          |       |                                     |       |                                 |       |                              |       |
| Balance at December 31, 2008             |       | 386,684                                  |       | 612,516                              |       | 98.08                             |       |
| Shares repurchased for   future option grants |       | 73,232                                   |       | —                               |       | 46.69                             |       |
| Stock options granted                         |       | (321,549                                 | )          | 321,549                              |       | 43.54                             |       |
| Balance at December 31, 2009             |       | 138,367                                  |       | 934,065                              |       | 79.30                             |       |
| Stock options exercised                       |       | —                                   |       | (126,691                             | )          | 43.54                             |       |
| Stock options forfeited                       |       | 612,516                                  |       | (612,516                             | )          | 98.08                             |       |
| Balance at December 31, 2010             |       | 750,883                                  |       | 194,858                              |       | 43.54                             |       |
| Stock options exercised                       |       | —                                   |       | (47,873                              | )          | 43.54                             |       |
| Stock options forfeited                       |       | 32,637                                   |       | (32,637                              | )          | 43.54                             |       |
| Balance at December 31, 2011             | ** ** | **783,520**                              | ** ** | **114,348**                          | ** ** | **Ps.**                           | **43.54**  | ** ** |
|                                               |            |                                          |            |                                      |            |                                   |            |  |

 

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The average fair value of 321,549 stock options granted during 2009 was Ps. 15.63 per stock option.

 

During the year ended December 31, 2011 and 2010, 47,873 and 126,691 of the stock options were exercised at an exercise price of Ps. 43.54, resulting in an increase of Ps. 2,716 and Ps. 5,516 in the equity, respectively.

 

Total compensation cost related to vested stock option awards totaled Ps. 689, Ps. 10,638 and Ps. 4,212 at December 31, 2011, 2010 and 2009, respectively.

 

Phantom Plan 2011

 

During 2011, the Company approved a new stock option plan, a “Phantom Plan” which consists of 965,596 options granted to the key executives, the awards are treated as liability awards.  This plan became effective on January 1, 2011 and the executives have the right to exercise one-third of their total options granted per year. The right to exercise the option expires after one year from the grant date or, in some cases, after 180 days from the departure of the executive from the Company.

 

The grants were made at an exercise price of 56.88 Mexican pesos and during 2011, a total of 53,675 options were exercised. Also during 2011 a total of 323,898 options were forfeited.

 

The following information is an analysis of Plantom Plan activity during the year:

 
| ** **                        | ** ** | **Options   available   for grant** | ** ** | **Average   exercise price** | ** ** |
|-----------------------------------|------------|------------------------------------------|------------|-----------------------------------|------------|
| Balance at January 1, 2011   |       | —                                   |       | Ps.                               | —     |   |
| Stock options granted             |       | 965,596                                  |       | 56.88                             |       |
| Stock options exercised           |       | (53,675                                  | )          | 56.88                             |       |
| Stock options forfeited           |       | (323,898                                 | )          | 56.88                             |       |
| Balance at December 31, 2011 | ** ** | **588,023**                              | ** ** | **Ps.**                           | **56.88**  | ** ** |

 

The average fair value of the Phantom Plan stock options granted during 2011 was 5.15 Mexican pesos per stock option.

 

During the year ended December 31, 2011, 53,675 of the stock options granted in 2011 were exercised at an exercise price of Ps. 56.88. Total compensation cost related to the vested stock option phantom plan recognized amounted to Ps. 3,685 at December 31, 2011.

 

e) During the year ended December 31, 2011, the Company repurchased 180,000 treasury shares for Ps. 6,437.   During the year ended December 31, 2009, the Company repurchased 49,500 treasury shares for Ps. 4,586.  The Company did not repurchased treasury shares during 2010.

 

f) As of December 31, 2011, 2010, and 2009 1,013,020, 800,383 and 187,867 shares remain in treasury, respectively.

 

Key assumptions used to calculate the fair value of stock options for the years ended December 31, 2011, 2010 and 2009 are as follows:

 
| ** **                          | ** ** | **2011**                 | ** ** | **2010**               | ** ** | **2009**               | ** ** |
|-------------------------------------|------------|--------------------------|------------|------------------------|------------|------------------------|------------|
| Expected dividend yield             | ** ** | **0**                    | **%**      | 0                      | %          | 0                      | %          |
| Expected stock price volatility     | ** ** | **41.45**                | **%**      | 29.56                  | %          | 59.56                  | %          |
| Risk-free interest rate             | ** ** | **4.52**                 | **%**      | 4.21                   | %          | 5.54                   | %          |
| Expected life of   options in years | ** ** | **3 years**              |       | 2   years              |       | 3   years              |       |
| Model used                          | ** ** | **Black Scholes Merton** |       | Black   Scholes Merton |       | Black   Scholes Merton |       |

 

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**19. Foreign currency balances and transactions**

 

a) As of December 31, 2011 and 2010, the foreign currency monetary position is as follows:

 
| ** **                       | ** ** | **2011**                                | ** **     | **2010**                                   | ** ** |
|----------------------------------|------------|-----------------------------------------|----------------|--------------------------------------------|------------|
| ** **                       | ** ** | **Thousands of   U.S.   dollars:** | ** **     | **Thousands of   Brazilian   reals:** | ** ** | **Thousands of   U.S.   dollars:** | ** ** | **Thousands of   Brazilian   reals:** | ** ** |
| Monetary assets                  | ** ** | **US$**                                 | **91**         | ** **                                 | **BR$**    | **27,913** |   | US$ | 246 |   | BR$ | 11,477 |   |
| Monetary liabilities             | ** ** |                                    | **(707,257**   | **)**                                      |       | **(258,577** | **)** |   | (508,901 | ) |   | (222,177 | ) |
| Monetary liability position, net | ** ** | **US$**                                 | **(707,166**   | **)**                                      | **BR$**    | **(230,664** | **)** | US$ | (508,655 | ) | BR$ | (210,700 | ) |
| Equivalent in Mexican pesos      | ** ** | **Ps.**                                 | **(9,885,259** | **)**                                      | **Ps.**    | **(1,733,553** | **)** | Ps. | (6,298,014 | ) | Ps. | (1,566,892 | ) |

 

b) The exchange rates in effect at the dates of the consolidated balance sheets and issuance of the consolidated financial statements were as follows:

 
| ** **     | ** ** | **(In Mexican pesos)** | ** ** |
|----------------|------------|----------------------------------|------------|
| ** **     | ** ** | **December 31,   2011**     | ** ** | **December 31,   2010** | ** ** | **April 29, 2012** | ** ** |
| U.S. dollar    | ** ** | **13.9787**                      |       | 12.3817 |   | 13.2093 |   |
| Brazilian real | ** ** | **7.5155**                       |       | 7.4366 |   | 7.0019 |   |

 

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**20. Segment reporting**

 

The following segment reporting information is presented according to the information used by the Company’s Chief Operating Decision Maker for decision-making purposes. The Company segregates the financial information by segments, (affordable entry-level housing construction, middle-income housing construction and other activities) considering the operational and organizational structure of the business despite its geographical localization (which was established by house models as explained in the next paragraph), according to the provisions of MFRS B-5 *Segment reporting*. Other activities consist primarily of the Company’s operations through its construction services and infrastructure division discussed above.

 

**General description of the products or services**

 

Mexico’s developer-built housing industry is divided into three segments according to cost:  affordable entry-level, middle-income, and residential. The prices of affordable entry-level segment range between Ps. 195 and Ps. 540; those of the middle-income segment are between Ps. 541 and Ps. 1,885 and those of the residential segment are above Ps. 1,885. The Company’s focus is to provide affordable entry-level and middle-income housing for its customers. Therefore, the operating segments that are presented in detail are the affordable entry-level and the middle-income segments, in conformity with guidelines of MFRS B-5.

 

Affordable entry-level developments range in size from 500 to 20,000 homes and are developed in stages typically comprising 300 homes each. During 2011, 2010 and 2009, affordable entry-level homes had an average price of approximately Ps. 346, Ps. 338 and Ps. 326, respectively. A typical affordable entry-level home consists of a kitchen, living-dining area, one to three bedrooms, and one bathroom. The affordable entry-level segment includes the results of the Company’s Brazilian operations.

 

Middle-income developments range in size from 400 to 2,000 homes and are developed in stages typically comprising 200 homes each. During 2011, 2010 and 2009, middle income homes had an average price of approximately Ps. 918, Ps. 1,086 and Ps. 978, respectively. A typical middle-income home consists of a kitchen, dining room, living room, two or three bedrooms, and two bathrooms.

 

Other includes revenues from construction services to government, sales and services to third parties and the tourism housing division.

 

The following table shows the operating results by each segment identified as of December 31, 2011, 2010 and 2009:

 
| **Year ending December 31, 2011** | ** ** | **Entry-level**                    | ** **     | **Middle-income**                    | ** ** | **Other**     | ** ** | **Consolidated** | ** **    |
|-------------------------------------------------------|------------|------------------------------------|----------------|--------------------------------------|------------|---------------|------------|------------------|---------------|
| Revenues                                              | ** ** | **Ps.**                            | **16,949,951** | ** **                           | **Ps.**    | **3,260,016** | ** ** | **Ps.**          | **1,643,312** | ** ** | **Ps.** | **21,853,279** | ** ** |
| Income from operations                                | ** ** | **2,264,479**                      | ** **     | **435,531**                          | ** ** | **219,543**   | ** ** | **2,919,553**    | ** **    |
| Depreciation and amortization                         | ** ** | **335,254**                        | ** **     | **64,480**                           | ** ** | **32,503**    | ** ** | **432,237**      | ** **    |
|                                                  | ** ** | ** **                         | ** **     | ** **                           | ** ** | ** **    | ** ** | ** **       | ** **    |
| **Year ending December 31, 2010** | ** ** | **Entry-level   as restated** | ** **     | **Middle-income   as restated** | ** ** | **Other**     | ** ** | **Consolidated** | ** **    |
| Revenues                                              |       | Ps.                                | 13,288,656     |                                 | Ps.        | 5,176,573     |       | Ps.              | 1,187,080     |   | Ps. | 19,652,309 |   |
| Income from operations                                |       | 1,990,999                          |           | 775,590                              |       | 177,857       |       | 2,944,446        |          |
| Depreciation and amortization                         |       | 314,843                            |           | 122,646                              |       | 28,125        |       | 465,614          |          |
|                                                  |       |                               |           |                                 |       |          |       |             |          |
| **Year ending December 31, 2009** | ** ** | **Entry-level   as restated** | ** **     | **Middle-income   as restated** | ** ** | **Other**     | ** ** | **Consolidated** | ** **    |
| Revenues                                              |       | Ps.                                | 13,791,983     |                                 | Ps.        | 3,406,806     |       | Ps.              | 277,700       |   | Ps. | 17,476,489 |   |
| Income from operations                                |       | 2,145,742                          |           | 530,027                              |       | 43,204        |       | 2,718,973        |          |
| Depreciation and amortization                         |       | 381,494                            |           | 94,234                               |       | 7,681         |       | 483,409          |          |

 

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The income from operations caption in the tables above were calculated as the total revenue from each segment, less allocated total consolidated operating cost and expenses. The allocation of total consolidated operating costs and expenses into the segments was based on the percentage that the sales in each segment represent of the total consolidated sales. Depreciation and amortization expense is allocated to each segment using the same basis as operating costs and expenses.

 

The Company has domestic operations in Mexico and international operations in Brazil and India. India assets and operations are immaterial as of December 31, 2011, 2010 and 2009. The Company ́s operations in Brazil started in 2010. Brazil loss from operations are Ps. 507,433 and Ps. 147,682 in 2011 and 2010 respectively and, it had approximately Ps. 966,177 and Ps. 427,466 in current assets and Ps. 758,326 and Ps. 514,046 in long lived assets as of December 31, 2011 and 2010, respectively.

 

The Company does not segregate its balance sheet or statement of cash flows by operating segment.

 

**21. Operating expenses**

 
| ** **                               | ** ** | **2011**      | ** **    | **2010**  | ** ** | **2009   as restated** | ** ** |
|------------------------------------------|------------|---------------|---------------|-----------|------------|-----------------------------|------------|
| Administrative                           | ** ** | **Ps.**       | **1,440,285** |      | Ps.        | 1,567,707                   |       | Ps. | 1,332,178 |   |
| Selling                                  | ** ** | **1,327,689** |          | 1,367,145 |       | 1,048,448                   |       |
| Amortization expense of   BETA trademark | ** ** | **—**    |          | 45,527    |       | 91,054                      |       |
|                                     | ** ** | **Ps.**       | **2,767,974** |      | Ps.        | 2,980,379                   |       | Ps. | 2,471,680 |   |

 

The table below shows the most significant operating expenses:

 
| ** **                  | ** ** | **2011**    | ** **  | **2010** | ** ** | **2009** | ** ** |
|-----------------------------|------------|-------------|-------------|----------|------------|----------|------------|
| Salaries and other benefits | ** ** | **Ps.**     | **881,705** |     | Ps.        | 874,212  |       | Ps. | 711,366 |   |
| Office expenses             | ** ** | **126,243** |        | 103,281  |       | 88,271   |       |
| Advertising                 | ** ** | **46,864**  |        | 90,944   |       | 72,044   |       |
|                             |            |             |             |          |            |          |            |  |  |  |

 

**22. Other (expenses) income**

 
| ** **                                      | ** ** | **2011**    | ** **   | **2010** | ** ** | **2009** | ** ** |
|-------------------------------------------------|------------|-------------|--------------|----------|------------|----------|------------|
| Tax surcharges                                  | ** ** | **Ps.**     | **(285,525** | **)**    | Ps.        | (136,193 | )          | Ps. | (44,155 | ) |
| Current statutory   profit-sharing to employees | ** ** | **(65,880** | **)**        | —   |       | —   |       |
| Equity in net earnings   of associate           | ** ** | **18,979**  |         | —   |       | —   |       |
| Other (expense) income, net                     | ** ** | **(12,441** | **)**        | (6,572   | )          | 49,475   |       |
|                                            | ** ** | **Ps.**     | **(344,867** | **)**    | Ps.        | (142,765 | )          | Ps. | 5,320 |   |

 

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**23. Interest expense**

 
| ** **                                                | ** ** | **2011**    | ** **  | **2010** | ** ** | **2009** | ** ** |
|-----------------------------------------------------------|------------|-------------|-------------|----------|------------|----------|------------|
| Interest expense   related to senior guaranteed notes (1) | ** ** | **Ps.**     | **—**  |     | Ps.        | —   |       | Ps. | — |   |
| Other interest expense                                    | ** ** | **223,598** |        | 173,610  |       | 162,069  |       |
| Commissions and financing costs (2) (3)              | ** ** | **167,020** |        | 166,505  |       | 163,641  |       |
|                                                      | ** ** | **Ps.**     | **390,618** |     | Ps.        | 340,115  |       | Ps. | 325,710 |   |

 

----

(1)  As of December 31, 2011, 2010 and 2009 the interest expense related to senior guaranteed notes was Ps. 675,852, Ps. 681,871 and Ps. 288,156, respectively; however due to the MFRS D-6 application, these amounts were fully capitalized during the three years (see Note 8).

 

(2) Includes the commissions paid by the Company to INFONAVIT and Registro Único de Vivienda (RUV), when obtaining approval of individual financing for its customers. The commissions facilitate the home sales and cash inflows recovery, so the Company considers these commissions as part of the financing costs. The amounts expensed in 2011, 2010 and 2009 were Ps. 84,646, Ps. 77,651 and Ps. 66,131, respectively.

 

(3) Due to anticipated payments made by the Company of short-term lines of credit during December 2010 (see Note 12), the Company wrote off Ps. 12,888, related to debt issuance costs previously capitalized in other assets.

 

**24. Income tax, asset tax and**Flat Rate Business Tax (IETU)**

 

In accordance with Mexican tax law, the Company is subject to income tax (ISR) and Flat Rate Business Tax (“IETU”) and files its tax returns on an individual entity basis and the related tax results are combined in the accompanying consolidated financial statements. The ISR is computed taking into consideration the taxable and deductible effects of inflation, such as depreciation calculated on restated asset values. Taxable income is increased or reduced by the effects of inflation on certain monetary assets and liabilities through the annual inflationary adjustment.

 

The Company files ISR and IETU tax returns on an individual entity basis and the related tax results are combined in the accompanying consolidated financial statements.

 

On December 7, 2009 a tax reform bill was approved and published, which reformed, amended and annulled certain tax dispositions that were effective on January 1, 2010.

 

This tax reform bill enacted an ISR rate increase that is to be effective as follows:

 

a) for years 2010 to 2012, 30%;

 

b) for year 2013, 29%; and

 

c) for year 2014 and future years, 28%

 

In addition, certain changes to the consolidation regime are effective. However, the Company is not subject to such regime.

 

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The IETU of the period is calculated applying the rate of 17.5% (16.5% for 2008, 17% for 2009 and 17.5% for 2010) based on income determined by cash flows less authorized credits.

 

The credits for the IETU are mainly composed of unamortized negative IETU base, salaries and social security contributions, and deductions from assets such as inventories and fixed assets, during the initial transition period.

 

The payment of IETU is required only to the extent that it exceeds the ISR for the same period. The ISR paid during the period will reduce the total IETU payable for the same period.

 

When the deductions exceed the accumulated income (negative IETU), no IETU is levied. The amount of the negative IETU multiplied by the applicable rate, results in an IETU credit, which can be offset against the ISR generated in the same period or against the IETU payable, if any, within the next ten years.

 

Based on projected tax calculations in the future it is estimated that the Company will continue to pay ISR only.

 

a) As of December 31, 2011, 2010 and 2009 the ISR consist of the following:

 
| ** ** | ** ** | **2011**   | ** **  | **2010** | ** ** | **2009** | ** ** |
|------------|------------|------------|-------------|----------|------------|----------|------------|
| ISR:       |       |       |        |     |       |     |       |
| Current    | ** ** | **Ps.**    | **847,711** |     | Ps.        | 557,395  |       | Ps. | 279,974 |   |
| Deferred   | ** ** | **18,229** |        | 349,602  |       | 714,415  |       |
|       | ** ** | **Ps.**    | **865,940** |     | Ps.        | 906,997  |       | Ps. | 994,389 |   |

 

To determine deferred ISR as of December 31, 2011 and 2010, the Company applied the enacted tax rates that were in effect beginning in 2011, to temporary differences according to their estimated dates of reversal.

 

For the years ended December 31, 2011 and 2010 the operations in Brazil generated loss before taxes of Ps. 925,598 and Ps. 711,389, respectively, and taxes of Ps. 113,826 and Ps. 28,016, respectively; as they were computed and paid under Brazilian Tax regulations.

 

b) The reconciliation of the statutory and effective ISR rates expressed as a percentage of income before the ISR is:

 
| ** **                                              | ** ** | **2011**   | ** ** | **2010**   | ** ** | **2009** | ** ** |
|---------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| ** **                                              | ** ** | **%**      | ** ** | **%**      | ** ** | **%**    | ** ** |
| Statutory rate:                                         | ** ** | **30**     |       | 30         |       | 28       |       |
| Add effect of permanent   differences mainly:           |       |       |       |       |       |     |       |
| Nondeductible expenses                                  | ** ** | **6**      |       | 6          |       | 3        |       |
| Difference between book   and tax inflation effects     | ** ** | **(4**     | **)**      | (6         | )          | 5        |       |
| Tax losses valuation   allowance from Brazil operations | ** ** | **8**      |       | 6          |       |     |       |
| Effect of change in   statutory rate on deferred ISR *  | ** ** | **—** | ** ** | **—** |       | 3        |       |
| Effective tax rate                                      | ** ** | **40**     |       | 36         |       | 39       |       |

 

----

* The effect of change in the statutory rate on deferred ISR represented an additional charge in the consolidated statement of income for 2009 of Ps. 78,624.

 

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c) At December 31, 2011 and 2010 the main items comprising the asset (liability) balance of deferred ISR are:

 
| ** **                                                       | ** ** | **2011**       | ** **     | **2010**   | ** ** |
|------------------------------------------------------------------|------------|----------------|----------------|------------|------------|
| Deferred ISR:                                                    |       |           |           |       |       |
| Effect of tax loss   carryforwards                               | ** ** | **Ps.**        | **1,550,303**  |       | Ps.        | 930,107 |   |
| Other creditors                                                  | ** ** | **200,178**    |           | 462,420    |       |
| Allowance for doubtful accounts                                  | ** ** | **33,407**     |           | 22,830     |       |
| Labor obligations                                                | ** ** | **19,817**     |           | 26,143     |       |
| Asset tax recoverable                                            | ** ** | **10,153**     |           | 11,311     |       |
| Employee profit sharing liability                                | ** ** | **20,226**     |           | 462        |       |
| Financial derivative instruments                                 | ** ** | **(23,869**    | **)**          | 107,346    |       |
| Unbilled revenues on   developments in progress                  | ** ** | **(150,801**   | **)**          | (133,680   | )          |
| Construction-in-process,   inventories and taxable inventory (1) | ** ** | **(4,470,088** | **)**          | (4,386,163 | )          |
| Property and equipment                                           | ** ** | **100,611**    |           | (10,143    | )          |
| Other assets                                                     | ** ** | **19,757**     |           | (20,880    | )          |
| Prepaid expenses                                                 | ** ** | **(1,528**     | **)**          | (3,447     | )          |
| Deferred ISR liability                                           | ** ** | **(2,691,834** | **)**          | (2,993,694 | )          |
| Valuation allowance   (see paragraph f below)                    | ** ** | **(942,234**   | **)**          | (604,139   | )          |
| Total deferred liability, net                                    | ** ** | **Ps.**        | **(3,634,068** | **)**      | Ps.        | (3,597,833 | ) |
|                                                             |       |           |           |       |       |
| Asset                                                            | ** ** | **Ps.**        | **867,471**    |       | Ps.        | 779,268 |   |
| Liability                                                        | ** ** | **(4,501,539** | **)**          | (4,377,101 | )          |
|                                                             | ** ** | **Ps.**        | **(3,634,068** | **)**      | Ps.        | (3,597,833 | ) |

 

----

(1)                In conformity with the Mexican Income Tax Law (MITLA) in force through December 31, 2004, the cost of sales was considered as a non-deductible expense and inventory purchases and production costs were considered as deductible items. This tax treatment in the MITLA gave rise to a temporary difference because of the difference in the book value of inventories and its corresponding tax value. Effective January 1, 2005, the MITLA considers cost of sales as a deductible item instead of inventory purchases and production costs. The MITLA established transition rules to be followed to include the December 31, 2004 inventory balance into taxable revenue. However, as result of the interpretation of the transition rules established by the MITLA, the Company did not include its inventory balance at December 31, 2004. Consequently, the Company recorded a taxable inventory as a deferred tax liability of Ps. 218,662 and Ps. 187,425 as of December 31, 2011 and 2010, respectively. This taxable inventory relates to the inventory item and tax law change described above as it is the source of income on which the Company did not pay taxes.

 

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d) As of December 31, 2011 the tax loss carryforward expiring in the following ten years amounted to Ps. 5,536,795.

 

i.                  The asset tax, used to be a minimum income tax, was payable based on 1.25% of the average value of most assets net of certain liabilities. The balances as of December 31, 2011 and 2010 of the asset tax were Ps. 10,153 and Ps. 11,311, respectively.

 

ii.               The loss carryforwards and recoverable IMPAC for which the deferred ISR asset and prepaid ISR, respectively, have been recognized can be recovered subject to certain conditions. Tax loss carryforwards and recoverable IMPAC for which the deferred ISR asset and prepaid ISR, respectively, have been recognized can be recovered, subject to certain conditions. The amounts as of December 31, 2011 and expiration dates are:

 
| ** **                       | ** ** | **Tax Loss**  | ** **    | **Recoverable** | ** ** |
|----------------------------------|------------|--------------------|---------------|-----------------|------------|
| **Year of Expiration** | ** ** | **Carry-forwards** | ** **    | **IMPAC**       | ** ** |
| 2012                             |       | Ps.                | —        |            | Ps.        | 338 |   |
| 2013                             |       | —             |          | 1,192           |       |
| 2014                             |       | —             |          | 1,989           |       |
| 2015                             |       | —             |          | 1,512           |       |
| 2016                             | ** ** | **49,392**         |          | 1,391           |       |
| 2017                             | ** ** | **—**         |          | 3,731           |       |
| 2018                             | ** ** | **706,129**        |          | —          |       |
| 2019                             | ** ** | **602,095**        |          | —          |       |
| 2020                             | ** ** | **1,157,628**      |          | —          |       |
| 2021                             | ** ** | **3,021,551**      |          | —          |       |
|                             |       | Ps.                | **5,536,795** |            | Ps.        | 10,153 |   |

 

Additionally, for its Brazilian operations the Company has accumulated tax loss carry forward that at December 31, 2011 and 2010 amounted to Ps. 328,213 and Ps. 141,374, respectively. In Brazil, tax losses never expire but they cannot be restated for inflation and are limited to 30% of the taxable income of each year. Due to the uncertainty to recover these tax losses, an allowance for the total amount was recognized as of December 31, 2011 and 2010.

 

e) The Federal tax authority has the right to perform reviews of the taxes paid by Mexican companies for a period of five years; therefore tax years beginning with 2006 are subject to possible review.

 

f) The Company has taken certain positions in its annual tax returns which are classified as uncertain tax positions for financial reporting purposes.  Specifically, uncertain tax positions currently outstanding relate to the Company’s interpretation of the MITLA related to the inclusion of certain debts in the calculation of the anual inflationary adjustment, and the deduction of land by real estate developers.  As of December 31, 2010, uncertain tax positions result in Ps. 604,139 in deferred tax assets which have been provided for through a full valuation allowance, and an additional current liability in the amount of Ps. 775,946. As of December 31, 2011, uncertain tax positions result in Ps. 942,234 in deferred tax assets which have been provided for through a full valuation allowance, and an additional current liability in the amount of Ps. 1,599,642. The Company considers this uncertain tax position as a current liability because it would be due upon demand to the extent requested.

 

The Mexican and Brazilian federal and state’s taxes and other contributions are subject to auditby tax authorities over a period of five years in both countries.  Depending upon the outcome of such audits, the 

 

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Company is contingently required to pay those taxes, contributions and corresponding surcharges of the any omitted payments and other differences that could been detected.

 

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**25. Contingencies and commitments**

 

*Construction guarantees*

 

The Company provides a two-year warranty against construction defects to all of its customers which could be due to the Company’s own activities, to defects in the construction materials provided by third parties (electrical installations, plumbing, gas, waterproofing, etc.) or to other circumstances not within the control of the Company.

 

The Company is insured against any defect, hidden or visible, that could occur during the construction, and after the construction for a certain period of time. In addition, the contractors provide a surety against any hidden or visible defects which is refunded on the approval of customers. The contractors also provide a security fund to cover any probable claims from customers during the warranty period, which is returned to them once such period ends.

 

Insurance coverage expensed for the years ended December 31, 2011, 2010 and 2009 amounted to Ps. 3,982, Ps. 3,584 and 3,226, respectively.

 

*Commitments*

 

a) At December 15, 2010 the Company through its subsidiary Homex India Private Limited, celebrated an investment agreement with Kotak Real Estate Fund - I, for which, in case of achieving certain conditions, that are obtaining all the permits, licenses and necessary authorizations for the construction of a development in the city of Chennai, India, the Company will acquire all equity shares of KS Realty Constructions Private Limited (KS Realty), company that owns the land on which the project will be developed.

 

KS Realty has liabilities and other credits or debt for approximately 1,600 million rupees (US 36 million) that the Company shall pay in five installments, the first one in the closing date (for 50 million rupees) and the following four in six, fourteen, twenty and thirty six months after the closing date for 388 million rupees each.

 

At the date of the financial statements, the Company is still waiting on the conditions to be achieved in order to acquire all equity shares of KS Realty.

 

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b) In 2010, a Mexican Government contract was directly awarded to the Company’s subisidiary CRS Morelos for the construction and service of a federal correctional facility in Morelos, México, following a direct assignment process (*procedimiento de asignación directa*) pursuant Article 41 paragraph IV of the “Ley de Adquisiciones Arrendamientos y Servicios del Sector Público” (the “Morelos Correctional Facility Contract”). The contract was entered with the Mexican Secretary of Public Security through its division of Prevention and Social Readjustment of the Mexican Secretary of Public Security (*Prevención y Readaptación Social de la Secretaría de Seguridad Pública*) to construct and then to assit with the operation, over a 20 year period, of a federal correctional facility.

 

In accordance with the provisions of MFRS Interpretation 17 (Service Contract Awards),**this agreement is being accounted for under the “financial asset model” based on the revenue recognition policies described in Note 3b.

 

The cost of the construction phase of the Morelos Correctional Facility project has been estimated to be approximately Ps. 3.9 billion.    Construction is to occur on land owned by the Company, and residual ownership of the prison and the land is that of the Mexican Government.   In accordance with Interpretation 17, the Company’s financial asset (account receivable) from construction does not constitute a qualifying asset under MFRS D-6, and accordingly no comprehensive financing costs are capitalized during the construction phase.

 

Pursuant to the Correctional Facility Contract, CRS Morelos will also develop and provide ongoing services to the correctional facility following the completion of construction, including services such as laundry, food services, landscaping, infrastructure up-keep, and other similar services. Prison security services are not a component of the Correctional Facility Contract to be provided by the Company.  Operating services will be provided by CRS Morelos and will commence in 2013 after the delivery of the correctional facilities, which is expected to be in late-2012. Certain of these services will be provided through subcontracts with third parties, previously approved by the Mexican Secretary of Public Security.

 

Penalties can be assessed by the Mexican Government if construction is not completed timely; Construction is required to be completed by August, 2012, although the Company currently has no reason to believe that the project will not be completed timely.

 

For the services provided, CRS Morelos will receive monthly payments from the Mexican Secretary of Public Security of Ps. 1,080 per year over a 20 year period starting in 2013. These monthly payments will cover both the eventual amortization of the construction fee, plus fees for on-going services rendered.   Annual payments will be indexed for inflation as stipulated in the contract.

 

The contract may be terminated in the event of continued non-performance of contract terms by either the Company or the Mexican Government prision agency, acts of legislation, and certain extraordinary situations (such as natural disasters, prision riots, agency personnel strikes, and certain other extraordinary situations)..   In the event of such extraordinary termination, the contract dictates the terms of settlement based on a prescribed formula.

 

Through December 31, 2011, the Company has recorded revenues of Ps. 129,672 and costs of Ps. 98,141 related to the construction project.

 

*Other Contingencies*

 

The Company is party to various legal disputes as a result of the normal course of construction business.  The Company is of the opinion that the ultimate outcome of such matters will not have a material adverse impact on the Company’s consolidated financial statements.

 

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**26. Subsequent events**

 

**Financings**

 

On February 2, 2012, the Company issued US$400 million of Senior Guaranteed Notes due 2020 with a coupon rate of 9.750%, payable semiannually. The proceeds from the issuance of the notes were used to prepay in full the Deutsche Bank Credit Agreement on February 17, 2012 and the Credit Suisse Credit Agreement on February 16, 2012, respectively.

 

As of February 16, 2012, the Company entered into a principal-only swap in order to hedge the principal amount of the US$400 million of Senior Guaranteed Notes due 2020 at an implied exchange rate of Ps.12.88 per U.S dollar through 2020. The cost of this instrument is 3.79%.

 

As of March 23, 2012, the Company entered into three capped forwards in order to hedge the first three interest payments of the US$400 million of Senior Guaranteed Notes due 2020. These instruments have a strike price of Ps. 13.22, with a cap of Ps. 17.00. These are zero cost instruments. The settlement dates of these instruments are September 25, 2012, March 25, 2013, and September 25, 2013.

** **

**Makobil acquisition**

 

On March 21, 2012, the Company and Arendal amended the Makobil shareholders agreement. That amendment includes an agreement whereby the Company will ultimately purchase Arendal’s 76% ownership interest in Makobil for a total of Ps. 1,106,508. Execution of this purchase, payment of the purchase price, and transfer of share ownership will occur after completion of construction of the prison complex.  At that time, the purchase price may also be deferred up to another 30 months, along with interest at 12% per annum with ultimate share ownership occurring when payments have been made.

 

The agreement also calls for the transfer of day-to-day operational control of Makobil to Homex from March 21, 2012. The Company anticipates consolidating Makobil in 2012. At the date that the Company begins consolidating Makobil, it will derecognize its equity method investment, recording a gain between the then fair value of the equity method investment and its carrying value.  The Company will also apply purchase accounting to the net assets consolidated.  The Company has yet to estimate the impact of such accounting.

 

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**27. New accounting principles**

 

**International Financial Reporting Standards (IFRS)**

 

The Comision Nacional Bancaria y de Valores (Mexican National Banking and Securities Commission, or CNBV) announced that commencing in 2012 all Mexican public companies must report their financial information in accordance with IFRS as issued by the International Accounting Standards Board (“IASB”).   The Company will adopt IFRS as of December 31, 2012, with a Transition Date to IFRS of January 1, 2011.  The Company will begin reporting under IFRS in Mexico from the first quarter of 2012.

 

IFRS 1 *“First-time Adoption of International Financial Reporting Standards”* (“IFRS 1”) sets mandatory exemptions and allows certain optional exemptions when completing a retrospective application of IFRS.  However, certain other balances will require adjustment to convert from MFRS to IFRS as of the Transition Date.   All the adjustments arising from the Company’s conversion to IFRS will be recorded against retained earnings at the Transition Date.

 

The Company is still in the process of finalizing its Transition Date balance sheet.  To date, the Company has identified the following key concepts:

 

·                                         **Revenue Recognition**

 

Under MFRS revenues from home construction are accounted for under IMFRS 14 “*Construction Sales and Service Agreements related to Real Estate”*as explained in Note 3 (b).   Under IFRS, the Company believes that it will account for these same contracts under IAS 18 “*Revenues*”.   While the Company is finalizing its analysis of the operational application of IAS 18, it anticipates that results will approximate IMFRS 14 in that revenue will be recognized upon completion of the housing unit, and the transfer of all legal risks and rewards to the customer.  This transfer typically occurs at the date the escritura is signed and the housing unit is available to be occupied.

 

Revenues from the construction and operation of prisons will be accounted for under IFRIC Interpretation No. 12 *“Service Concession Arrangements”*.  IFRC 12’s provisions are consistent with IMFRS 17 “*Service Concession Contracts”* which is explained in Note 3 and was used in preparing the accompanying consolidated financial statements.

 

Accordingly, significant revenue recognition differences are not anticipated.

 

·                                          **Business Combinations**

 

According to IFRS 1, an entity may elect not to apply IFRS 3 “*Business Combinations*” retrospectively to business combinations made prior of the Transition Date.  The Company will likely apply this exemption and not amend its prior business combination accounting.

 

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·                                          **Inventories and Borrowing Costs**

 

The Company currently capitalizes comprehensive financing costs (“CFC”) under MFRS as disclosed in Note 3 (g).  These costs are capitalized to construction inventory during the construction process, and ultimately included as a component of cost of sales.    The amounts capitalized include interest expense, the results of foreign exchange gains and losses, and the fair value of financial derivative instruments when such instruments qualify for hedge accounting.

 

IAS 23 *“Borrowing Costs”* also provides for the capitalization of borrowing costs, although both the method and the types of items capitalized differ from MFRS.

 

The transitional provisions of IAS 23 indicate that when application of IAS 23 constitutes a change in accounting policy, an entity shall apply the IAS 23 to borrowing costs relating to qualifying assets for which the commencement date for capitalization is on or after the effective date.   However, an entity may also designate any date before the effective date and apply the IAS 23 to borrowing costs relating to all qualifying assets for which the commencement date for capitalization is on or after that date.

 

The Company anticipates that it will recompute the amount of capitalized borrowing costs beginning on the Transition Date and the carrying value of its inventory balances will be adjusted at that time.  The Company has yet to quantify this adjustment.

 

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·                                          **Long-Term Assets**

 

A first-time adopter may elect to use the fair value or the previous GAAP’s revaluation of an item of property, plant and equipment at (or before) the Transition Date as “deemed cost” if it was broadly comparable to cost or depreciated cost in accordance with IFRS, adjusted to reflect changes in a general or specific price index.    The Company will likely present its property, plant and equipment at its fair value at the transition date. Accordingly, significant adjustments to property, plant and equipment are anticipated.

 

While a deemed cost approach may be taken towards property, plant and equipment, it is typically not appropriate for other long-term assets such as goodwill and intangible assets.  For those assets the values established in purchase accounting will be adjusted for the removal of inflation recorded under MFRS for periods from the acquisition date through January 1, 2008.

 

·                                          **Employee Benefits**

 

The Company will likely apply an exemption whereby unrecognized actuarial losses will be charged to retained earnings at the Transition Date.  The Company’s unrecognized actuarial losses are disclosed in Note 15.

 

According to MFRS D-3, a severance provision and the corresponding expenditure must be recognized if the entity intends to terminate the employment relationship before the retirement date, or intends to pay benefits as a result of an offer made to employees to encourage a voluntary termination.    For IFRS purposes, this provision is recorded pursuant to IAS 19R,”Employee Benefits”, when the actions of the Company have demonstrated commitment to end the relationship with the employee or a bid to encourage voluntary retirement.   This action is shown with a formal plan that describes the characteristics of the termination of employment.  Accordingly, at the Transition Date, the Company anticipates that it will eliminate its severance indemnity as per Note 15, as an increase in retained earnings.

 

The Company will not recognize deferred profit-sharing liability under IFRS, while under MFRS it has recognized it using the assets and liabilities method.  There is no effect at the transition date since the deferred profit-sharing was fully reserved under MFRS.

 

Profit-sharing expense will be included under operating expenses in the statement of income. Under MFRS this is included in the other expense item.

 

·                                          **Foreign Currency Translation**

 

The Company will likely apply a first time exemption and reclassify the accumulated translation effect recorded under MFRS to retained earnings and beginning January 1, 2011, it will calculate the translation effect prospectively according to International Accounting Standard (“IAS”) 21, *The Effects of Changes in Foreign Exchange Rates.*

 

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·                                          **Indexation of Equity Balances**

 

As disclosed in Note 3(c), for the purposes of MFRS B-10, the effects of inflation on financial information must be recognized when the economic environment of the entity is inflationary, that is, when cumulative inflation of the three preceding years is equal to or larger than the 26%.  IAS 29 considers an economy as hyper-inflationary when the cumulative inflation over three years approaches or exceeds 100%. The last hyperinflationary period for Mexico was 1997, and for Brazil was in 1997 prior to the Company’s initiation of its Brazilian operations. Accordingly, the Company has eliminated previously recorded inflationary effects in Mexico for the period 1998 through 2007.   This will result in a decrease in capital stock and additional paid in capital, and an increase in retained earnings.   The entry will have no impact on total equity at the Transition Date.

 

·                                          **Financial derivative Instruments**

 

IAS 39, “*Financial Instruments: Recognition and Measurement”,* requires the consideration of credit risk in determining the fair value of financial instruments. Credit risk is the risk that the counterparty will not meet its contractual obligations. Upon transition to IFRS, the Company will adjust the fair value of the asset and liability position of the derivative financial instruments considering the credit risk of the counterparty. The amount of this adjustment is currently estimated as a to retained earnings.

 

IAS 39 also requires measuring the effectiveness of financial derivative instruments that meet the criteria for hedge accounting at the end of each reporting date, while under MFRS this is not required. The ineffective portion of financial derivative instruments that qualified as hedge will be adjusted to retained earnings at the transition date.

 

·                                          **Deferred Taxes**

 

The IFRS adjustments that will be recorded by the Company will have an impact on the calculation of deferred income taxes according to the requirements established by IAS 12, *Income Taxes.*

 

·                                          **Classification Differences**

 

Under MFRS the cash and restricted cash are shown on the same row as cash and cash equivalents. Under IFRS restricted cash is shown separately and is not considered a cash equivalent for statement of cash flows purposes.

 

Debt issue costs are disclosed in Note 11 as a component of other assets.  Under IFRS, such amounts will be reflected as a reduction of outstanding borrowings in the consolidated balance sheet.

 

Under MFRS, profit- sharing costs are considered as an other expense.  The Company anticipates that under IFRS such amounts will be recorded as part of operating expense.

 

Other balance sheet, income statement and statement of cash flows classification differences might also exist between MFRS and IFRS.

 

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·                                          **Disclosures**

 

Generally, IFRS disclosure requirements are more extensive than those of MFRS, which will result in increased disclosures about accounting policies, significant judgments and estimates, financial derivative instruments and management risks, among others. In addition, there may be differences in presentation.

 

The information presented above, does not intend to be an all inclusive list of Transition Date adjustments that might be recorded.  Rather, it represents potential adjustments identified to date.   The above discussion should also be construed as a “preliminary IFRS” discussion as the Company will be adopting IFRS as of December 31, 2012, based on the standards that are in-force as of that date.  The standards that will actually be applicable to December 31, 2012, including those that will be applicable on an optional basis, are not known with certainty at this time. Additionally, the accounting policies selected by the Company may change as a result of changes in the economic or industry trends that are observable after the issuance of these consolidated financial statements.   Accordingly, the above disclosed information is subject to change.

 

Under IFRS, only one set of financial statements comprising the balance sheet, comprehensive income statement, statement of changes in equity and cash flow, together with comparative information and explanatory notes, can provide a fair presentation of the financial position of the Company, the results of its operations and cash flows.  Not all such information is presented in the preliminary IFRS discussion presented above.

 

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**28.    Summary of differences between Mexican Financial Reporting Standards (MFRS) and US GAAP**

 

The consolidated financial statements of the Company are prepared in accordance with MFRS, which vary in certain significant respects from US GAAP. A reconciliation of the consolidated net income, equity and comprehensive income for US GAAP is presented in Note 29.

 

Effective January 1, 2008, and as a result of adopting Standard B-10, *Effects of inflation*, the Company ceased recognizing the effects of inflation in its financial statements and considered the restated amounts of all non-monetary items as their carrying basis as of January 1, 2008. The Company has not reconciled inflation adjustments recorded prior to 2008, nor has it reconciled inflation adjustments still included in its non-monetary items, including depreciation.

 

The United States Financial Accounting Standards Board (“FASB”) released the *FASB Accounting Standards Codification*, or “ASC” for short, on January 15, 2008 and it became effective in the summer of 2009. At that time all previous US GAAP reference sources became obsolete. The ASC organizes thousands of U.S. GAAP pronouncements under approximately 90 accounting topic areas.  The objective of this project was to arrive at a single source of authoritative U.S. accounting and reporting standards, other than guidance issued by the SEC. Below are references to various ASCs, and their former US GAAP references.

 

The differences between MFRS and US GAAP included in the reconciliation that affect the accompanying consolidated financial statements of the Company are as follows:

 

**a)****                                     ****Revenue and cost recognition**

 

The substantial majority of the Company’s revenues are derived from the construction of homes on Company owned land, and the related sale of such homes. Under US GAAP, the Company recognizes these revenues pursuant to ASC 360.20 (formerly FAS 66 “Accounting for Sales of Real Estate Sales*”)*. Such revenues are recognized when all of the following events occur:

 

·                  a sale is consummated;

 

·                  a significant initial consideration is received (when applicable);

 

·                  the earnings process is complete and the collection of any remaining receivables is reasonably assured.

 

All such conditions typically occur at the time the title passes to the homebuyer, and he has the legal right to take possession of this property.

 

In situations where the Company sells customers a house with incremental improvements beyond the “basic” house, the Company recognizes amounts from the customer on a cash-basis when received, which is essentially cost recovery accounting.

 

Pursuant to MFRS, and the adoption of IMFRS 14, as of January 1, 2010, the Company uses what is often referred to as “completed contract method” of accounting for revenues and costs. The principal difference between ASC 360.20 and IMFRS 14 relates to: (1) revenues from FOVI and INVI financial institutions, that are recognized for MFRS purposes before they are recognized for US GAAP purposes, since for US GAAP purposes they do not yet comply with one of the ASC conditions above, specifically that a significant down payment is received, that is typically more than 10%, and (2) the deferral and thus recognition on a cash basis for US GAAP of unsecured home-buyer receivables.

 

A reconciling item for the incremental revenues and costs associated with the above differences is included in the US GAAP reconciliation of net income and equity for all periods presented.

 

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Approximately Ps. 186,740, Ps. 246,846 and Ps. 198,755 of the Company’s revenues during the years ended December 31, 2011, 2010 and 2009, respectively, were derived from construction services performed pursuant to a formal contract with the Mexican Government, on Mexican Government owned land.  Such revenues have been accounted for US GAAP purposes under a percentage-of-completion method of accounting pursuant to ASC 605.35 (formerly SOP 81-1 — “Accounting for Performance of Construction-Type and Certain Production-Type Contracts”), consistent with MFRS.

 

**b)****                         ****Deferred income taxes**

 

The Company follows ASC740.10 (formerly SFAS No. 109, “Accounting for Income Taxes”) for US GAAP purposes, which differs from the MFRS. Under MFRS, the effects of inflation on the deferred tax balance generated by monetary items are recognized in the result on monetary position. Under US GAAP, the deferred tax balance is classified as a non-monetary item. As previously mentioned, the Company does not recognize the inflation effects in accordance with MFRS B-10, accordingly, there is no difference related to the presentation of the gain (loss) on monetary position and deferred income tax provision.

 

As a result of the differences related to the recognition of revenue, costs, interest capitalization and other items described below, the related deferred income tax presented under MFRS is different from the effect calculated in accordance with US GAAP.

 

Below is a reconciliation of deferred tax balances between MFRS and USGAAP:

 
| ** **                                                                                                 | ** ** | **2011** | ** ** | **2010** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred income tax   liability according to MFRS, net                                                     | ** ** | **Ps.**  | 3,634,068  |     | Ps.        | 3,597,833 |   |
| Effect of US GAAP   adjustments:                                                                           |       |     |       |     |       |
| Accounts receivable and   deferral of unsecured homebuyers’ receivables (Note 28 a)    |       | (52,841  | )          | (64,578  | )          |
| Capitalization of   financing cost (Note 28 i)                                                             |       | (178,879 | )          | (56,797  | )          |
|                                                                                                       |       |     |       |     |       |
| Fair value adjustment   to financial derivative instruments (Note 28 h)                                    |       | (6,380   | )          | (2,947   | )          |
| Bargain gain (negative   goodwill) on business acquisition (Note 28j and Note 4)                           |       | 104,742  |       | 104,742  |       |
| Others, net                                                                                                |       | 13,841   |       | 60,793   |       |
| Deferred income tax   liability according to US GAAP, net                                                  | ** ** | **Ps.**  | 3,514,551  |     | Ps.        | 3,639,046 |   |

 

Deferred income tax balance sheet classification:

 
| ** **                           | ** ** | **2011**    | ** ** | **2010**        | ** ** |
|--------------------------------------|------------|-------------|------------|-----------------|------------|
| ** **                           | ** ** | **Current** | ** ** | **Non-current** | ** ** | **Current** | ** ** | **Non-current** | ** ** |
|                                 |       |        |       |            |       |   |   |   |   |
| Deferred tax assets                  | ** ** | **Ps.**     | 172,640    | ** **      | **Ps.**    | 1,552,929 |   | Ps. | 427,921 |   | Ps. | 1,062,437 |   |
| Deferred tax liability               |       | (4,297,886  | **)**      | (942,234        | )          | (4,530,764 | ) | (598,640 | ) |
| Net deferred tax   (liability) asset | ** ** | **Ps.**     | (4,125,246 | **)**           | **Ps.**    | 610,695 |   | Ps. | (4,102,843 | ) | Ps. | 463,797 |   |

 

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At December 31, 2011 and 2010, the Company had Ps. 610,695 and Ps.463,797, respectively, of net long-term deferred tax assets. These amounts include net operating loss carryforwards as disclosed in Note 24. The Company believes that it is more likely than not those amounts will ultimately be recovered, primarily through the reversal of deferred tax liabilities. Accordingly, no valuation allowance has been provided under US GAAP for these amounts.

 

Bellow is the roll forward of the Company’s provision for uncertain tax positions:

** **
| **Description**                         | ** ** | **Beginning   balance   accrual** | ** ** | **Tax provisions   charged to   income tax   expense** | ** ** | **Potential tax   surcharges   charged to   other   expense** | ** ** | **Ending   balance   accrual** | ** ** |
|-----------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|--------------------------------|------------|
|                                    |       |                              |       |                                                                  |       |                                                                    |       |                           |       |
| Provision for uncertain   tax positions |       |                              |       |                                                                  |       |                                                                    |       |                           |       |
| 2011                                    |       | Ps.                               | 775,946    |                                                                  | Ps.        | 700,273                                                                 |       | Ps.                            | 123,423    |   | Ps. | 1,599,642 |   |
| 2010                                    |       | 248,781                           |       | 454,231                                                               |       | 72,934                                                                  |       | 775,946                        |       |
| 2009                                    |       | 102,969                           |       | 132,828                                                               |       | 12,984                                                                  |       | 248,781                        |       |
|                                         |            |                                   |            |                                                                       |            |                                                                         |            |                                |            |  |  |  |  |

 

Please refer to the Note 24 f)

 

**c)****                    ****Acquisition of Non-Controlling Interest**

 

On September 12, 2005, Beta del Centro acquired the remaining 50% of Super Abastos Centrales y Comerciales, S.A. de C.V.’s outstanding shares. Under Mexican GAAP (now MFRS), the excess cost of the shares acquired from the minority shareholders was recorded as a capital distribution, since this was a transaction between common shareholders.

 

Under US GAAP the acquisition of the remaining outstanding shares from the minority shareholders was accounted for under purchase method of accounting.

 

**d)****                         ****Classification differences**

 

Under MFRS the cash and restricted cash are shown as part of cash and cash equivalents. Under USGAAP restricted cash is shown separately as part of “other current and none assets”.

 

Under MFRS, deferred taxes are classified as non-current. US GAAP requires a current or non-current classification based on the classification of the related asset or liability (See Note 28 b).

 

Under MFRS, the commissions paid by the Company to INFONAVIT and Registro Unico de Vivienda (RUV), when obtaining approval of individual financing for its clients, which facilitate home sales and cash inflows recovery are consider part of the financing costs; US GAAP requires that such amounts be recorded as operating costs.

 

Under MFRS, amounts due under the Company’s factoring agreements are included in trade accounts payable; US GAAP requires that such amounts be recorded as a borrowing from the financial intermediary.

 

Under MFRS, uncertain tax positions are shown as currently liabilities as they are due upon demand if so requested by the tax authorities.   To the extent that the taxing entity with such an uncertain tax position has net operating loss carry-forwards, US GAAP requires such amounts to be reflected as a reduction of the net operating loss carry-forward given that would be the means of ultimate settlement.   Net operating loss carry-forwards would be classified as current or non-current based on the expected date of reversal.

 

Under MFRS, interest expense from the factoring program sponsored by Nafinsa is included in the net comprehensive financing cost; US GAAP requires that such amounts be recorded as part of the cost of sales.

 

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Under MFRS, profit- sharing costs are considered as an “other expense” For USGAAP purposes, employee statutory profit-sharing is classified as an operating expense.

** **

**e)****                         ****Inventory**

 

Inventories under US GAAP are stated at cost. Inventories as of December 31, 2011 and 2010 are as follows:

 
| ** **                                                          | ** ** | **2011**        | ** **     | **2010**    | ** ** |
|---------------------------------------------------------------------|------------|-----------------|----------------|-------------|------------|
|                                                                |       |            |           |        |       |
| Titled land                                                         | ** ** | **Ps.**         | **9,197,142**  |        | Ps.        | 9,701,296 |   |
| Contracted land                                                     | ** ** | **2,181,989**   |           | 2,467,273   |       |
| Construction-in-process                                             | ** ** | **19,046,544**  |           | 14,969,826  |       |
| Construction materials                                              | ** ** | **440,672**     |           | 576,499     |       |
|                                                                | ** ** | **30,866,347**  |           | 27,714,894  |       |
| Land and held for   future developmentand   construction-in-process | ** ** | **(12,859,328** | **)**          | (10,591,499 | )          |
| Total inventories                                                   | ** ** | **Ps.**         | **18,007,019** |        | Ps.        | 17,123,395 |   |

 

**f)****                           ****Goodwill**

 

The amount of goodwill under US GAAP related to a 2006 acquisition and is greater than that reported under MFRS, due to the difference in the revenue recognition methods between MFRS and US GAAP and the amount of backlog recorded under US GAAP differed from the reported under MFRS. This backlog has been fully amortized as of December 31, 2011, and thus the difference in equity is presented below essentially relates to differences in the carrying value of goodwill between MFRS and US GAAP.

 

Goodwill is not amortized.  However, it is subject to annual impairment tests as required by ASC 350.10 (formerly SFAS 142), and is adjusted for any impairment losses. Goodwill is allocated to the affordable entry-level reporting segment, which is considered the cash generating unit.

 

**g)****                        ****Labor obligations**

 

The Company has recorded liabilities for the seniority premium and termination indemnity (severance) liabilities for its Mexican subsidiaries with employees (Desarrolladora de Casas del Noroeste, Altos Mandos de Negocios, Homex Infraestructura and CT Commercial Properties). For its MFRS consolidated financial statements, the Company applies MFRS D-3. Significant assumptions (weighted-average rates) used in determining net periodic pension cost and the Company’s related plan obligations are described in Note 15.

 

Severance indemnities: Under MFRS, effective 2005 revised Bulletin D-3 requires the recognition of a severance indemnity liability calculated based on actuarial valuations. Recognition criteria under US GAAP are established in ASC712.10 (formerly SFAS No. 112, “Employers’ Accounting for Post-employment Benefits”), which requires that a liability for certain termination benefits provided under an ongoing benefit arrangement such as these statutorily mandated severance indemnities be recognized when the likelihood of future settlement is probable and the liability can be reasonably estimated. MFRS allows for the Company to amortize the transition obligation related to the adoption of revised Bulletin D-3 over the expected service life of the employees, but beginning January 1, 2008 the transition obligation must be amortized at most in five years. However, US GAAP required the Company to recognize such effect upon initial adoption under ASC715.10, which results in an immaterial difference in the amount recorded under the two accounting principles.

 

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Prior to the adoption of ASC715 (formerly SFAS No. 158), there was no difference in the liabilities recorded for pension plans and seniority premiums between MFRS and US GAAP.

 
| ** **                | ** ** | **2011**   | ** ** | **2010** | ** ** |
|---------------------------|------------|------------|------------|----------|------------|
| Unrecognized items:       |       |       |       |     |       |
| Transition obligation     | ** ** | **Ps.**    | **249**    |     | Ps.        | 457 |   |
| Prior service cost        | ** ** | **106**    |       | 170      |       |
| Net actuarial (gain) loss | ** ** | **(1,913** | **)**      | 1,707    |       |
| Unrecognized ítems   | ** ** | **Ps.**    | **(1,558** | **)**    | Ps.        | 2,334 |   |

 

For purposes of determining the cost of pension plans, seniority premiums and severance indemnities under US GAAP, the Company uses a December 31 measurement date for its seniority premiums and severance indemnities.

 

Net periodic costs for 2011, 2010 and 2009 are summarized below:

 
| ** **                                 | ** ** | **2011**    | ** ** | **2010**   | ** ** | **2009** | ** ** |
|--------------------------------------------|------------|-------------|------------|------------|------------|----------|------------|
| Integration of Net Periodic Costs:         |       |        |       |       |       |     |       |
| Labor cost                                 |       | **Ps.**     | **29,345** | ** ** | Ps.        | 24,824   |       | Ps. | 25,360 |   |
| Financial cost                             |       | **8,857**   | ** ** | 11,526     |       | 11,083   |       |
| Amortization of transition liability       |       | **34**      | ** ** | 2,507      |       | 1,639    |       |
| Actuarial (gains) losses                   |       | **(19,704** | **)**      | 47,921     |       | 9,902    |       |
| Amortization of prior services adjustments |       | **22**      | ** ** | —     |       | 1,168    |       |
| Curtailment                                |       | **(17,824** | **)**      | (96,218    | )          | —   |       |
| Net periodic costs (gain)                  |       | **Ps.**     | **730**    | ** ** | Ps.        | (9,440   | )          | Ps. | 49,152 |   |

 

Analysis of changes in the defined benefit obligation:

 
| ** **                                      | ** ** | **2011**    | ** ** | **2010**   | ** ** |
|-------------------------------------------------|------------|-------------|------------|------------|------------|
| Defined benefit obligation at beginning of year |       | **Ps.**     | **95,124** | ** ** | Ps.        | 121,639 |   |
| Labor cost                                      |       | **29,345**  | ** ** | 24,824     |       |
| Finance cost on defined benefit obligation      |       | **8,857**   | ** ** | 11,526     |       |
| Actuarial (gains) losses                        |       | **(19,704** | **)**      | 51,253     |       |
| Benefits paid to employees                      |       | **(20,689** | **)**      | (17,900    | )          |
| Curtailment                                     |       | **(17,824** | **)**      | (96,218    | )          |
| Defined benefit obligation at end of year       |       | **Ps.**     | **75,109** | ** ** | Ps.        | 95,124 |   |

 
| ** **                     | ** ** | **2011** | ** ** | **2010**   | ** ** |
|--------------------------------|------------|----------|------------|------------|------------|
| Accumulated benefit obligation |       | **Ps.**  | **59,718** | ** ** | Ps.        | 75,687 |   |
|                                |            |          |            |            |            |  |  |

 

**h)****                        ****Disclosure about fair value of financial derivative instruments**

 

ASC 820.10 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements), and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy are described below:

 

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2 - Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

 

Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

When possible, the Company uses quoted prices to determine fair value. Where quoted prices are not available, the fair value is internally derived based upon appropriate valuation methodologies with respect to the amount and timing of future cash flows and estimated discount rates. However, considerable judgment is 

 

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required in interpreting market data to develop estimates of fair value, so the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange. The effect of using different market assumptions or estimation methodologies could be material to the estimated fair values. Fair value presented herein is based on information available at December 31, 2011 and 2010. Although management is not aware of any factors that would be significantly affect the fair value amounts, such amounts have not been updated since those dates. Therefore the current estimates of fair value at dates after December 31, 2011 and 2010 could differ significantly from these amounts.

 

The fair value of total debt, including capital leases and excluding interest payables, is estimated for variable rate debt whereby changes in interest rates generally do not impact the fair value of the debt instrument, and quoted market prices are used for senior guaranteed notes at December 31, 2011 and 2010. As of December 31, 2011 and 2010, the carrying value of total debt is Ps. 15,249,426 and Ps.12,807,660, respectively. The fair value is Ps. 15,110,697 at December 31, 2011 and Ps. 13,441,705 at December 31, 2010.

 

The Company’s estimate of the derivative’s fair value was made using Level 2 evidence as per the ASC820.10 hierarchy discussed above.

 

ASC 820.10 requires the fair value of an asset or liability to be determined based on the assumptions that market participants would use in pricing the asset or liability. Therefore, if market participants would consider counterparty credit risk in pricing the financial derivative instrument, then an entity’s valuation methodology under US GAAP should incorporate the effect of this risk on fair value. MFRS does not specifically require the inclusion of the counterparty’s credit risk in the computation of fair value. The Company has incorporated the counterparty credit risk into the valuation of their financial derivative instrument positions under US GAAP, but not under MFRS.

 

The Company determined the US GAAP fair value of its principal-only and interest-only swaps as of December 31, 2011 to be Ps. 31,900, resulting in a difference of Ps. 53,347 from the net asset carrying value of Ps. 85,247 (Ps. 12,226 liability position and Ps. 97,473 asset position) shown in the December 31, 2011 MFRS balance sheet. The Company determined the US GAAP fair value of its principal-only and interest-only swaps as of December 31, 2010 to be Ps. 569,757, resulting in a difference of Ps. 81,401 from the carrying value of Ps. 488,356 (Ps. 508,160 liability position and Ps. 19,804 asset position) shown in the December 31, 2010 MFRS balance sheet. Differences attributable to counterparty credit risk were immaterial during periods prior to 2009, and thus have not been reflected as reconciling items in those years.

 

ASC 815.10.50 requires measuring the effectiveness of financial derivative instruments that meet the criteria for hedge accounting at the end of each reporting date, while under MFRS this is not required. The Company determined the US GAAP ineffective portion of the financial derivative instrument that met the hedge accounting criteria as of December 31, 2011 and 2010, which resulted in a difference of Ps. 33,679 and Ps. (30,354), respectively, while there was no ineffective portion as of December 31, 2009.

 

**i)****                           ****Capitalization of net comprehensive financing cost**

 

Under MFRS, the capitalization of net comprehensive financing cost (interest, foreign exchange gains and losses) incurred to finance investment projects is capitalized.

 

Similar to MFRS, under US GAAP, if interest is incurred during the construction of qualifying assets, capitalization is required as part of the cost of such assets. The Company applies the weighted-average interest rate on all outstanding debt to the balance of construction-in-progress additions during the period.

The difference between financing cost capitalization methods applied for US GAAP and for MFRS purposes relates to the capitalization of foreign currency exchange gains and losses for MFRS purposes, while for US GAAP purposes only interest costs is capitalized.   Accordingly, a reconciling item for the capitalization of interest is included in the US GAAP reconciliation of consolidated net income and equity. As the amounts are capitalized to inventory and then ultimately released to cost of sales as the inventory is sold, resulting in an impact in the gross profit margin percentage between US GAAP and MFRS.

 

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**j)****                           ****Business acquisition**

 

Under MFRS, business acquisitions are recorded using the purchase method. If the net assets acquired at fair value are greater than the purchase price, the acquired assets are adjusted to their relative fair value purchase price in accordance to the order established in MFRS B-7, allocating the fair value adjustment to the non-monetary assets.

 

Under US GAAP, if net assets acquired at fair value are greater than the purchase price (“negative goodwill”), a gain from bargain purchase is recorded in the consolidated statement of income on the acquisition date.

 

**k)****                  ****Concession Arrangements**

 

The Company accounts for its Morelos Correctional Facility Contract as a concession arrangement in accordance with MFRS Interpretation 17 (Service Contract Awards).  As described in Note 3b, MFRS construction revenues are being accounted for using the percentage of completion method.  For USGAAP, the Morelos Correctional Facility Contract is considered to be the construction of the facilities on Company land, with its subsequent lease with residual ownership transfer at completion.  During the construction phase, construction costs are capitalized to the extent recoverable, including capitalized construction interest.  Accordingly, the 2011 MFRS revenues of Ps. 129,672 and expenses of Ps. 98,141 are being reversed for US GAAP purposes.

 

The Company’s equity method investee (Makobil) is also a party to a concession arrangement for the construction of a prison.  Similar differences between MFRS and US GAAP exist for that arrangement.  Because this prison construction represents the substantial majority of Makobil’s operating results to date, the equity in earnings from Makobil of Ps. 18,979 per Note 22, are also being reversed for US GAAP purposes in 2011.

 

**29.       Reconciliation of MFRS net income and equity to US GAAP net income and equity and the presentation of condensed consolidated financial statements in accordance with US GAAP.**

 

**a.****                          ****Reconciliation of Consolidated Net Income for the Year**

 
| ** **                                                                       | ** ** | **2011**     | ** **          | **2010** | ** ** | **2009**        | ** ** |
|----------------------------------------------------------------------------------|------------|--------------|---------------------|----------|------------|-----------------|------------|
| Consolidated net income   according to MFRS                                      | ** ** | **Ps.**      |  **1,313,942** |     | Ps.        |  1,579,942 |       | Ps. |  1,581,393 |   |
|                                                                             |       |         |                |     |       |            |       |
| US GAAP adjustments:                                                             |       |         |                |     |       |            |       |
| Revenues (Note 28a)                                                              | ** ** | **21,029**   |                | 14,981   |       | 181,205         |       |
| Costs (Note 28a)                                                                 | ** ** | **(15,883**  | **)**               | (11,626  | )          | (112,666        | )          |
| Revenues from   concession arrangements (Note 28k)                               | ** ** | **(129,672** | **)**               | —   |       | —          |       |
| Costs from concession   arrangements (Note 28k)                                  | ** ** | **98,141**   |                | —   |       | —          |       |
| Equity method earnings   from concession arrangements (Note 28k)                 | ** ** | **(18,979**  | **)**               | —   |       | —          |       |
| Labor obligations (Note 28g)                                                     | ** ** | **2,587**    |                | 19,630   |       | (6,692          | )          |
| Capitalization of   financing costs (Note 28i)                                   | ** ** | **(493,096** | **)**               | 196,601  |       | 26,544          |       |
| Deferral of unsecured   homebuyers’ receivables (Note 28a)                  | ** ** | **14,434**   |                | (31,372  | )          | (37,712         | )          |
| Deferral of future involvement                                                   | ** ** | **2,838**    |                | (1,129   | )          | (365            | )          |
| Prepaid sales commissions                                                        | ** ** | **(1,537**   | **)**               | 33,529   |       | (16,640         | )          |
| Ineffective financial   derivative instruments (Note 28h)                        | ** ** | **33,679**   |                | (30,354  | )          | —          |       |
| Fair value adjustment   to financial derivative instruments (Note 28h)           | ** ** | **(31,900**  | **)**               | 81,401   |       | (72,286         | )          |
| Bargain gain (negative   goodwill) on business acquisition (Note 28j and Note 4) |       | —       |                | 374,081  |       | —          |       |
| Total US GAAP   adjustments before tax effects                                   | ** ** | **(518,359** | **)**               | 645,742  |       | (38,612         | )          |
| Tax effects on US GAAP   adjustments                                             | ** ** | **146,533**  |                | (180,068 | )          | (42,775         | )          |
| Total US GAAP adjustments                                                        | ** ** | **(371,826** | **)**               | 465,674  |       | (81,387         | )          |
|                                                                             |       |         |                |     |       |            |       |
| Consolidated net income   according to US GAAP                                   | ** ** | **Ps.**      |  **942,116**   |     | Ps.        |  2,045,616 |       | Ps. |  1,500,006 |   |

 

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**b.****                          ****Reconciliation of Consolidated Equity**

 
| ** **                                                                       | ** ** | **2011**     | ** **           | **2010** | ** ** | **2009**         | ** ** |
|----------------------------------------------------------------------------------|------------|--------------|----------------------|----------|------------|------------------|------------|
| Consolidated equity   according to MFRS                                          | ** ** | **Ps.**      |  **13,687,478** |     | Ps.        |  12,320,511 |       | Ps. |  10,905,812 |   |
| US GAAP adjustments:                                                             |       |         |                 |     |       |             |       |
| Revenues (Note 28a)                                                              | ** ** | **(50,056**  | **)**                | (71,085  | )          | (86,066          | )          |
| Costs (Note 28a)                                                                 | ** ** | **38,934**   |                 | 54,817   |       | 66,443           |       |
| Revenues from   concession arrangements (Note 28k)                               | ** ** | **(129,672** | **)**                | —   |       | —           |       |
| Costs from concession   arrangements (Note 28k)                                  | ** ** | **98,141**   |                 | —   |       | —           |       |
| Equity method investment   (Note 28k)                                            | ** ** | **(18,979**  | **)**                | —   |       | —           |       |
| Backlog (goodwill) (Note 28f)                                                    | ** ** | **(237,001** | **)**                | (237,001 | )          | (237,001         | )          |
| Labor obligations (Note 28g)                                                     | ** ** | **(995**     | **)**                | (4,646   | )          | (23,442          | )          |
| Prepaid sales commissions                                                        | ** ** | **821**      |                 | 2,358    |       | (31,171          | )          |
| Deferral of unsecured   homebuyers’ receivables of the year (Note 28a)      | ** ** | **(126,266** | **)**                | (140,700 | )          | (109,328         | )          |
| Deferral of future involvement                                                   | ** ** | **(582**     | **)**                | (3,420   | )          | (2,291           | )          |
| Acquisition of non   controlling interest (Note 28c)                             | ** ** | **79,438**   |                 | 79,438   |       | 79,438           |       |
| Bargain gain (negative   goodwill) on business acquisition (Note 28j and Note 4) | ** ** | **374,081**  |                 | 374,081  |       | —           |       |
| Ineffective financial   derivative instruments (Note 28h)                        | ** ** | **3,325**    |                 | (30,354  | )          | —           |       |
| Fair value adjustment   to financial derivative instruments (Note 28h)           | ** ** | **(22,785**  | **)**                | 9,115    |       | (72,286          | )          |
| Capitalization of   financing costs (Note 28i)                                   | ** ** | **(622,006** | **)**                | (128,910 | )          | (325,511         | )          |
| Goodwill, net (Note 28f)                                                         | ** ** | **86,754**   |                 | 86,754   |       | 86,754           |       |
| Total US GAAP   adjustments before tax effects                                   | ** ** | **(526,848** | **)**                | (9,553   | )          | (654,461         | )          |
| Tax effects on US GAAP   adjustments                                             | ** ** | **145,776**  |                 | (6,747   | )          | 173,312          |       |
| Total US GAAP adjustments                                                        | ** ** | **(381,072** | **)**                | (16,300  | )          | (481,149         | )          |
|                                                                             |       |         |                 |     |       |             |       |
| Equity according to US   GAAP                                                    | ** ** | **Ps.**      |  **13,306,406** |     | Ps.        |  12,304,211 |       | Ps. |  10,424,663 |   |

 

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**c.****                          ****Reconciliation of Consolidated Comprehensive Income**

 
| ** **                                                                   | ** ** | **2011**      | ** **          | **2010**  | ** ** | **2009**        | ** ** |
|------------------------------------------------------------------------------|------------|---------------|---------------------|-----------|------------|-----------------|------------|
| Consolidated net income   according to MFRS                                  | ** ** | **Ps.**       |  **1,313,942** |      | Ps.        |  1,579,942 |       | Ps. |  1,581,393 |   |
|                                                                         |       |          |                |      |       |            |       |
| Foreign currency translation adjustment                                      | ** ** | **(289,744**  | **)**               | 72,078    |       | (42,401         | )          |
|                                                                         |       |          |                |      |       |            |       |
| Fair value of financial   derivative instruments, net of deferred income tax | ** ** | **346,410**   |                | (242,837  | )          | (87,872         | )          |
| Comprehensive income   according to MFRS                                     | ** ** | **1,370,608** |                | 1,409,183 |       | 1,451,120       |       |
|                                                                         | ** ** | ** **    |                |      |       |            |       |
| Labor obligations                                                            | ** ** | **617**       |                | (825      | )          | 14,839          |       |
|                                                                         | ** ** | ** **    |                |      |       |            |       |
| Net US GAAP adjustments:                                                     |       |          |                |      |       |            |       |
| Net income                                                                   | ** ** | **(371,826**  | **)**               | 465,674   |       | (81,387         | )          |
|                                                                         |       |          |                |      |       |            |       |
| Comprehensive income   according to US GAAP                                  | ** ** | **Ps.**       |  **999,399**   |      | Ps.        |  1,874,032 |       | Ps. |  1,384,572 |   |

 

**d.****                          ****Condensed Consolidated Balance Sheets according to US GAAP**

 
| ** **                                                     | ** ** | **2011**       | ** **           | **2010**   | ** ** |
|----------------------------------------------------------------|------------|----------------|----------------------|------------|------------|
| **Assets**                                                     |       |           |                 |       |       |
| Current assets                                                 | ** ** | **Ps.**        |  **25,148,134** |       | Ps.        |  23,496,997 |   |
| Land held for future   development and construction-in-process | ** ** | **12,859,328** |                 | 10,591,499 |       |
| Property and equipment                                         | ** ** | **1,160,215**  |                 | 1,376,650  |       |
| Goodwill                                                       | ** ** | **650,344**    |                 | 650,344    |       |
| Other non-current assets                                       | ** ** | **1,898,582**  |                 | 1,313,288  |       |
|                                                           |       |           |                 |       |       |
| Total assets                                                   | ** ** | **Ps.**        |  **41,716,603** |       | Ps.        |  37,428,778 |   |
|                                                           |       |           |                 |       |       |
| **Liabilities and equity**                                     |       |           |                 |       |       |
| Current liabilities                                            | ** ** | **Ps.**        |  **15,881,987** |       | Ps.        |  12,875,279 |   |
| Long-term liabilities                                          | ** ** | **12,528,210** |                 | 12,249,288 |       |
| Equity                                                         | ** ** | **13,306,406** |                 | 12,304,211 |       |
|                                                           |       |           |                 |       |       |
| Total liabilities and   equity                                 | ** ** | **Ps.**        |  **41,716,603** |       | Ps.        |  37,428,778 |   |

 

Inflationary accounting was discontinued in Mexico as of December 31, 2007. As previously discussed, during 2010 it came to management attention that for the 2006 and 2007 periods, certain misstatements related to inflation adjustments were included. The Company made some adjustments that were reflected on current assets, current liabilities, long-term liabilities and equity balances as of December 31, 2009.

 

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**e.****                          ****Condensed Consolidated Statements of Operations according to US GAAP**

 
| ** **                                                                            | ** ** | **2011**       | ** **           | **2010**   | ** ** | **2009**         | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------|----------------------|------------|------------|------------------|------------|
| Revenues                                                                              | ** ** | **Ps.**        |  **21,760,926** |       | Ps.        |  19,628,540 |       | Ps. |  17,615,888 |   |
| Costs                                                                                 | ** ** | **15,884,983** |                 | 13,754,383 |       | 12,658,080       |       |
| Gross profit                                                                          | ** ** | **5,875,943**  |                 | 5,874,157  |       | 4,957,808        |       |
| Income from operations                                                                | ** ** | **3,070,596**  |                 | 2,955,455  |       | 2,527,445        |       |
| Income before income taxes                                                            | ** ** | **1,661,523**  |                 | 3,132,676  |       | 2,534,550        |       |
| Income taxes                                                                          | ** ** | **719,407**    |                 | 1,087,060  |       | 1,034,544        |       |
| Consolidated net income   according to US GAAP                                        | ** ** | **Ps.**        |  **942,116**    |       | Ps.        |  2,045,616  |       | Ps. |  1,500,006 |   |
| Less: income   attributable to the non-controlling interests                          | ** ** | **9,528**      |                 | 68,179     |       | (11,351          | )          |
| Net income attributable   to the controlling interests                                | ** ** | **Ps.**        |  **932,588**    |       | Ps.        |  1,977,437  |       | Ps. |  1,511,357 |   |
| Consolidated net income   according to US GAAP                                        | ** ** | **Ps.**        |  **942,116**    |       | Ps.        |  2,045,616  |       | Ps. |  1,500,006 |   |
| Other comprehensive income (loss)                                                     | ** ** | **57,283**     |                 | (171,584   | )          | (115,434         | )          |
| Consolidated comprehensive income                                                     | ** ** | **999,399**    |                 | 1,874,032  |       | 1,384,572        |       |
| Less: comprehensive   income attributable to the non-controlling interest             | ** ** | **9,528**      |                 | 68,179     |       | (11,350          | )          |
| Comprehensive income   attributable to the controlling interest                       | ** ** | **Ps.**        |  **989,871**    |       | Ps.        |  1,805,853  |       | Ps. |  1,395,922 |   |
| Weighted average shares   outstanding (in thousands)                                  | ** ** | **334,700**    |                 | 334,748    |       | 334,830          |       |
| Earnings per share of   controlling interest according to US GAAP (basic and diluted) | ** ** | **Ps.**        |  **2.79**       |       | Ps.        | 5.91             |       | Ps. | 4.51 |   |

 

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**f.****                            ****Condensed statements of cash flows according to US GAAP**

 

The following cash flow statements were prepared in accordance with ASC230 provided by operating, financing and investing activities, giving effect to the US GAAP adjustments, excluding the effect of inflation required by Bulletin B-10. The following information is presented in thousands of historical pesos and is not presented in pesos of constant purchasing power:

 
| ** **                                                  | ** ** | **2011**       | ** **    | **2010**   | ** ** | **2009**     | ** ** |
|-------------------------------------------------------------|------------|----------------|---------------|------------|------------|--------------|------------|
| Operating activities:                                       |       |           |          |       |       |         |       |
| Consolidated net income                                     | ** ** | **Ps.**        | **942,116**   |       | Ps.        | 2,045,616    |       | Ps. | 1,500,006 |   |
| Non-cash items:                                             |       |           |          |       |       |         |       |
| Depreciation and amortization                               | ** ** | **432,237**    |          | 465,614    |       | 483,409      |       |
| Deferred income tax and   statutory profit-sharing          | ** ** | **563,407**    |          | 529,665    |       | 781,178      |       |
| Share-based payment transactions                            |       | —         |          | —     |       | 10,638       |       |
| Exchange loss (gain)                                        | ** ** | **779,109**    |          | (170,830   | )          | (184,346     | )          |
| Change in valuation   effects of derivative instruments     | ** ** | **(67,616**    | **)**         | 70,008     |       | 66,451       |       |
| Changes in operating   assets and liabilities               | ** ** | **(3,025,887** | **)**         | (5,327,813 | )          | (3,023,369   | )          |
| Net cash flows (used   in) provided by operating activities | ** ** | **(376,634**   | **)**         | (2,387,740 | )          | (366,033     | )          |
|                                                        |       |           |          |       |       |         |       |
| Investing activities:                                       |       |           |          |       |       |         |       |
| Investments in:                                             |       |           |          |       |       |         |       |
| Investment in associate                                     | ** ** | **(18,000**    | **)**         | —     |       | —       |       |
|                                                        |       |           |          |       |       |         |       |
| Proceeds from sale of   propety and equipement              | ** ** | **9,436**      |          | 81,192     |       | 30,625       |       |
| Note receivable from   related parties                      | ** ** | **(174,073**   | **)**         | —     |       | —       |       |
| Acquisition of property   and equipment                     | ** ** | **(38,547**    | **)**         | (279,644   | )          | (89,352      | )          |
| Business acquisition                                        |       | —         |          | (290,478   | )          | —       |       |
| Net cash flows from   investing activities                  | ** ** | **(221,184**   | **)**         | (488,930   | )          | (58,727      | )          |
|                                                        |       |           |          |       |       |         |       |
| Financing activities:                                       |       |           |          |       |       |         |       |
| Short-term borrowings   (payments), net                     | ** ** | **1,825,028**  |          | 743,662    |       | (1,672,256   | )          |
| Proceeds from long-term   borrowings                        | ** ** | **1,406,532**  |          | 2,477,964  |       | 4,168,004    |       |
| Repayments of long-term   borrowings                        | ** ** | **(2,077,443** | **)**         | (164,854   | )          | (84,468      | )          |
| Shares—based options exercised                         | ** ** | **2,796**      |          | 5,516      |       | —       |       |
| Shares repurchased for   employee stock option plan         | ** ** | **(6,437**     | **)**         | —     |       | (4,586       | )          |
| Net cash flows from   financing activities                  | ** ** | **1,150,476**  |          | 3,062,288  |       | 2,406,694    |       |
|                                                        |       |           |          |       |       |         |       |
| Net increase in cash   and cash equivalents                 | ** ** | **552,658**    |          | 185,618    |       | 1,981,934    |       |
| Cash and cash   equivalents at the beginning of the year    | ** ** | **3,307,692**  |          | 3,122,074  |       | 1,140,140    |       |
| Cash and cash   equivalents at the end of the year          | ** ** | **Ps.**        | **3,860,350** |       | Ps.        | 3,307,692    |       | Ps. | 3,122,074 |   |
|                                                        |       |           |          |       |       |         |       |
| Supplemental cash flow information:                         |       |           |          |       |       |         |       |
| Interest paid                                               | ** ** | **Ps.**        | **1,734,417** |       | Ps.        | 1,265,649    |       | Ps. | 874,911 |   |
| Income tax paid   (recovered), net                          | ** ** | **Ps.**        | **186,221**   |       | Ps.        | 33,658       |       | Ps. | (43,272 | ) |
| Termination payments   for derivative contracts             | ** ** | **Ps.**        | **24,863**    | ** ** | Ps.        |  — |       | Ps. | 123,271 |   |
| Non-cash financing activities:                              |       |           |          |       |       |         |       |
| Capital lease obligation incurred                           | ** ** | **Ps.**        | **109,290**   |       | Ps.        | 49,667       |       | Ps. | 47,035 |   |

 

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**g.****                         ****Consolidated Statements of Changes in Equity according to US GAAP**

 
| ** **                                                  | ** ** | **Common   Stock** | ** ** | **Additional   paid-in   capital** | ** ** | **Treasury   stock (Note   16)** | ** ** | **Retained   earnings** | ** ** | **Other   comprehensive   income** | ** ** | **Equity of   non-   controlling   interest** | ** ** | **Equity** | ** ** | **Comprehensive   income of the   year** | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|------------------------------------|------------|---------------------------------------|------------|-------------------------|------------|------------------------------------|------------|----------------------------------------------------|------------|------------|------------|----------------------------------------------------|------------|
| Balances as of   December 31, 2008                     |       | Ps.                | 528,011    |                               | Ps.        | 3,280,222                             |       | Ps.                     | (99,342    | )                                  | Ps.        | 5,207,997                                          |       | Ps.        | 7,094      |                                               | Ps.        | 110,057 |   | Ps. | 9,034,039 |   | Ps. | 657,845 |   |
| Shares repurchased for stock option plan                    |       |               |       |                               |       | (4,586                                | )          |                    |       |                               |       |                                               |       | (4,586     | )          |                                               |       |
| Share-based   compensation transactions                     |       |               |       | 10,638                             |       |                                  |       |                    |       |                               |       |                                               |       | 10,638     |       |                                               |       |
| Changes in fair value of financial derivative   instruments |       |               |       |                               |       |                                  |       |                    |       | (87,872                            | )          |                                               |       | (87,872    | )          | (87,872                                            | )          |
| Labor obligations                                           |       |               |       |                               |       |                                  |       |                    |       | 14,838                             |       |                                               |       | 14,838     |       | 14,838                                             |       |
| Foreign currency   translation adjustment                   |       |               |       |                               |       |                                  |       |                    |       | (42,401                            | )          |                                               |       | (42,401    | )          | (42,401                                            | )          |
| Net income                                                  |       |               |       |                               |       |                                  |       | 1,511,357               |       |                               |       | (11,350                                            | )          | 1,500,006  |       | 1,500,006                                          |       |
| Balances as of   December 31, 2009                     |       | 528,011            |       | 3,290,860                          |       | (103,928                              | )          | 6,719,354               |       | (108,341                           | )          | 98,707                                             |       | 10,424,663 |       | 1,384,572                                          |       |
| Share   based-payments exercised                            |       |               |       |                               |       | 5,516                                 |       |                    |       |                               |       |                                               |       | 5,516      |       |                                               |       |
| Changes in fair value of financial derivative   instruments |       |               |       |                               |       |                                  |       |                    |       | (242,837                           | )          |                                               |       | (242,837   | )          | (242,837                                           | )          |
| Labor obligations                                           |       |               |       |                               |       |                                  |       |                    |       | (825                               | )          |                                               |       | (825       | )          | (825                                               | )          |
| Foreign currency   translation adjustment                   |       |               |       |                               |       |                                  |       |                    |       | 72,078                             |       |                                               |       | 72,078     |       | 72,078                                             |       |
| Net income                                                  |       |               |       |                               |       |                                  |       | 1,977,437               |       |                               |       | 68,179                                             |       | 2,045,616  |       | 2,045,616                                          |       |
| Balances as of December 31, 2010                       |       | Ps.                | 528,011    |                               | Ps.        | 3,290,860                             |       | Ps.                     | (98,412    | )                                  | Ps.        | 8,696,791                                          |       | Ps.        | (279,925   | )                                                  | Ps.        | 166,886 |   | Ps. | 12,304,211 |   | Ps. | 1,874,032 |   |
|                                                        |       |               |       |                               |       |                                  |       |                    |       |                               |       |                                               |       |       |       |                                               |       |
| Share   based-payments exercised                            |       |               |       |                               |       | 2,796                                 |       |                    |       |                               |       |                                               |       | 2,796      |       |                                               |       |
| Changes in fair value of financial derivative   instruments |       |               |       |                               |       |                                  |       |                    |       | 346,410                            |       |                                               |       | 346,410    |       | 346,410                                            |       |
| Labor obligations                                           |       |               |       |                               |       |                                  |       |                    |       | 617                                |       |                                               |       | 617        |       | 617                                                |       |
| Foreign currency   translation adjustment                   |       |               |       |                               |       |                                  |       |                    |       | (289,744                           | )          |                                               |       | (289,744   | )          | (289,744                                           | )          |
| Net income                                                  |       |               |       |                               |       |                                  |       | 932,588                 |       |                               |       | 9,528                                              |       | 942,116    |       | 942,116                                            |       |
| Balances as of December 31, 2011                       |       | Ps.                | 528,011    |                               | Ps.        | 3,290,860                             |       | Ps.                     | (95,616    | )                                  | Ps.        | 9,629,379                                          |       | Ps.        | (222,642   | )                                                  | Ps.        | 176,414 |   | Ps. | 13,306,406 |   | Ps. | 999,399 |   |

 

**30.  Additional US GAAP disclosure information**

 

**a) Accounting for uncertainty in income taxes**

 

The Company adopted the provisions of ASC740 (formerly FASB Interpretation No. 48,”Accounting for Uncertainty in Income Taxes” (FIN48) as of January 1, 2007).

 

The Company policy is  to remove some or all of the tax benefit of any of tax positions at the time it determines that it becomes uncertain based upon one of the following conditions: (1) the tax position is not “more likely than not” to be sustained, (2) the tax position is “more likely than not” to be sustained, but for a lesser amount, or (3) the tax position is “more likely than not” to be sustained, but not in the financial period in which the tax position was originally taken.

 

For purposes of evaluating whether or not a tax position is uncertain, (1) the Company presumes the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information, (2) the technical merits of a tax position are derived from authorities such as legislation and statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and circumstances of the tax position, and (3) each tax position is evaluated without consideration of the possibility of offset or aggregation with other tax positions taken.

 

A number of years may elapse before a particular uncertain tax position is audited and finally resolved or when a tax assessment is raised. The number of years subject to tax assessments varies depending on the tax jurisdiction and is generally five years for the countries in which the Company principally operates. The tax benefit that has been previously reserved because of a failure to meet the “more likely than not” recognition threshold would be recognized in our income tax expense in the first period when the uncertainty disappears under any one of the following conditions: (1) the tax position is “more likely than not” to be sustained, (2) the tax position, amount, and/or timing is ultimately settled through negotiation or litigation, or (3) the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired.

 

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**b) Recent accounting pronouncements**

 

***U.S. GAAP***

 

The most relevant US GAAP standards that came into force in each of the three years ended December 31, 2011 are described below:

 

**In 2011 and 2010:**

 

No significant US GAAP standards were initially adopted in 2011 and 2010.

 

**In 2009:**

 

***ASC 810.10 (formerly FAS 160)***

 

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 160, “Non-controlling Interest in Consolidated Financial Statements — an amendment of ARB No. 51” (“FAS 160”). FAS 160 was codified as a component of ASC 810.10. ASC 810.10 requires non-controlling interests held by parties other than the parent in subsidiaries to be clearly identified, labeled, and presented in the consolidated statements of financial position within equity, but separate from the parent’s equity.

 

This new guidance is effective for fiscal years beginning after December 15, 2008. The Company’s US GAAP financial information included in Note 29 was previously retrospectively adjusted for all periods to reflect the adoption of ASC 810.10.

 

***ASC 805.10 (formerly FAS 141 (R))***

 

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“FAS 141 (R)”). FAS 141 (R) was a revision of FAS 141 and was codified as a component of ASC 805.10. This new guidance requires that costs incurred to effect the acquisition (i.e., acquisition-related cost) be recognized separately from the acquisition. In addition, restructuring costs that the acquirer expected but was not obligated to incur, which included changes to benefit plans, were recognized as if they were a liability assumed at the acquisition date. This new guidance requires the acquirer to recognize those costs separately from the business combination. This new guidance is effective for the Company in 2009, and did not have any impact on the Company’s consolidated financial statements, primarily as no acquisitions occurred during that year.

 

***ASC 815.10 (formerly FAS 161)***

 

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“FAS 161”). FAS 161 was codified as a component of ASC 815.10. This new guidance requires enhanced disclosures about an entity’s derivatives and hedging activities to improve the transparency of financial reporting. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. This new guidance increases year end disclosures but did not have an impact on the Company’s consolidated financial position and results of operations.

 

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***ASC 350.10 (formerly FSP FAS 142-3)***

 

In April 2008, the FASB issued FASB Staff Position FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 was codified as a component of ASC 350. This new guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008. This pronouncement did not have any impact on the Company’s financial position and results of operation.

 

***ASC 323.10 (formerly EITF 08-6)***

 

In November 2008, the Emerging Issues Task Force (EITF) reached a consensus on EITF 08-6, “Equity Method Investment Accounting Considerations”. EITF 08-6 was codified as a component of ASC 323.10. This new guidance provides guidance on the application of the equity method. It states equity-method investments should be recognized using a cost accumulation model. Also, it requires that equity method investments as a whole be assessed for other-than-temporary impairments. This new guidance is effective on a prospective basis for transactions in an investee’s shares occurring or impairments recognized in fiscal years beginning on or after December 15, 2008.  During the years ended December 31, 2009, the Company’s equity method investments did not represent a significant component of its operations. Accordingly, the adoption of this EITF did not have a significant impact on its consolidated financial statements.

 

***ASC 855 (formerly FAS 165)***

 

In May 2009, the FASB issued ASC 855, “Subsequent Events”. ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, ASC 855 sets forth (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. In accordance with ASC 855, an entity should apply the requirements to annual financial periods ending after June 15, 2009. Subsequent events have been considered through the financial statement approval date specified in Note 1 above.

 

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**31.****                              ****Valuation and qualifying accounts for the years ended December 31, 2011, 2010 and 2009**

 
| **Description**                                                                       | ** ** | **Beginning   balance   allowancel** | ** **   | **Additions   charged to   expenses** | ** ** | **Writte-off** | ** ** | **Ending   balance   allowance** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------|--------------|--------------------------------------------|------------|----------------|------------|----------------------------------|------------|
|                                                                                  |       |                                 |         |                                       |       |           |       |                             |       |
| Allowance for doubtful accounts                                                       |       |                                 |         |                                       |       |           |       |                             |       |
| 2011                                                                                  |       | Ps.                                  |  78,852 |                                       | Ps.        | 34,406         |       | Ps.                              | (1,901     | ) | Ps. | 111,357 |   |
| 2010                                                                                  |       | 57,279                               |         | 25,430                                     |       | (3,857         | )          | 78,852                           |       |
| 2009                                                                                  |       | 48,184                               |         | 26,968                                     |       | (17,873        | )          | 57,279                           |       |
|                                                                                  |       |                                 |         |                                       |       |           |       |                             |       |
| Allowance for doubtful   accounts sundry debtors included within other current assets |       |                                 |         |                                       |       |           |       |                             |       |
| 2011                                                                                  |       | Ps.                                  | 6,597        |                                       | Ps.        | 2,390          |       | Ps.                              | —     |   | Ps. | 8,987 |   |
| 2010                                                                                  |       | 29,197                               |         | —                                     |       | (22,600        | )          | 6,597                            |       |
| 2009                                                                                  |       | 5,643                                |         | 25,445                                     |       | (1,891         | )          | 29,197                           |       |

 

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**32.****                              ****Supplemental guarantor information (restated)**

 

**Supplemental guarantor information**

 

The Senior Guaranteed Notes due 2015 and 2019 are fully and unconditionally guaranteed, on an unsecured senior, joint and several basis, by each of the Company’s significant subsidiaries. Each of the guarantor subsidiaries (for Senior Guaranteed Notes due 2015: Proyectos Inmobiliarios de Culiacán, S. A. de C. V. (PICSA), Desarrollodora de Casas del Noroeste, S. A. de C. V. (DECANO), Casas Beta del Centro, S. de R.L. de C.V. (CBC), Casas Beta del Norte, S. de R.L. de C.V. and  Casas Beta del Noroeste, S. de R.L. de C.V., and for Senior Guaranteed Notes due 2019: PICSA, DECANO and CBC) is a wholly-owned subsidiary. The following condensed combining financial information includes the guarantor subsidiaries, non-guarantor-subsidiaries and the parent company for both Senior Guaranteed Notes 2005 and 2009. The wholly-owned guarantor subsidiaries column includes both the guarantors of our Senior Guaranteed Notes 2005 and the guarantors of our Senior Guaranteed Notes 2009.

 

Investments in subsidiaries are accounted for by the parent company under the equity method for purpose of the supplemental combining presentation. Earnings of subsidiaries are therefore reflected in the parent company’s investment account and earnings. The principal elimination entries eliminate the parent company’s investment in subsidiaries and intercompany balances and transactions.

 

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**Desarrolladora Homex, S.A. B de C.V. and Subsidiaries**

**Supplemental Condensed Combining Financial Information**

**Balance Sheet as of December 31, 2011**

**(In thousands of Mexican pesos (Ps.))**

 
| ** **                                                     | ** ** | **Parent   company** | ** ** | **Wholly-   owned   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent   company and   wholly-   owned   guarantor   subsidiaries** | ** **  | **Non-   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------|------------|----------------------|------------|------------------------------------------------|------------|------------------|------------|-----------------------------------------------------------------------|-------------|-------------------------------------|------------|------------------|------------|------------------|------------|
| Assets                                                         |       |                 |       |                                           |       |             |       |                                                                  |        |                                |       |             |       |             |       |
| Currents assets:                                               |       |                 |       |                                           |       |             |       |                                                                  |        |                                |       |             |       |             |       |
| Cash and cash   equivalents                                    |       | Ps.                  | 13,229     |                                           | Ps.        | 3,748,340        |       | Ps.                                                                   | —      |                                | Ps.        | 3,761,569        |       | Ps.              | 98.781     |   | Ps. |   |   | Ps. | 3,860,350 |   |
| Restricted cash                                                |       | —               |       |                                           |       |             |       |                                                                  |        | 132,303                             |       |             |       | 132,303          |       |
| Trade accounts receivable, net                                 |       | 72                   |       | 1,582,645                                      |       |             |       | 1,582,717                                                             |        | 410,306                             |       |             |       | 1,993,023        |       |
| Due from affiliates                                            |       | 15,802,558           |       | 25,728,371                                     |       | (30,371,694      | )          | 11,159,235                                                            |        | 15,636,052                          |       | (26,621,214      | )          | 174,073          |       |
| Inventories                                                    |       |                 |       | 16,319,364                                     |       |             |       | 16,319,364                                                            |        | 2,093,222                           |       |             |       | 18,412,586       |       |
| Prepaid expenses and other current assets, net                 |       | 6,573                |       | 782,180                                        |       |             |       | 788,753                                                               |        | 211,594                             |       |             |       | 1,000,347        |       |
| Total current   assets                                         |       | 15,822,432           |       | 48,160,900                                     |       | (30,371,694      | )          | 33,611,638                                                            |        | 18,582,258                          |       | (26,621,214      | )          | 25,572,682       |       |
| Land held for future development and   construction-in-process |       |                 |       | 12,510,935                                     |       |             |       | 12,510,935                                                            |        | 348,393                             |       |             |       | 12,859,328       |       |
| Property and   equipment, net                                  |       |                 |       | 272,668                                        |       |             |       | 272,668                                                               |        | 513,469                             |       |             |       | 786,137          |       |
| Investment in   shares                                         |       | 17,658,284           |       | 52,192                                         |       | (18,620,511      | )          | (910,035                                                              | )           | (1,037,620                          | )          | 1,984,634        |       | 36,979           |       |
| Other assets, net                                              |       | 218,625              |       | 29,524                                         |       |             |       | 248,149                                                               |        | 269,694                             |       |             |       | 517,843          |       |
| Goodwill                                                       |       | 731,861              |       |                                           |       |             |       | 731,861                                                               |        |                                |       |             |       | 731,861          |       |
| Deferred income   taxes                                        |       | 327,759              |       | 272,858                                        |       |             |       | 600,617                                                               |        | 266,854                             |       |             |       | 867,471          |       |
| **Total**                                                      | ** ** | **Ps.**              | 34,758,961 | ** **                                     | **Ps.**    | 61,299,077       | ** ** | **Ps.**                                                               | (48,992,205 | )                                   | **Ps.**    | 47,065,833       | ** ** | **Ps.**          | 18,943,048 | ** ** | **Ps.** | (24,636,580 | ) | **Ps.** | 41,372,301 | ** ** |
|                                                           |       |                 |       |                                           |       |             |       |                                                                  |        |                                |       |             |       |             |       |
| Liabilities and   equity                                       |       |                 |       |                                           |       |             |       |                                                                  |        |                                |       |             |       |             |       |
| Current   liabilities:                                         |       |                 |       |                                           |       |             |       |                                                                  |        |                                |       |             |       |             |       |
| Current debt and current portion of long-term   debt           |       | Ps.                  | 889,934    |                                           | Ps.        | 654,995          |       | Ps.                                                                   | —      |                                | Ps.        | 1,544,929        |       | Ps.              | 2,117,428  |   | Ps. | — |   | Ps. | 3,662,357 |   |
| Current portion of long-term capital leases                    |       |                 |       | 144,949                                        |       |             |       | 144,949                                                               |        | 43,988                              |       |             |       | 188,937          |       |
| Trade accounts   payable                                       |       | 22,147               |       | 1,860,813                                      |       |             |       | 1,882,960                                                             |        | 1,192,449                           |       |             |       | 3,075,409        |       |
| Land suppliers                                                 |       |                 |       | 1,109,992                                      |       |             |       | 1,109,992                                                             |        | 62,301                              |       |             |       | 1,172,293        |       |
| Advances from   customers                                      |       |                 |       | 246,559                                        |       |             |       | 246,559                                                               |        | 423,292                             |       |             |       | 669,851          |       |
| Taxes other than income taxes                                  |       | 101,084              |       | 187,818                                        |       |             |       | 288,902                                                               |        | 767,704                             |       |             |       | 1,056,606        |       |
| Due to related   parties                                       |       | 11,178,195           |       | 30,895,105                                     |       | (30,371,694      | )          | 11,701,606                                                            |        | 14,916,448                          |       | (26,618,054      | )          |             |       |
| Income taxes                                                   |       |                 |       | 7,509                                          |       |             |       | 7,509                                                                 |        | 84,077                              |       |             |       | 91,586           |       |
| Employee statutory   profit-sharing                            |       |                 |       | 67,230                                         |       |             |       | 67,230                                                                |        | 190                                 |       |             |       | 67,420           |       |
| Provision for uncertain tax positions                          |       |                 |       | 1,568,495                                      |       |             |       | 1,568,495                                                             |        | 31,147                              |       |             |       | 1,599,642        |       |
| Total current   liabilities                                    |       | 12,191,360           |       | 36,743,465                                     |       | (30,371,694      | )          | 18,563,131                                                            |        | 19,639,024                          |       | (26,618,054      | )          | 11,584,101       |       |
| Long-term debt                                                 |       | 9,067,350            |       | 933,838                                        |       |             |       | 10,001,188                                                            |        | 1,356,721                           |       |             |       | 11,357,909       |       |
| Long-term capital   leases                                     |       |                 |       | 74,896                                         |       |             |       | 74,896                                                                |        | 80,037                              |       |             |       | 154,933          |       |
| Financial   derivative instruments                             |       | 12,226               |       |                                           |       |             |       | 12,226                                                                |        |                                |       |             |       | 12,226           |       |
| Long-term land   suppliers                                     |       |                 |       |                                           |       |             |       |                                                                  |        |                                |       |             |       |             |       |
| Employee benefits   obligations                                |       |                 |       | 56,065                                         |       | 478              |       | 56,543                                                                |        | 17,572                              |       |             |       | 74,115           |       |
| Deferred income   taxes                                        |       |                 |       | 4,403,521                                      |       |             |       | 4,403,521                                                             |        | 98,018                              |       |             |       | 4,501,539        |       |
| Total liabilities                                              |       | 21,270,936           |       | 42,211,785                                     |       | (30,371,216      | )          | 33,111,505                                                            |        | 21,191,372                          |       | (26,618,054      | )          | 27,684,823       |       |
| Equity:                                                        |       |                 |       |                                           |       |             |       |                                                                  |        |                                |       |             |       |             |       |
| Common stock                                                   |       | 528,011              |       | 5,325,597                                      |       | (5,325,597       | )          | 528,011                                                               |        | 3,739,458                           |       | (3,739,458       | )          | 528,011          |       |
| Additional paid-in   capital                                   |       | 3,290,861            |       |                                           |       |             |       | 3,290,861                                                             |        |                                |       |             |       | 3,290,861        |       |
| Treasure stock, at cost                                        |       | (102,053             | )          |                                           |       |             |       | (102,053                                                              | )           |                                |       |             |       | (102,053         | )          |
| Retained earnings                                              |       | 9,962,265            |       | 13,761,695                                     |       | (13,295,392      | )          | 10,428,568                                                            |        | (5,987,782                          | )          | 5,521,479        |       | 9,962,265        |       |
| Financial derivative instruments, net of deferred   taxes      |       | 15,701               |       |                                           |       |             |       | 15,701                                                                |        |                                |       |             |       | 15,701           |       |
| Other equity   accounts                                        |       | (206,760             | )          |                                           |       |             |       | (206,760                                                              | )           |                                |       |             |       | (206,760         | )          |
| Equity of   controlling interest                               |       | 13,488,025           |       | 19,087,292                                     |       | (18,620,989      | )          | 13,954,328                                                            |        | (2,248,324                          | )          | 1,782,021        |       | 13,488,025       |       |
| Non-controlling interest in consolidated   subsidiaries        |       |                 |       |                                           |       |             |       |                                                                  |        |                                |       | 199,453          |       | 199,453          |       |
| Total equity                                                   |       | 13,488,025           |       | 19,087,292                                     |       | (18,620,989      | )          | 13,954,328                                                            |        | (2,248,324                          | )          | 1,981,474        |       | 13,687,478       |       |
| Total liabilities   and equity                                 | ** ** | **Ps.**              | 34,758,961 | ** **                                     | **Ps.**    | 61,299,077       | ** ** | **Ps.**                                                               | (48,992,205 | )                                   | **Ps.**    | 47,065,833       | ** ** | **Ps.**          | 18,943,048 | ** ** | **Ps.** | (24,636,581 | ) | **Ps.** | 41,372,301 | ** ** |

 

F-80

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Table of Contents

 

**Desarrolladora Homex, S.A. B de C.V. and Subsidiaries**

**Supplemental Condensed Combining Financial Information**

**Balance Sheet as of December 31, 2010**

**(In thousands of Mexican pesos (Ps.))**

 
| ** **                                                     | ** ** | **Parent   company** | ** ** | **Wholly-   owned   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent   company and   wholly-   owned   guarantor   subsidiaries** | ** **     | **Non-   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------|------------|----------------------|------------|------------------------------------------------|------------|------------------|------------|-----------------------------------------------------------------------|----------------|-------------------------------------|------------|------------------|------------|------------------|------------|
| Assets                                                         |       |                 |       |                                           |       |             |       |                                                                  |           |                                |       |             |       |             |       |
| Currents assets:                                               |       |                 |       |                                           |       |             |       |                                                                  |           |                                |       |             |       |             |       |
| Cash and cash   equivalents                                    |       | Ps.                  | 3,070      |                                           | Ps.        | 3,236,515        |       | Ps.                                                                   |  

— |                                | Ps.        | 3,239,585        |       | Ps.              | 68,107     |   | Ps. |   |   | Ps. | 3,307,692 |   |
| Restricted cash                                                |       | —               |       |                                           |       |             |       |                                                                  |           | 127,530                             |       |             |       | 127,530          |       |
| Trade accounts   receivable, net                               |       |                 |       | 1,891,681                                      |       |             |       | 1,891,681                                                             |           | 83,522                              |       |             |       | 1,975,203        |       |
| Due from affiliates                                            |       | 13,386,690           |       | 24,084,841                                     |       | (27,500,024      | )          | 9,971,507                                                             |           | 11,250,946                          |       | (21,222,453      | )          |             |       |
| Inventories                                                    |       | 18,417               |       | 15,957,698                                     |       |             |       | 15,976,115                                                            |           | 1,181,812                           |       | (36,070          | )          | 17,121,857       |       |
| Prepaid expenses and other current assets, net                 |       | 15,840               |       | 312,298                                        |       |             |       | 328,138                                                               |           | 414,053                             |       |             |       | 742,191          |       |
| Total current   assets                                         |       | 13,424,017           |       | 45,483,033                                     |       | (27,500,024      | )          | 31,407,026                                                            |           | 13,125,970                          |       | (21,258,523      | )          | 23,274,473       |       |
| Land held for future development and   construction-in-process |       |                 |       | 10,142,310                                     |       |             |       | 10,142,310                                                            |           | 449,189                             |       |             |       | 10,591,499       |       |
| Property and   equipment, net                                  |       |                 |       | 532,863                                        |       |             |       | 532,863                                                               |           | 469,709                             |       |             |       | 1,002,572        |       |
| Investment in shares                                           |       | 15,329,604           |       | 223,404                                        |       | (15,474,127      | )          | 78,881                                                                |           | (895,470                            | )          | 816,589          |       |             |       |
| Other assets, net                                              |       | 160,057              |       | 29,295                                         |       |             |       | 189,352                                                               |           | 72,459                              |       |             |       | 261,811          |       |
| Goodwill                                                       |       | 731,861              |       |                                           |       |             |       | 731,861                                                               |           |                                |       |             |       | 731,861          |       |
| Deferred income   taxes                                        |       | 119,416              |       | 553,298                                        |       |             |       | 672,714                                                               |           | 106,554                             |       |             |       | 779,268          |       |
| **Total**                                                      | ** ** | **Ps.**              | 29,764,955 | ** **                                     | **Ps.**    | 56,964,203       | ** ** | **Ps.**                                                               | (42,974,151    | )                                   | **Ps.**    | 43,755,007       | ** ** | **Ps.**          | 13,328,411 | ** ** | **Ps.** | (20,441,934 | ) | **Ps.** | 36,641,484 | ** ** |
|                                                           |       |                 |       |                                           |       |             |       |                                                                  |           |                                |       |             |       |             |       |
| Liabilities and   equity                                       |       |                 |       |                                           |       |             |       |                                                                  |           |                                |       |             |       |             |       |
| Current   liabilities:                                         |       |                 |       |                                           |       |             |       |                                                                  |           |                                |       |             |       |             |       |
| Current debt and current portion of long-term   debt           |       | Ps.                  | 180,740    |                                           | Ps.        | 824,967          |       | Ps.                                                                   | —         |                                | Ps.        | 1,005,707        |       | Ps.              | 722,806    |   | Ps. | — |   | Ps. | 1,728,513 |   |
| Current portion of capital leases                              |       |                 |       | 143,765                                        |       |             |       | 143,765                                                               |           | 25,839                              |       |             |       | 169,604          |       |
| Trade accounts   payable                                       |       | 16,838               |       | 2,938,721                                      |       |             |       | 2,955,559                                                             |           | 455,020                             |       |             |       | 3,410,579        |       |
| Land suppliers                                                 |       |                 |       | 636,322                                        |       |             |       | 636,322                                                               |           | 141,819                             |       |             |       | 778,141          |       |
| Advances from   customers                                      |       |                 |       | 327,049                                        |       |             |       | 327,049                                                               |           | 297,595                             |       |             |       | 624,644          |       |
| Taxes other than income taxes                                  |       | 159,145              |       | 173,195                                        |       |             |       | 332,340                                                               |           | 421,924                             |       |             |       | 754,264          |       |
| Due to related   parties                                       |       | 8,492,240            |       | 29,138,914                                     |       | (27,500,024      | )          | 10,131,130                                                            |           | 11,087,280                          |       | (21,218,410      | )          |             |       |
| Income taxes                                                   |       | 8,396                |       | 31,946                                         |       |             |       | 40,342                                                                |           | (2,811                              | )          |             |       | 37,531           |       |
| Employee statutory   profit-sharing                            |       |                 |       | 1,350                                          |       |             |       | 1,350                                                                 |           | 190                                 |       |             |       | 1,540            |       |
| Provision for uncertain tax positions                          |       |                 |       | 756,235                                        |       |             |       | 756,235                                                               |           | 19,711                              |       |             |       | 775,946          |       |
| Total current   liabilities                                    |       | 8,857,359            |       | 34,972,464                                     |       | (27,500,024      | )          | 16,329,799                                                            |           | 13,169,373                          |       | (21,218,410      | )          | 8,280,762        |       |
| Long-term debt                                                 |       | 8,268,850            |       | 1,962.613                                      |       |             |       | 10,231,463                                                            |           | 556,138                             |       |             |       | 10,787,601       |       |
| Long-term capital   leases                                     |       |                 |       | 199,875                                        |       |             |       | 199,875                                                               |           | 35,555                              |       |             |       | 235,430          |       |
| Financial   derivative instruments                             |       | 508,160              |       |                                           |       |             |       | 508,160                                                               |           |                                |       |             |       | 508,160          |       |
| Long-term land   suppliers                                     |       |                 |       | 41,441                                         |       |             |       | 41,441                                                                |           |                                |       |             |       | 41,441           |       |
| Employee benefits   obligations                                |       |                 |       | 77,643                                         |       | 880              |       | 78,523                                                                |           | 11,955                              |       |             |       | 90,478           |       |
| Deferred income   taxes                                        |       |                 |       | 4,259,557                                      |       |             |       | 4,259,557                                                             |           | 117,544                             |       |             |       | 4,377,101        |       |
| Total liabilities                                              |       | 17,634,369           |       | 41,513,593                                     |       | (27,499,144      | )          | 31,648,818                                                            |           | 13,890,565                          |       | (21,218,410      | )          | 24,320,973       |       |
| Equity:                                                        |       |                 |       |                                           |       |             |       |                                                                  |           |                                |       |             |       |             |       |
| Common stock                                                   |       | 528,011              |       | 5,325,597                                      |       | (5,325,597       | )          | 528,011                                                               |           | 2,375,125                           |       | (2,375,125       | )          | 528,011          |       |
| Additional paid-in   capital                                   |       | 3,290,861            |       |                                           |       |             |       | 3,290,861                                                             |           | (16,145                             | )          | 16,145           |       | 3,290,861        |       |
| Treasury stock, at cost                                        |       | (98,412              | )          |                                           |       |             |       | (98,412                                                               | )              |                                |       |             |       | (98,412          | )          |
| Retained earnings                                              |       | 8,657,851            |       | 10,125,013                                     |       | (10,149,410      | )          | 8,633,454                                                             |           | (2,921,134                          | )          | 2,945,531        |       | 8,657,851        |       |
| Financial derivative instruments, net of deferred   taxes      |       | (330,709             | )          |                                           |       |             |       | (330,709                                                              | )              |                                |       |             |       | (330,709         | )          |
| Other equity   accounts                                        |       | 82,984               |       |                                           |       |             |       | 82,984                                                                |           |                                |       |             |       | 82,984           |       |
| Equity of   controlling interest                               |       | 12,130,586           |       | 15,450,610                                     |       | (15,475,007      | )          | 12,106,189                                                            |           | (562,154                            | )          | 586,551          |       | 12,130,586       |       |
| Non-controlling interest in consolidated   subsidiaries        |       |                 |       |                                           |       |             |       |                                                                  |           |                                |       | 189,925          |       | 189,925          |       |
| Total equity                                                   |       | 12,130,586           |       | 15,450,610                                     |       | (15,475,007      | )          | 12,106,189                                                            |           | (562,154                            | )          | 776,476          |       | 12,320,511       |       |
| Total liabilities   and equity                                 | ** ** | **Ps.**              | 29,764,955 | ** **                                     | **Ps.**    | 56,964,203       | ** ** | **Ps.**                                                               | (42,974,151    | )                                   | **Ps.**    | 43,755,007       | ** ** | **Ps.**          | 13,328,411 | ** ** | **Ps.** | (20,441,934 | ) | **Ps.** | 36,641,484 | ** ** |

 

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Table of Contents

 

**Desarrolladora Homex, S.A.B de C.V. and Subsidiaries**

**Supplemental Condensed Combining Financial Information**

**Statement of Income for the Year Ended December 31, 2011**

**(In thousands of Mexican pesos (Ps.))**

 
| ** **                                                   | ** ** | **Parent   company** | ** **      | **Wholly-   owned   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent   company and   wholly-   owned   guarantor   subsidiaries** | ** **        | **Non-   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** **      |
|--------------------------------------------------------------|------------|----------------------|-----------------|------------------------------------------------|------------|------------------|------------|----------------------------------------------------------------------------|-------------------|-------------------------------------|------------|------------------|------------|------------------|-----------------|
| Revenues                                                     |       | Ps.                  |            |                                           | Ps.        |  35,129,242 |       | Ps.                                                                        |  (14,460,600 | )                                   | Ps.        |  20,668,642 |       | Ps.              |  3,375,656 |   | Ps. |  (2,191,019 | ) | Ps. |  21,853,279 |   |
| Cost of sales                                                |       |                 |            | 26,905,236                                     |       | (12,829,529      | )          | 14,075,707                                                                 |              | 2,425,812                           |       | (335,767         | )          | 16,165,752       |            |
| Gross profit                                                 |       |                 |            | 8,224,006                                      |       | (1,631,071       | )          | 6,592,935                                                                  |              | 949,844                             |       | (1,855,252       | )          | 5,687,527        |            |
| Operating expenses                                           |       | 76,817               |            | 3,429,536                                      |       | (1,209,818       | )          | 2,296,535                                                                  |              | 1,316,106                           |       | (844,667         | )          | 2,767,974        |            |
| Income (loss) from   operations                              |       | (76,817              | )               | 4,794,470                                      |       | (421,253         | )          | 4,296,400                                                                  |              | (366,263                            | )          | (1,010,585       | )          | 2,919,553        |            |
| Other (expenses)   income, net                               |       | (45,225              | )               | (278,271                                       | )          |             |       | (323,496                                                                   | )                 | (21,371                             | )          |             |       | (344,867         | )               |
| Net comprehensive   financing cost:                          |       |                 |            |                                           |       |             |       |                                                                       |              |                                |       |             |       |             |            |
| Interest expense                                             |       | 718,849              |            | 1,360,089                                      |       | (1,974,215       | )          | 104,723                                                                    |              | 925,799                             |       | (639,904         | )          | 390,618          |            |
| Interest income                                              |       | (964,787             | )               | (1,089,833                                     | )          | 1,974,215        |       | (80,405                                                                    | )                 | (753,508                            | )          | 639,904          |       | (194,009         | )               |
| Exchange loss(gain)                                          |       | 251,892              |            | 213,169                                        |       |             |       | 465,061                                                                    |              | (199,250                            | )          |             |       | 265,811          |            |
| Valuation effects of financial derivative   instruments, net |       | (63,973              | )               |                                           |       |             |       | (63,973                                                                    | )                 | (3,643                              | )          |             |       | (67,616          | )               |
|                                                         |       | (58,019              | )               | 483,425                                        |       |             |       | 425,406                                                                    |              | (30,602                             | )          |             |       | 394,804          |            |
| Income (loss) before income taxes                            |       | (64,023              | )               | 4,032,774                                      |       | (421,253         | )          | 3,547,498                                                                  |              | (357,032                            | )          | (1,010,585       | )          | 2,179,882        |            |
| Income taxes   (benefit) expense                             |       | (295,954             | )               | 1,211,284                                      |       |             |       | 915,330                                                                    |              | (49,390                             | )          |             |       | 865,940          |            |
|                                                         |       |                 |            |                                           |       |             |       |                                                                       |              |                                |       |             |       |             |            |
| Equity in income of associated companies                     |       | 1,072,483            |            | 287                                            |       | (1,072,770       | )          |                                                                       |              |                                |       |             |       |             |            |
| Consolidated net   income                                    |       | Ps.                  |  1,304,414 |                                           | Ps.        | 2,821,777        |       | Ps.                                                                        | (1,494,023        | )                                   | Ps.        | 2,632,168        |       | Ps.              | (307,643        | ) | Ps. |  (1,010,585 | ) | Ps. |  1,313,942 |   |
| Net income (loss) of controlling interest                    |       | 1,304,414            |            | 2,821,777                                      |       | (1,494,023       | )          | 2,632,168                                                                  |              | (307,643                            | )          | (1,020,113       | )          | 1,304,414        |            |
| Net (loss) income of non-controlling interest                |       |                 |            |                                           |       |             |       |                                                                       |              |                                |       | 9,528            |       | 9,528            |            |
| Consolidated net   income                                    | ** ** | **Ps.**              |  1,304,414 | ** **                                     | **Ps.**    | 2,821,777        | ** ** | **Ps.**                                                                    | (1,494,023        | )                                   | **Ps.**    | 2,632,168        | ** ** | **Ps.**          | (307,643        | ) | **Ps.** |  (1,010,585 | **)** | **Ps.** |  1,313,942 | ** ** |

 

F-82

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Table of Contents

 

**Desarrolladora Homex, S.A.B de C.V. and Subsidiaries**

**Supplemental Condensed Combining Financial Information**

**Statement of Income for the Year Ended December 31, 2010**

**(In thousands of Mexican pesos (Ps.))**

 
| ** **                                                   | ** ** | **Parent   company** | ** **      | **Wholly-   owned   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent   company and   wholly-   owned   guarantor   subsidiaries** | ** **        | **Non-   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** **      |
|--------------------------------------------------------------|------------|----------------------|-----------------|------------------------------------------------|------------|------------------|------------|----------------------------------------------------------------------------|-------------------|-------------------------------------|------------|------------------|------------|------------------|-----------------|
| Revenues                                                     |       | Ps.                  |            |                                           | Ps.        |  32,891,424 |       | Ps.                                                                        |  (13,640,630 | )                                   | Ps.        |  19,250,794 |       | Ps.              |  2,831,898 |   | Ps. |  (2,430,383 | ) | Ps. |  19,652,309 |   |
| Cost of sales                                                |       |                 |            | 26,555,668                                     |       | (13,280,553      | )          | 13,275,115                                                                 |              | 914,559                             |       | (462,190         | )          | 13,727,484       |            |
| Gross profit                                                 |       |                 |            | 6,335,756                                      |       | (360,077         | )          | 5,975,679                                                                  |              | 1,917,339                           |       | (1,968,193       | )          | 5,924,825        |            |
| Operating expenses                                           |       | 108,602              |            | 2,956,833                                      |       | (359,197         | )          | 2,706,238                                                                  |              | 2,206,249                           |       | (1,932,108       | )          | 2,980,379        |            |
| Income from   operations                                     |       | (108,602             | )               | 3,378,923                                      |       | (880             | )          | 3,269,441                                                                  |              | (288,910                            | )          | (36,085          | )          | 2,944,446        |            |
| Other (expenses)   income, net                               |       | (7,325               | )               | (64,337                                        | )          |             |       | (71,662                                                                    | )                 | (71,103                             | )          |             |       | (142,765         | )               |
| Net comprehensive   financing cost:                          |       |                 |            |                                           |       |             |       |                                                                       |              |                                |       |             |       |             |            |
| Interest expense                                             |       | 1,309,617            |            | 246,410                                        |       | (1,080,005       | )          | 476,022                                                                    |              | 475,771                             |       | (611,678         | )          | 340,115          |            |
| Interest income                                              |       | (825,320             | )               | (647,953                                       | )          | 1,080,005        |       | (393,268                                                                   | )                 | (381,297                            | )          | 611,678          |       | (162,887         | )               |
| Exchange (gain)   loss                                       |       | (309,250             | )               | 334,598                                        |       |             |       | 25,348                                                                     |              | 72,512                              |       |             |       | 97,860           |            |
| Valuation effects of financial derivative   instruments, net |       | 39,654               |            |                                           |       |             |       | 39,654                                                                     |              |                                |       |             |       | 39,654           |            |
|                                                         |       | 214,701              |            | (66,945                                        | )          |             |       | 147,756                                                                    |              | 166,986                             |       |             |       | 314,742          |            |
| Income before   income taxes                                 |       | (330,628             | )               | 3,381,531                                      |       | (880             | )          | 3,050,023                                                                  |              | (526,999                            | )          | (36,085          | )          | 2,486,939        |            |
| Income taxes   (benefit) expense                             |       | (75,426              | )               | 928,212                                        |       |             |       | 852,786                                                                    |              | 53,744                              |       | 467              |       | 906,997          |            |
|                                                         |       |                 |            |                                           |       |             |       |                                                                       |              |                                |       |             |       |             |            |
| Equity in income of associated companies                     |       | 1,766,965            |            | 1,983                                          |       | (1,768,948       | )          |                                                                       |              |                                |       |             |       |             |            |
| Consolidated net   income                                    |       | Ps.                  |  1,511,763 |                                           | Ps.        |  2,455,302  |       | Ps.                                                                        |  (1,769,828  | )                                   | Ps.        |  2,197,237  |       | Ps.              |  (580,743  | ) | Ps. |  (36,552 | ) | Ps. |  1,579,942 |   |
| Net income (loss) of controlling interest                    |       | 1,511,763            |            | 2,455,302                                      |       | (1,769,828       | )          | 2,197,237                                                                  |              | (580,743                            | )          | (104,731         | )          | 1,511,763        |            |
| Net (loss) income of non-controlling interest                |       |                 |            |                                           |       |             |       |                                                                       |              |                                |       | 68,179           |       | 68,179           |            |
| Consolidated net   income                                    | ** ** | **Ps.**              |  1,511,763 | ** **                                     | **Ps.**    |  2,455,302  | ** ** | **Ps.**                                                                    |  (1,769,828  | )                                   | **Ps.**    |  2,197,237  | ** ** | **Ps.**          |  (580,743  | ) | **Ps.** |  (36,552 | **)** | **Ps.** |  1,579,942 | ** ** |

 

F-83

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Table of Contents

** **

**Desarrolladora Homex, S.A.B de C.V. and Subsidiaries**

**Supplemental Condensed Combining Financial Information**

**Statement of Income for the Year Ended December 31, 2009**

**(In thousands of Mexican pesos (Ps.))**

 
| ** **                                                   | ** ** | **Parent   company** | ** **      | **Wholly-   owned   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent   company and   wholly-   owned   guarantor   subsidiaries** | ** **        | **Non-   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** **      |
|--------------------------------------------------------------|------------|----------------------|-----------------|------------------------------------------------|------------|------------------|------------|----------------------------------------------------------------------------|-------------------|-------------------------------------|------------|------------------|------------|------------------|-----------------|
| Revenues                                                     |       | Ps.                  |  185,533   |                                           | Ps.        |  27,225,467 |       | Ps.                                                                        |  (10,534,341 | )                                   | Ps.        |  16,876,659 |       | Ps.              |  2,422,910 |   | Ps. |  (1,823,080 | ) | Ps. |  17,476,489 |   |
| Cost of sales                                                |       |                 |            | 21,365,150                                     |       | (9,601,808       | )          | 11,763,342                                                                 |              | 522,614                             |       | (120             | )          | 12,285,836       |            |
| Gross profit                                                 |       | 185,533              |            | 5,860,317                                      |       | (932,533         | )          | 5,113,317                                                                  |              | 1,900,296                           |       | (1,822,960       | )          | 5,190,653        |            |
| Operating expenses                                           |       | 162,876              |            | 2,280,626                                      |       | (182,555         | )          | 2,260,947                                                                  |              | 2,033,683                           |       | (1,822,950       | )          | 2,471,680        |            |
| Income from   operations                                     |       | 22,657               |            | 3,579,691                                      |       | (749,978         | )          | 2,852,370                                                                  |              | (133,387                            | )          | (10              | )          | 2,718,973        |            |
| Other income   (expenses), net                               |       | 2,439                |            | 16,501                                         |       | (98              | )          | 18,842                                                                     |              | (13,522                             | )          |             |       | 5,320            |            |
| Net comprehensive   financing cost:                          |       |                 |            |                                           |       |             |       |                                                                       |              |                                |       |             |       |             |            |
| Interest expense                                             |       | 756,754              |            | 611,905                                        |       | (1,004,678       | )          | 363,981                                                                    |              | 324,813                             |       | (363,084         | )          | 325,710          |            |
| Interest income                                              |       | (570,557             | )               | (660,381                                       | )          | 1,004,678        |       | (226,260                                                                   | )                 | (320,964                            | )          | 363,084          |       | (184,140         | )               |
| Exchange (gain)   loss                                       |       | (429,273             | )               | 312,865                                        |       |             |       | (116,408                                                                   | )                 | 56,898                              |       |             |       | (59,510          | )               |
| Valuation effects of financial derivative   instruments, net |       | 66,451               |            |                                           |       |             |       | 66,451                                                                     |              |                                |       |             |       | 66,451           |            |
|                                                         |       | (176,625             | )               | 264,389                                        |       |             |       | 87,764                                                                     |              | 60,747                              |       |             |       | 148,511          |            |
| Income before   income taxes                                 |       | 201,721              |            | 3,331,803                                      |       | (750,076         | )          | 2,783,448                                                                  |              | (207,656                            | )          | (10              | )          | 2,575,782        |            |
| Income taxes   expense (benefit)                             |       | 61,497               |            | 939,866                                        |       |             |       | 1,001,363                                                                  |              | 20,908                              |       | (27,882          | )          | 994,389          |            |
|                                                         |       |                 |            |                                           |       |             |       |                                                                       |              |                                |       |             |       |             |            |
| Equity in income of associated companies                     |       | 1,425,645            |            | (46,507                                        | )          | (1,379,138       | )          |                                                                       |              |                                |       |             |       |             |            |
| Consolidated net   income                                    |       | Ps.                  |  1,565,869 |                                           | Ps.        |  2,345,430  |       | Ps.                                                                        |  (2,129,214  | )                                   | Ps.        |  1,782,085  |       | Ps.              |  (228,564  | ) | Ps. |  27,872 |   | Ps. |  1,581,393 |   |
| Net income (loss) of controlling interest                    |       | 1,565,869            |            | 2,345,430                                      |       | (2,129,214       | )          | 1,782,085                                                                  |              | (228,564                            | )          | 12,348           |       | 1,565,869        |            |
| Net (loss) income of non-controlling interest                |       |                 |            |                                           |       |             |       |                                                                       |              |                                |       | 15,524           |       | 15,524           |            |
| Consolidated net   income                                    | ** ** | **Ps.**              |  1,565,869 | ** **                                     | **Ps.**    |  2,345,430  | ** ** | **Ps.**                                                                    |  (2,129,214  | )                                   | **Ps.**    |  1,782,085  | ** ** | **Ps.**          |  (228,564  | ) | **Ps.** |  27,872 | ** ** | **Ps.** |  1,581,393 | ** ** |

 

F-84

----

Table of Contents

 

**Desarrolladora Homex, S.A.B de C.V. and Subsidiaries**

**Supplemental Condensed Statement of Cash Flows**

**Statement of Cash Flows for the Year Ended December 31, 2011**

**(In thousands of Mexican pesos (Ps.))**

 
| ** **                                                                 | ** ** | **Parent   company** | ** ** | **Wholly-   owned   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent   company and   wholly-   owned   guarantor   subsidiaries** | ** ** | **Non-   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------|------------|------------------------------------------------|------------|------------------|------------|----------------------------------------------------------------------------|------------|-------------------------------------|------------|------------------|------------|------------------|------------|
| Cash flows generated by (used in) operating   activities                   |       |                 |       |                                           |       |             |       |                                                                       |       |                                |       |             |       |             |       |
| Income before   income tax                                                 |       | Ps.                  | (64,023    | )                                              | Ps.        | 4,032,774        |       | Ps.                                                                        | (421,253   | )                                   | Ps.        | 3,547,498        |       | Ps.              | (357,032   | ) | Ps. | (1,010,585 | ) | Ps. | 2,179,882 |   |
| Items related to investing activities:                                     |       |                 |       |                                           |       |             |       |                                                                       |       |                                |       |             |       |             |       |
| Depreciation and   amortization                                            |       | 22,919               |       | 317,232                                        |       |             |       | 340,151                                                                    |       | 92,086                              |       |             |       | 432,237          |       |
| Loss (gain) on sale of property and equipment                              |       |                 |       | 2,502                                          |       |             |       | 2,502                                                                      |       | (332                                | )          |             |       | 2,170            |       |
| Equity earnings in   associate                                             |       | (18,979              | )          |                                           |       |             |       | (18,979                                                                    | )          |                                |       |             |       | (18,979          | )          |
| Interest income                                                            |       | (964,787             | )          | (1,089,833                                     | )          | 1,974,215        |       | (80,405                                                                    | )          | (753,508                            | )          | 639,904          |       | (194,009         | )          |
| Items related to financing activities:                                     |       |                 |       |                                           |       |             |       |                                                                       |       |                                |       |             |       |             |       |
| Interest expense                                                           |       | 1,520,036            |       | 1,529,408                                      |       | (1,974,215       | )          | 1,075,229                                                                  |       | 1,300,314                           |       | (639,904         | )          | 1,735,639        |       |
| Valuation effects of financial derivative   instruments                    |       | (63,973              | )          |                                           |       |             |       | (63,973                                                                    | )          | (3,643                              | )          |             |       | (67,616          | )          |
| Exchange loss                                                              |       | 399,250              |       |                                           |       |             |       | 399,250                                                                    |       | 379,858                             |       |             |       | 779,108          |       |
|                                                                       |       | 830,444              |       | 4,792,083                                      |       | (421,253         | )          | 5,201,274                                                                  |       | 657,743                             |       | (1,010,585       | )          | 4,848,432        |       |
| Decrease in trade accounts receivable                                      |       |                 |       | 308,964                                        |       |             |       | 308,964                                                                    |       | (326,784                            | )          |             |       | (17,820          | )          |
| Decrease (increase) in inventories and land held   for future developments |       | 18,417               |       | (2,730,291                                     | )          |             |       | (2,711,874                                                                 | )          | (810,614                            | )          | (36,070          | )          | (3,558,558       | )          |
| (Increase) in prepaid expenses and other assets                            |       | (49,230              | )          | (456,299                                       | )          |             |       | (505,529                                                                   | )          | 5,224                               |       |             |       | (500,304         | )          |
| Interest income   collected                                                |       | 345                  |       | 80,060                                         |       |             |       | 80,405                                                                     |       | 113,604                             |       |             |       | 194,009          |       |
| Increase (Decrease) in trade accounts payable                              |       | 5,309                |       | (1,077,906                                     | )          |             |       | (1,072,597                                                                 | )          | 737,427                             |       |             |       | (335,170         | )          |
| Increase (decrease) from/to affiliates                                     |       |                 |       | 112,660                                        |       |             |       | 112,660                                                                    |       | (556,820                            | )          | 444,160          |       |             |       |
| Increase in accounts payable to land suppliers                             |       |                 |       | 432,229                                        |       |             |       | 432,229                                                                    |       | (79,518                             | )          |             |       | 352,711          |       |
| (Decrease) increase in other liabilities                                   |       | (66,456              | )          | 787,836                                        |       |             |       | 721,380                                                                    |       | (112,392                            | )          |             |       | 608,988          |       |
| (Decrease) in employee benefits obligations                                |       |                 |       | (21,578                                        | )          | (402             | )          | (21,980                                                                    | )          | 5,617                               |       |             |       | (16,363          | )          |
| Termination payments for financial derivative   contracts                  |       | (24,863              | )          |                                           |       |             |       | (24,863                                                                    | )          |                                |       |             |       | (24,863          | )          |
| Income tax paid                                                            |       |                 |       | (116,584                                       | )          |             |       | (116,584                                                                   | )          | (69,637                             | )          |             |       | (186,221         | )          |
| Net cash flows from operating activities                                   |       | 713,966              |       | 2,111,174                                      |       | (421,655         | )          | 2,403,485                                                                  |       | (436,150                            | )          | (602,495         | )          | 1,364,841        |       |
|                                                                       |       |                 |       |                                           |       |             |       |                                                                       |       |                                |       |             |       |             |       |
| Cash flows generated by (used in) investing   activities                   |       |                 |       |                                           |       |             |       |                                                                       |       |                                |       |             |       |             |       |
| Increase in the investment in associate                                    |       | (18,000              | )          |                                           |       |             |       | (18,000                                                                    | )          |                                |       |             |       | (18,000          | )          |
| Increase in notes receivable from related parties                          |       | (174,073             | )          |                                           |       |             |       | (174,073                                                                   | )          |                                |       |             |       | (174,073         | )          |
| Acquisition of property and equipment                                      |       |                 |       | (9,957                                         | )          |             |       | (9,957                                                                     | )          | (28,590                             | )          |             |       | (38,547          | )          |
| Proceeds from sale of property and equipment                               |       |                 |       | 8,320                                          |       |             |       | 8,320                                                                      |       | 1,116                               |       |             |       | 9,436            |       |
| Net cash flows from investing activities                                   |       | (192,073             | )          | (1,637                                         | )          |             |       | (193,710                                                                   | )          | (27,474                             | )          |             |       | (221,184         | )          |
|                                                                       |       |                 |       |                                           |       |             |       |                                                                       |       |                                |       |             |       |             |       |
| Cash flows generated by (used in) financing   activities                   |       |                 |       |                                           |       |             |       |                                                                       |       |                                |       |             |       |             |       |
| Proceeds from new   borrowings                                             |       | 30,999,340           |       | 7,098,657                                      |       |             |       | 38,097,997                                                                 |       | 5,634,644                           |       |             |       | 43,732,641       |       |
| Payments of notes   payable                                                |       | (30,299,765          | )          | (8,420,552                                     | )          |             |       | (38,720,317                                                                | )          | (3,858,207                          | )          |             |       | (42,578,524      | )          |
| Net proceeds from   affiliates                                             |       | (1,361,123           | )          | (993,914                                       | )          | 1,095,892        |       | (1,259,145                                                                 | )          | (1,375,596                          | )          | 2,634,741        |       | —           |       |
| Interest income                                                            |       | 964,442              |       | 1,009,773                                      |       | (674,237         | )          | 1,299,978                                                                  |       | 732,269                             |       | (2,032,247       | )          | —           |       |
| Interest paid                                                              |       | (810,987             | )          | (291,676                                       | )          |             |       | (1,102,663                                                                 | )          | (631,754                            | )          |             |       | (1,734,417       | )          |
| Shares repurchased                                                         |       | (6,437               | )          |                                           |       |             |       | (6,437                                                                     | )          |                                |       |             |       | (6,437           | )          |
| Share-based   payments exercised                                           |       | 2,796                |       |                                           |       |             |       | 2,796                                                                      |       |                                |       |             |       | 2,796            |       |
| Net cash flows from financing activities                                   |       | (511,734             | )          | (1,597,712                                     | )          | 421,655          |       | (1,687,791                                                                 | )          | 501,356                             |       | 602,495          |       | (583,941         | )          |
| Net decrease of cash and cash equivalents                                  |       | 10,159               |       | 511,825                                        |       |             |       | 521,984                                                                    |       | 37,732                              |       |             |       | 559,716          |       |
| Adjustment to cash flows due to exchange rate   fluctuation                |       |                 |       |                                           |       |             |       |                                                                       |       | (2,285                              | )          |             |       | (2,285           | )          |
| Cash, cash equivalents and restricted cash at the   beginning of the year  |       | 3,070                |       | 3,236,515                                      |       |             |       | 3,239,585                                                                  |       | 195,637                             |       |             |       | 3,435,222        |       |
| Cash, cash equivalents and restricted cash at the   end of the year        | ** ** | **Ps.**              | 13,229     | ** **                                     | **Ps.**    | 3,748,340        | ** ** | **Ps.**                                                                    | ** ** | ** **                          | **Ps.**    | 3,761,569        | ** ** | **Ps.**          | 231,084    |   | **Ps.** | ** ** |   | **Ps.** | 3,992,653 |   |

 

F-85

----

Table of Contents

 

**Desarrolladora Homex, S.A.B de C.V. and Subsidiaries**

**Supplemental Condensed Statement of Cash Flows**

**Statement of Cash Flows for the Year Ended December 31, 2010**

**(In thousands of Mexican pesos (Ps.))**

 
| ** **                                                                | ** ** | **Parent   company** | ** ** | **Wholly-   owned   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent   company and   wholly-   owned   guarantor   subsidiaries** | ** ** | **Non-   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** **     |
|---------------------------------------------------------------------------|------------|----------------------|------------|------------------------------------------------|------------|------------------|------------|----------------------------------------------------------------------------|------------|-------------------------------------|------------|------------------|------------|------------------|----------------|
| Cash flows generated by (used in) operating   activities                  |       |                 |       |                                           |       |             |       |                                                                       |       |                                |       |             |       |             |           |
| Income before income tax                                                  |       | Ps.                  | (330,628   | )                                              | Ps.        | 3,381,531        |       | Ps.                                                                        |  (880 | )                                   | Ps.        |  3,050,023  |       | Ps.              |  (526,999 | ) | Ps. |  (36,085 | ) | Ps. |  2,486,939 |   |
| Items related to investing activities:                                    |       |                 |       |                                           |       |             |       |                                                                       |       |                                |       |             |       |             |           |
| Depreciation and amortization                                             |       | 67,456               |       | 341,138                                        |       |             |       | 408,594                                                                    |       | 57,020                              |       |             |       | 465,614          |           |
| Gain on sale of property and equipment                                    |       |                 |       | (3,631                                         | )          |             |       | (3,631                                                                     | )          | (615                                | )          |             |       | (4,246           | )              |
| Interest income                                                           |       | (825,320             | )          | (647,953                                       | )          | 1,080,005        |       | (393,268                                                                   | )          | (381,297                            | )          | 611,678          |       | (162,887         | )              |
| Items related to financing activities:                                    |       |                 |       |                                           |       |             |       |                                                                       |       |                                |       |             |       |             |           |
| Interest expense                                                          |       | 1,291,363            |       | 1,145,564                                      |       | (1,080,005       | )          | 1,356,922                                                                  |       | 545,659                             |       | (611,678         | )          | 1,290,903        |           |
| Valuation effects of financial derivative   instruments                   |       | 39,654               |       |                                           |       |             |       | 39,654                                                                     |       |                                |       |             |       | 39,654           |           |
| Exchange gain                                                             |       | (165,500             | )          |                                           |       |             |       | (165,500                                                                   | )          | (5,330                              | )          |             |       | (170,830         | )              |
|                                                                      |       | 77,025               |       | 4,216,649                                      |       | (880             | )          | 4,292,794                                                                  |       | (311,562                            | )          | (36,085          | )          | 3,945,147        |           |
| Increase in trade accounts receivable                                     |       |                 |       | (1,397,106                                     | )          |             |       | (1,397,106                                                                 | )          | (58,623                             | )          |             |       | (1,455,729       | )              |
| Increase in inventories and land held for future   developments           |       | (18,417              | )          | (3,895,020                                     | )          |             |       | (3,913,437                                                                 | )          | (184,138                            | )          | 36,071           |       | (4,061,504       | )              |
| (Increase) decrease in prepaid expenses and other   assets                |       | (35,943              | )          | 361,347                                        |       |             |       | 325,404                                                                    |       | 221,129                             |       |             |       | 546,533          |           |
| Interest income   collected                                               |       | 434                  |       | 50,164                                         |       |             |       | 50,598                                                                     |       | 112,289                             |       |             |       | 162,887          |           |
| Increase (decrease) in trade accounts payable                             |       | 2,453                |       | 1,034,538                                      |       |             |       | 1,036,991                                                                  |       | 173,507                             |       |             |       | 1,210,498        |           |
| Increase/Decrease from/to affiliates                                      |       |                 |       | 4,491,370                                      |       |             |       | 4,491,370                                                                  |       | (3,698,349                          | )          | (793,021         | )          |             |           |
| Decrease in accounts payable to land suppliers                            |       |                 |       | (670,131                                       | )          |             |       | (670,131                                                                   | )          | 76,828                              |       |             |       | (593,303         | )              |
| Increase in other   liabilities                                           |       | (75,340              | )          | 132,337                                        |       |             |       | 56,997                                                                     |       | (870,371                            | )          |             |       | (813,374         | )              |
| Increase in employee benefits obligations                                 |       |                 |       | 36,007                                         |       | 880              |       | 36,887                                                                     |       | (31,495                             | )          | (13,101          | )          | (7,709           | )              |
| Income tax paid                                                           |       |                 |       |                                           |       |             |       |                                                                       |       | (33,658                             | )          |             |       | (33,658          | )              |
| Net cash flows from operating activities                                  |       | (49,788              | )          | 4,360,155                                      |       |             |       | 4,310,367                                                                  |       | (4,604,443                          | )          | (806,136         | )          | (1,100,212       | )              |
|                                                                      |       |                 |       |                                           |       |             |       |                                                                       |       |                                |       |             |       |             |           |
| Cash flows generated by (used in) investing   activities                  |       |                 |       |                                           |       |             |       |                                                                       |       |                                |       |             |       |             |           |
| Business   acquisition                                                    |       | (290,478             | )          |                                           |       |             |       | (290,478                                                                   | )          |                                |       |             |       | (290,478         | )              |
| Acquisition of property and equipment                                     |       |                 |       | (198,518                                       | )          |             |       | (198,518                                                                   | )          | (81,126                             | )          |             |       | (279,644         | )              |
| Proceeds from sale of property and equipment                              |       |                 |       | 81,192                                         |       |             |       | 81,192                                                                     |       |                                |       |             |       | 81,192           |           |
| Net cash flows from investing activities                                  |       | (290,478             | )          | (117,326                                       | )          |             |       | (407,804                                                                   | )          | (81,126                             | )          |             |       | (488,930         | )              |
|                                                                      |       |                 |       |                                           |       |             |       |                                                                       |       |                                |       |             |       |             |           |
| Cash flows generated by (used in) financing   activities                  |       |                 |       |                                           |       |             |       |                                                                       |       |                                |       |             |       |             |           |
| Proceeds from new   borrowings                                            |       | 13,195,852           |       | 6,526,353                                      |       |             |       | 19,722,205                                                                 |       | 1,247,355                           |       |             |       | 20,969,560       |           |
| Payments of notes   payable                                               |       | (13,096,493          | )          | (4,623,693                                     | )          |             |       | (17,720,186                                                                | )          | (192,602                            | )          |             |       | (17,912,788      | )              |
| Net proceeds from   affiliates                                            |       | (92,802              | )          | (6,162,997                                     | )          | 1,080,005        |       | (5,175,794                                                                 | )          | 3,757,980                           |       | 1,417,814        |       |             |           |
| Interest income                                                           |       | 824,886              |       | 597,789                                        |       | (1,080,005       | )          | 342,670                                                                    |       | 269,008                             |       | (611,678         | )          |             |           |
| Interest paid                                                             |       | (501,724             | )          | (330,172                                       | )          |             |       | (831,896                                                                   | )          | (433,753                            | )          |             |       | (1,265,649       | )              |
| Shares repurchased                                                        |       | 5,516                |       |                                           |       |             |       | 5,516                                                                      |       |                                |       |             |       | 5,516            |           |
| Net cash flows from financing activities                                  |       | 335,235              |       | (3,992,720                                     | )          |             |       | (3,657,485                                                                 | )          | 4,647,988                           |       | 806,136          |       | 1,796,639        |           |
| Net increase (decrease) of cash and cash   equivalents                    |       | (5,031               | )          | 250,109                                        |       |             |       | 245,078                                                                    |       | (37,581                             | )          |             |       | 207,497          |           |
| Adjustment to cash flows due to exchange rate   fluctuation               |       |                 |       |                                           |       |             |       |                                                                       |       | (23,691                             | )          |             |       | (23,691          | )              |
| Cash, cash equivalents and restricted cash at the   beginning of the year |       | 8,101                |       | 2,986,406                                      |       |             |       | 2,994,507                                                                  |       | 256,909                             |       |             |       | 3,251,416        |           |
| Cash, cash equivalents and restricted cash at the   end of the year       |       | **Ps.**              | 3,070      |                                           | **Ps.**    | 3,236,515        |       | **Ps.**                                                                    |       |                                | **Ps.**    | 3,239,585        |       | **Ps.**          | 195,637        |   | **Ps.** |   |   | **Ps.** | 3,435,222 |   |

 

F-86

----

Table of Contents

 

**Desarrolladora Homex, S.A.B de C.V. and Subsidiaries**

**Supplemental Condensed Statement of Cash Flows**

**Statement of Cash Flows for the Year Ended December 31, 2009**

**(In thousands of Mexican pesos (Ps.))**

 
| ** **                                                                | ** ** | **Parent   company** | ** **    | **Wholly-   owned   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent   company and   wholly-   owned   guarantor   subsidiaries** | ** **     | **Non-   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** **     |
|---------------------------------------------------------------------------|------------|----------------------|---------------|------------------------------------------------|------------|------------------|------------|----------------------------------------------------------------------------|----------------|-------------------------------------|------------|------------------|------------|------------------|----------------|
| Cash flows generated by (used in) operating   activities                  |       |                 |          |                                           |       |             |       |                                                                       |           |                                |       |             |       |             |           |
| Income before   income tax                                                |       | Ps.                  |  201,721 |                                           | Ps.        |  3,331,803  |       | Ps.                                                                        |  (750,076 | )                                   | Ps.        |  2,783,448  |       | Ps.              |  (207,656 | ) | Ps. |  (10 | ) | Ps. |  2,575,782 |   |
| Items related to investing activities:                                    |       |                 |          |                                           |       |             |       |                                                                       |           |                                |       |             |       |             |           |
| Depreciation and   amortization                                           |       | 112,007              |          | 300,472                                        |       |             |       | 412,479                                                                    |           | 70,930                              |       |             |       | 483,409          |           |
| Loss on sale of property and equipment                                    |       |                 |          | 3,179                                          |       |             |       | 3,179                                                                      |           | 23,527                              |       |             |       | 26,706           |           |
| Interest income                                                           |       | (570,557             | )             | (660,381                                       | )          | 1,187,472        |       | (43,466                                                                    | )              | (320,964                            | )          | 180,290          |       | (184,140         | )              |
| Gain on sale of other investment                                          |       |                 |          |                                           |       |             |       |                                                                       |           | (11,676                             | )          |             |       | (11,676          | )              |
| Items related to financing activities:                                    |       |                 |          |                                           |       |             |       |                                                                       |           |                                |       |             |       |             |           |
| Interest expense                                                          |       | 752,458              |          | 643,068                                        |       | (627,333         | )          | 768,193                                                                    |           | 304,930                             |       | (186,974         | )          | 886,149          |           |
| Share-based payment   transactions                                        |       | 10,638               |          |                                           |       |             |       | 10,638                                                                     |           |                                |       |             |       | 10,638           |           |
| Valuation effects of financial derivative   instruments                   |       | 66,451               |          |                                           |       |             |       | 66,451                                                                     |           |                                |       |             |       | 66,451           |           |
| Deferred   profit-sharing                                                 |       |                 |          | 24,646                                         |       |             |       | 24,646                                                                     |           | 1,960                               |       |             |       | 26,606           |           |
| Exchange gain                                                             |       | (182,525             | )             |                                           |       |             |       | (182,525                                                                   | )              | (1,821                              | )          |             |       | (184,346         | )              |
|                                                                      |       | 390,193              |          | 3,642,787                                      |       | (189,937         | )          | 3,843,043                                                                  |           | (140,770                            | )          | (6,694           | )          | 3,695,579        |           |
| Increase in trade accounts receivable                                     |       |                 |          | 713,907                                        |       |             |       | 713,907                                                                    |           | 42,105                              |       |             |       | 756,012          |           |
| Increase in inventories and land held for future   developments           |       | (1                   | )             | (1,944,005                                     | )          |             |       | (1,944,006                                                                 | )              | (30,022                             | )          |             |       | (1,974,028       | )              |
| (Increase) decrease in prepaid expenses and other   assets                |       | (181,271             | )             | (275,833                                       | )          |             |       | (457,104                                                                   | )              | 138,269                             |       |             |       | (318,835         | )              |
| Interest income   collected                                               |       | 3,951                |          | 39,514                                         |       |             |       | 43,466                                                                     |           | 140,674                             |       |             |       | 184,140          |           |
| (Decrease) increase in trade accounts payable                             |       | (6,093               | )             | (1,673,088                                     | )          |             |       | (1,679,181                                                                 | )              | 13,430                              |       |             |       | (1,665,751       | )              |
| Increase/decrease from/to affiliates                                      |       | (185,533             | )             | 1,505,554                                      |       | 753,703          |       | 2,073,724                                                                  |           | (2,093,665                          | )          | 19,941           |       |             |           |
| Decrease in accounts payable to land suppliers                            |       |                 |          | (1,317,359                                     | )          |             |       | (1,317,359                                                                 | )              | (1,218                              | )          |             |       | (1,318,577       | )              |
| Increase in other   liabilities                                           |       | 138,548              |          | 774,719                                        |       | (5,726           | )          | 907,541                                                                    |           | 339,008                             |       |             |       | 1,246,549        |           |
| Increase in employee benefits obligations                                 |       |                 |          | (2,551                                         | )          |             |       | (2,551                                                                     | )              | 2,487                               |       | 13,101           |       | 13,037           |           |
| Payments of   derivative instruments                                      |       | (123,271             | )             |                                           |       |             |       | (123,271                                                                   | )              |                                |       |             |       | (123,271         | )              |
| Income tax   recovered (paid)                                             |       |                 |          | 59,675                                         |       |             |       | 59,675                                                                     |           | (16,403                             | )          |             |       | 43,272           |           |
| Net cash flows from operating activities                                  |       | 36,523               |          | 1,523,320                                      |       | 558,040          |       | 2,117,884                                                                  |           | (1,606,105                          | )          | 26,348           |       | 538,127          |           |
|                                                                      |       |                 |          |                                           |       |             |       |                                                                       |           |                                |       |             |       |             |           |
| Cash flows generated by (used in) investing   activities                  |       |                 |          |                                           |       |             |       |                                                                       |           |                                |       |             |       |             |           |
| Acquisition of property and equipment                                     |       |                 |          | (62,924                                        | )          |             |       | (62,924                                                                    | )              | (26,428                             | )          |             |       | (89,352          | )              |
| Proceeds from sale of property and equipment                              |       |                 |          | 28,396                                         |       |             |       | 28,396                                                                     |           | 2,229                               |       |             |       | 30,625           |           |
| Net cash flows from investing activities                                  |       |                 |          | (34,528                                        | )          |             |       | (34,528                                                                    | )              | (24,199                             | )          |             |       | (58,727          | )              |
|                                                                      |       |                 |          |                                           |       |             |       |                                                                       |           |                                |       |             |       |             |           |
| Cash flows generated by (used in) financing   activities                  |       |                 |          |                                           |       |             |       |                                                                       |           |                                |       |             |       |             |           |
| Proceeds and payments from affiliates                                     |       |                 |          |                                           |       |             |       |                                                                       |           |                                |       |             |       |             |           |
| Proceeds from new   borrowings                                            |       | 9,869,733            |          | 5,677,352                                      |       |             |       | 15,547,085                                                                 |           | 202,066                             |       |             |       | 15,749,151       |           |
| Payments of notes   payable                                               |       | (7,237,583           | )             | (6,054,368                                     | )          |             |       | (13,291,951                                                                | )              | (45,920                             | )          |             |       | (13,337,871      | )              |
| Net proceeds from   affiliates                                            |       | (3,051,905           | )             | 833,374                                        |       | 629,432          |       | (1,589,099                                                                 | )              | 1,441,841                           |       | 147,258          |       |             |           |
| Interest income                                                           |       | 566,606              |          | 620,867                                        |       | (1,187,473       | )          |                                                                       |           | 180,290                             |       | (180,290         | )          |             |           |
| Interest paid                                                             |       | (171,122             | )             | (589,506                                       | )          |             |       | (760,628                                                                   | )              | (120,967                            | )          | 6,684            |       | (874,911         | )              |
| Shares repurchased                                                        |       | (4,586               | )             |                                           |       |             |       | (4,586                                                                     | )              |                                |       |             |       | (4,586           | )              |
| Net cash flows from financing activities                                  |       | (28,857              | )             | 487,719                                        |       | (558,040         | )          | (99,179                                                                    | )              | 1,657,310                           |       | (26,348          | )          | 1,531,783        |           |
| Net increase (decrease) of cash and cash   equivalents                    |       | 7,666                |          | 1,976,511                                      |       |             |       | 1,984,177                                                                  |           | 27,006                              |       |             |       | 2,011,183        |           |
| Adjustment to cash flows due to exchange rate   fluctuation               |       |                 |          |                                           |       |             |       |                                                                       |           | (27,952                             | )          |             |       | (27,952          | )              |
| Cash, cash equivalents and restricted cash at the   beginning of the year |       | 435                  |          | 1,009,895                                      |       |             |       | 1,010,330                                                                  |           | 257,855                             |       |             |       | 1,268,185        |           |
| Cash, cash equivalents and restricted cash at the   end of the year       | ** ** | **Ps.**              |  8,101   | ** **                                     | **Ps.**    |  2,986,406  | ** ** | **Ps.**                                                                    |           | ** **                          | **Ps.**    |  2,994,507  | ** ** | **Ps.**          |  256,909  | ** ** | **Ps.** |   | ** ** | **Ps.** |   3,251,416 | ** ** |

 

F-87

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Table of Contents

 

**Desarrolladora Homex, S.A.B de C.V. and Subsidiaries**

**Supplemental Condensed Combining Reconciliation of Mexican Financial Reporting Standards (MFRS) to**

**US GAAP**

**As of and for the Year Ended December 31, 2011**

**(In thousands of Mexican pesos (Ps.))**

 
| ** **                                                       | ** ** | **Parent   company** | ** **       | **Wholly-   owned   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent   company and   wholly-   owned   guarantor   subsidiaries** | ** **        | **Non-   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------|------------|----------------------|------------------|------------------------------------------------|------------|------------------|------------|----------------------------------------------------------------------------|-------------------|-------------------------------------|------------|------------------|------------|------------------|------------|
| Consolidated net income according to MFRS                        |       | Ps.                  |  1,304,414  |                                           | Ps.        | 2,821,777        |       | Ps.                                                                        | (1,494,023        | )                                   | Ps.        | 2,632,169        |       | Ps.              | (307,642   | ) | Ps. |  (1,010,585 | ) | Ps. |  1,313,942 |   |
| US GAAP   adjustments:                                           |       |                 |             |                                           |       |             |       |                                                                       |              |                                |       |             |       |             |       |
| Revenues                                                         |       |                 |             | (5,278                                         | )          |             |       | (5,278                                                                     | )                 | 26,307                              |       |             |       | 21,029           |       |
| Costs                                                            |       |                 |             | 4,090                                          |       |             |       | 4,090                                                                      |              | (19,973                             | )          |             |       | (15,883          | )          |
| Revenues from   concession arrangements                          |       |                 |             |                                           |       |             |       |                                                                       |              | (129,672                            | )          |             |       | (129,672         | )          |
| Costs from   concession arrangements                             |       |                 |             |                                           |       |             |       |                                                                       |              | 98,141                              |       |             |       | 98,141           |       |
| Equity earnings from concessions arrangements                    |       | (18,979              | )                |                                           |       |             |       | (18,979                                                                    | )                 | —                              |       |             |       | (18,979          | )          |
| Capitalization of   financing costs                              |       | (286,169             | )                | (89,289                                        | )          |             |       | (375,458                                                                   | )                 | (117,638                            | )          |             |       | (493,096         | )          |
| Labor obligations                                                |       |                 |             | (1,463                                         | )          |             |       | (1,463                                                                     | )                 | 4,050                               |       |             |       | 2,587            |       |
| Deferral of unsecured homebuyers’ receivables               |       |                 |             | 13,712                                         |       |             |       | 13,712                                                                     |              | 722                                 |       |             |       | 14,434           |       |
| Deferral of future   involvement                                 |       |                 |             | 2,838                                          |       |             |       | 2,838                                                                      |              |                                |       |             |       | 2,838            |       |
| Fair value adjustment to financial derivative   instruments      |       | (31,893              | )                |                                           |       |             |       | (31,893                                                                    | )                 | (7                                  | )          |             |       | (31,900          | )          |
| Prepaid sales commissions                                        |       |                 |             | 386                                            |       |             |       | 386                                                                        |              | (1,923                              | )          |             |       | (1,537           | )          |
| Ineffective financial derivative instruments                     |       | 33,679               |             |                                           |       |             |       | 33,679                                                                     |              |                                |       |             |       | 33,679           |       |
| Total US GAAP adjustments before tax effects                     |       | (303,362             | )                | (75,004                                        | )          |             |       | (378,366                                                                   | )                 | (139,993                            | )          |             |       | (518,359         | )          |
| Tax effects on US GAAP adjustments                               |       | 85,756               |             | 21,203                                         |       |             |       | 106,959                                                                    |              | 39,574                              |       |             |       | 146,533          |       |
| Total US GAAP   adjustments                                      |       | (217,606             | )                | (53,801                                        | )          |             |       | (271,407                                                                   | )                 | (100,419                            | )          |             |       | (371,826         | )          |
| Net income according to US GAAP                                  | ** ** | **Ps.**              | 1,086,809        | ** **                                     | **Ps.**    | 2,767,976        | ** ** | **Ps.**                                                                    | (1,494,023        | )                                   | **Ps.**    | 2,360,762        | ** ** | **Ps.**          | (408,061   | ) | **Ps.** |  (1,010,585 | **)** | **Ps.** |  942,116 | ** ** |
|                                                             |       |                 |             |                                           |       |             |       |                                                                       |              |                                |       |             |       |             |       |
| Consolidated equity according to MFRS U.S. GAAP   adjustments    |       | Ps.                  |  13,488,025 |                                           | Ps.        | 19,087,292       |       | Ps.                                                                        |  (18,620,989 | )                                   | Ps.        | 13,954,329       |       | Ps.              | (2,248,324 | ) | Ps. |  1,981,473 |   | Ps. |  13,687,478 |   |
| US GAAP   adjustments:                                           |       |                 |             |                                           |       |             |       |                                                                       |              |                                |       |             |       |             |       |
| Revenues                                                         |       |                 |             | (5,278                                         | )          |             |       | (5,278                                                                     | )                 | (44,778                             | )          |             |       | (50,056          | )          |
| Costs                                                            |       |                 |             | 4,090                                          |       |             |       | 4,090                                                                      |              | 34,844                              |       |             |       | 38,934           |       |
| Revenues from   concessions arrangements                         |       |                 |             |                                           |       |             |       |                                                                       |              | (129,672                            | )          |             |       | (129,672         | )          |
| Cost from   concessions arrangements                             |       |                 |             |                                           |       |             |       |                                                                       |              | 98,141                              |       |             |       | 98,141           |       |
| Equity earnings from concessions arrangements                    |       | (18,979              | )                |                                           |       |             |       | (18,979                                                                    | )                 |                                |       |             |       | (18,979          | )          |
| Backlog (goodwill)                                               |       | (237,001             | )                |                                           |       |             |       | (237,001                                                                   | )                 |                                |       |             |       | (237,001         | )          |
| Labor obligations                                                |       |                 |             | (5,033                                         | )          |             |       | (5,033                                                                     | )                 | 4,038                               |       |             |       | (995             | )          |
| Prepaid sales   commissions                                      |       |                 |             | 386                                            |       |             |       | 386                                                                        |              | 435                                 |       |             |       | 821              |       |
| Deferral of future   involvement                                 |       |                 |             | (582                                           | )          |             |       | (582                                                                       | )                 |                                |       |             |       | (582             | )          |
| Acquisition of non controlling interest                          |       |                 |             | 79,438                                         |       |             |       | 79,438                                                                     |              |                                |       |             |       | 79,438           |       |
| Fair value adjustment to financial derivative   instruments      |       | (22,778              | )                |                                           |       |             |       | (22,778                                                                    | )                 | (7                                  | )          |             |       | (22,785          | )          |
| Bargain gain (negative goodwill) on business   acquisition       |       | 374,081              |             |                                           |       |             |       | 374,081                                                                    |              |                                |       |             |       | 374,081          |       |
| Ineffective   financial derivative instruments                   |       | 3,325                |             |                                           |       |             |       | 3,325                                                                      |              |                                |       |             |       | 3,325            |       |
| Capitalization of   financing costs                              |       | (360,982             | )                | (112,632                                       | )          |             |       | (473,614                                                                   | )                 | (148,392                            | )          |             |       | (622,006         | )          |
| Goodwill, net                                                    |       | 86,754               |             |                                           |       |             |       | 86,754                                                                     |              |                                |       |             |       | 86,754           |       |
| Deferral of unsecured homebuyers’ receivables of   the year |       |                 |             | (126,266                                       | )          |             |       | (126,266                                                                   | )                 |                                |       |             |       | (126,266         | )          |
| Total US GAAP adjustments before tax effects                     |       | (175,580             | )                | (165,877                                       | )          |             |       | (341,457                                                                   | )                 | (185,391                            | )          |             |       | (526,848         | )          |
| Tax effects on US GAAP adjustments                               |       | 48,584               |             | 45,897                                         |       |             |       | 94,481                                                                     |              | 51,295                              |       |             |       | 145,776          |       |
| Total U.S. GAAP adjustments                                      |       | (126,996             | )                | (119,980                                       | )          |             |       | (246,976                                                                   | )                 | (134,096                            | )          |             |       | (381,072         | )          |
| Equity according to US GAAP                                      | ** ** | **Ps.**              |  13,361,029 | ** **                                     | **Ps.**    | 18,967,312       | ** ** | **Ps.**                                                                    |  (18,620,989 | )                                   | **Ps.**    | 13,707,353       | ** ** | **Ps.**          | (2,382,420 | **)** | **Ps.** |  1,981,473 | ** ** | **Ps.** |  13,306,406 | ** ** |

 

F-88

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Table of Contents

 

**Desarrolladora Homex, S.A.B de C.V. and Subsidiaries**

**Supplemental Condensed Combining Reconciliation of Mexican Financial Reporting Standards (MFRS) to**

**US GAAP**

**As of and for the Year Ended December 31, 2010**

**(In thousands of Mexican pesos (Ps.))**

 
| ** **                                                       | ** ** | **Parent   company** | ** **       | **Wholly-   owned   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent   company and   wholly-   owned   guarantor   subsidiaries** | ** **        | **Non-   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** **     |
|------------------------------------------------------------------|------------|----------------------|------------------|------------------------------------------------|------------|------------------|------------|----------------------------------------------------------------------------|-------------------|-------------------------------------|------------|------------------|------------|------------------|----------------|
| Consolidated net income according to MFRS                        |       | Ps.                  |  1,511,763  |                                           | Ps.        |  2,455,302  |       | Ps.                                                                        |  (1,769,828  | )                                   | Ps.        |  2,197,237  |       | Ps.              |  (580,743 | ) | Ps. |  (36,552 | ) | Ps. |  1,579,942 |   |
| US GAAP   adjustments:                                           |       |                 |             |                                           |       |             |       |                                                                       |              |                                |       |             |       |             |           |
| Revenues                                                         |       |                 |             |                                           |       |             |       |                                                                       |              | 14,981                              |       |             |       | 14,981           |           |
| Costs                                                            |       |                 |             |                                           |       |             |       |                                                                       |              | (11,626                             | )          |             |       | (11,626          | )              |
| Capitalization of   financing costs                              |       | 149,298              |             | 37,650                                         |       |             |       | 186,948                                                                    |              | 9,653                               |       |             |       | 196,601          |           |
| Amortization of   Backlog                                        |       |                 |             |                                           |       |             |       |                                                                       |              |                                |       |             |       |             |           |
| Labor obligations                                                |       |                 |             | 15,974                                         |       |             |       | 15,974                                                                     |              | 3,656                               |       |             |       | 19,630           |           |
| Deferral of unsecured homebuyers’ receivables               |       |                 |             | (29,627                                        | )          |             |       | (29,627                                                                    | )                 | (1,745                              | )          |             |       | (31,372          | )              |
| Deferral of future   involvement                                 |       |                 |             | (1,129                                         | )          |             |       | (1,129                                                                     | )                 |                                |       |             |       | (1,129           | )              |
| Ineffective financial derivative instruments                     |       | (30,354              | )                |                                           |       |             |       | (30,354                                                                    | )                 |                                |       |             |       | (30,354          | )              |
| Fair value adjustment to financial derivatives   instruments     |       | 81,401               |             |                                           |       |             |       | 81,401                                                                     |              |                                |       |             |       | 81,401           |           |
| Bargain gain (negative goodwill) on business   acquisition       |       | 374,081              |             |                                           |       |             |       | 374,081                                                                    |              |                                |       |             |       | 374,081          |           |
| Prepaid sales   commissions                                      |       |                 |             |                                           |       |             |       |                                                                       |              | 33,529                              |       |             |       | 33,529           |           |
| Total US GAAP adjustments before tax effects                     |       | 574,426              |             | 22,868                                         |       |             |       | 597,294                                                                    |              | 48,448                              |       |             |       | 645,742          |           |
| Tax effects on US GAAP adjustments                               |       | (160,181             | )                | (6,377                                         | )          |             |       | (166,558                                                                   | )                 | (13,510                             | )          |             |       | (180,068         | )              |
| Total US GAAP   adjustments                                      |       | 414,245              |             | 16,491                                         |       |             |       | 430,736                                                                    |              | 34,938                              |       |             |       | 465,674          |           |
| Net income according to US GAAP                                  | ** ** | **Ps.**              |  1,926,008  | ** **                                     | **Ps.**    |  2,471,793  | ** ** | **Ps.**                                                                    |  (1,769,828  | )                                   | **Ps.**    |  2,627,973  | ** ** | **Ps.**          |  (545,805 | ) | **Ps.** |  (36,552 | **)** | **Ps.** |  2,045,616 | ** ** |
|                                                             |       |                 |             |                                           |       |             |       |                                                                       |              |                                |       |             |       |             |           |
| Consolidated equity according to MFRS U.S. GAAP   adjustments    |       | Ps.                  |  12,130,586 |                                           | Ps.        |  15,450,610 |       | Ps.                                                                        |  (15,475,007 | )                                   | Ps.        |  12,106,189 |       | Ps.              |  (562,154 | ) | Ps. |  776,476 |   | Ps. |  12,320,511 |   |
| US GAAP   adjustments:                                           |       |                 |             |                                           |       |             |       |                                                                       |              |                                |       |             |       |             |           |
| Revenues                                                         |       |                 |             |                                           |       |             |       |                                                                       |              | (71,085                             | )          |             |       | (71,085          | )              |
| Costs                                                            |       |                 |             |                                           |       |             |       |                                                                       |              | 54,817                              |       |             |       | 54,817           |           |
| Goodwill, net                                                    |       | 86,754               |             |                                           |       |             |       | 86,754                                                                     |              |                                |       |             |       | 86,754           |           |
| Backlog                                                          |       | (237,001             | )                |                                           |       |             |       | (237,001                                                                   | )                 |                                |       |             |       | (237,001         | )              |
| Labor obligations                                                |       |                 |             | (3,570                                         | )          |             |       | (3,570                                                                     | )                 | (1,076                              | )          |             |       | (4,646           | )              |
| Prepaid sales   commissions                                      |       |                 |             |                                           |       |             |       |                                                                       |              | 2,358                               |       |             |       | 2,358            |           |
| Deferral of future   involvement                                 |       |                 |             | (3,420                                         | )          |             |       | (3,420                                                                     | )                 |                                |       |             |       | (3,420           | )              |
| Acquisition of non controlling interest                          |       |                 |             | 79,438                                         |       |             |       | 79,438                                                                     |              |                                |       |             |       | 79,438           |           |
| Ineffective financial derivative instruments                     |       | (30,354              | )                |                                           |       |             |       | (30,354                                                                    | )                 |                                |       |             |       | (30,354          | )              |
| Fair value adjustment to financial derivatives   instruments     |       | 9,115                |             |                                           |       |             |       | 9,115                                                                      |              |                                |       |             |       | 9,115            |           |
| Gain on business   acquisition                                   |       | 374,078              |             |                                           |       |             |       | 374,078                                                                    |              |                                |       |             |       | 374,078          |           |
| Capitalization of   financing costs                              |       | (97,894              | )                | (24,687                                        | )          |             |       | (122,581                                                                   | )                 | (6,329                              | )          |             |       | (128,910         | )              |
| Deferral of unsecured homebuyers’ receivables of   the year |       |                 |             | (140,700                                       | )          |             |       | (140,700                                                                   | )                 |                                |       |             |       | (140,700         | )              |
| Total US GAAP adjustments before tax effects                     |       | 104,698              |             | (92,939                                        | )          |             |       | 11,759                                                                     |              | (21,312                             | )          |             |       | (9,553           | )              |
| Tax effects on US GAAP adjustments                               |       | 73,884               |             | (65,586                                        | )          |             |       | 8,298                                                                      |              | (15,045                             | )          |             |       | (6,747           | )              |
| Total U.S. GAAP adjustments                                      |       | 178,582              |             | (158,525                                       | )          |             |       | 20,057                                                                     |              | (36,357                             | )          |             |       | (16,300          | )              |
| Equity according to US GAAP                                      | ** ** | **Ps.**              |  12,309,168 | ** **                                     | **Ps.**    |  15,292,085 | ** ** | **Ps.**                                                                    |  (15,475,007 | )                                   | **Ps.**    |  12,126,246 | ** ** | **Ps.**          |  (598,511 | ) | **Ps.** |  776,476 | ** ** | **Ps.** |  12,304,211 | ** ** |

 

F-89

----

Table of Contents

 

**Desarrolladora Homex, S.A.B de C.V. and Subsidiaries**

**Supplemental Condensed Combining Reconciliation of Mexican Financial Reporting Standards (MFRS) to**

**US GAAP**

**As of and for the Year Ended December 31, 2009**

**(In thousands of Mexican pesos (Ps.))**

 
| ** **                                                       | ** ** | **Parent   company** | ** **       | **Wholly-   owned   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent   company and   wholly-   owned   guarantor   subsidiaries** | ** **        | **Non-   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** **     |
|------------------------------------------------------------------|------------|----------------------|------------------|------------------------------------------------|------------|------------------|------------|----------------------------------------------------------------------------|-------------------|-------------------------------------|------------|------------------|------------|------------------|----------------|
| Consolidated net income according to MFRS                        |       | Ps.                  |  1,565,869  |                                           | Ps.        |  2,345,430  |       | Ps.                                                                        |  (2,129,214  | )                                   | Ps.        |  1,782,085  |       | Ps.              |  (228,564 | ) | Ps. |  27,872 |   | Ps. |  1,581,393 |   |
| US GAAP   adjustments:                                           |       |                 |             |                                           |       |             |       |                                                                       |              |                                |       |             |       |             |           |
| Revenues                                                         |       |                 |             | 223,553                                        |       |             |       | 223,553                                                                    |              | (42,348                             | )          |             |       | 181,205          |           |
| Costs                                                            |       |                 |             | (177,823                                       | )          |             |       | (177,823                                                                   | )                 | 65,157                              |       |             |       | (112,666         | )              |
| Capitalization of   financing costs                              |       | 98,177               |             | (71,633                                        | )          |             |       | 26,544                                                                     |              |                                |       |             |       | 26,544           |           |
| Amortization of   Backlog                                        |       |                 |             |                                           |       |             |       |                                                                       |              |                                |       |             |       |             |           |
| Labor obligations                                                |       |                 |             | (4,407                                         | )          |             |       | (4,407                                                                     | )                 | (2,285                              | )          |             |       | (6,692           | )              |
| Deferral of unsecured homebuyers’ receivables               |       |                 |             | (35,772                                        | )          |             |       | (35,772                                                                    | )                 | (1,940                              | )          |             |       | (37,712          | )              |
| Deferral of future   involvement                                 |       |                 |             | (365                                           | )          |             |       | (365                                                                       | )                 |                                |       |             |       | (365             | )              |
| Fair value adjustment to financial derivative   instruments      |       | (72,286              | )                |                                           |       |             |       | (72,286                                                                    | )                 |                                |       |             |       | (72,286          | )              |
| Prepaid sales   commissions                                      |       |                 |             | (20,529                                        | )          |             |       | (20,529                                                                    | )                 | 3,889                               |       |             |       | (16,640          | )              |
| Total US GAAP adjustments before tax effects                     |       | 25,891               |             | (86,976                                        | )          |             |       | (61,085                                                                    | )                 | 22,473                              |       |             |       | (38,612          | )              |
| Tax effects on US GAAP adjustments                               |       | 3,858                |             | (57,135                                        | )          |             |       | (53,277                                                                    | )                 | 10,502                              |       |             |       | (42,775          | )              |
| Total US GAAP   adjustments                                      |       | 29,749               |             | (144,111                                       | )          |             |       | (114,362                                                                   | )                 | 32,975                              |       |             |       | (81,387          | )              |
| Net income according to US GAAP                                  | ** ** | **Ps.**              |  1,595,618  | ** **                                     | **Ps.**    |  2,201,319  | ** ** | **Ps.**                                                                    |  (2,129,214  | )                                   | **Ps.**    |  1,667,723  | ** ** | **Ps.**          |  (195,589 | ) | **Ps.** |  27,872 | ** ** | **Ps.** |  1,500,006 | ** ** |
|                                                             |       |                 |             |                                           |       |             |       |                                                                       |              |                                |       |             |       |             |           |
| Consolidated equity according to MFRS U.S. GAAP   adjustments    |       | Ps.                  |  10,784,066 |                                           | Ps.        |  11,950,429 |       | Ps.                                                                        |  (12,029,822 | )                                   | Ps.        |  10,704,673 |       | Ps.              |  839,971  |   | Ps. |  (638,832 | ) | Ps. |  10,905,812 |   |
| US GAAP   adjustments:                                           |       |                 |             |                                           |       |             |       |                                                                       |              |                                |       |             |       |             |           |
| Revenues                                                         |       |                 |             | (77,928                                        | )          |             |       | (77,928                                                                    | )                 | (8,138                              | )          |             |       | (86,066          | )              |
| Costs                                                            |       |                 |             | 60,404                                         |       |             |       | 60,404                                                                     |              | 6,039                               |       |             |       | 66,443           |           |
| Goodwill, net                                                    |       | 86,754               |             |                                           |       |             |       | 86,754                                                                     |              |                                |       |             |       | 86,754           |           |
| Backlog                                                          |       | (237,001             | )                |                                           |       |             |       | (237,001                                                                   | )                 |                                |       |             |       | (237,001         | )              |
| Labor obligations                                                |       |                 |             | (10,741                                        | )          |             |       | (10,741                                                                    | )                 | (12,701                             | )          |             |       | (23,442          | )              |
| Prepaid sales   commissions                                      |       |                 |             | (28,225                                        | )          |             |       | (28,225                                                                    | )                 | (2,946                              | )          |             |       | (31,171          | )              |
| Deferral of future   involvement                                 |       |                 |             | (2,291                                         | )          |             |       | (2,291                                                                     | )                 |                                |       |             |       | (2,291           | )              |
| Acquisition of non controlling interest                          |       |                 |             | 79,438                                         |       |             |       | 79,438                                                                     |              |                                |       |             |       | 79,438           |           |
| Fair value adjustment to financial derivatives   instruments     |       | (72,286              | )                |                                           |       |             |       | (72,286                                                                    | )                 |                                |       |             |       | (72,286          | )              |
| Capitalization of   financing costs                              |       | (235,960             | )                | (89,551                                        | )          |             |       | (325,511                                                                   | )                 |                                |       |             |       | (325,511         | )              |
| Deferral of unsecured homebuyers’ receivables of   the year |       |                 |             | (101,848                                       | )          |             |       | (101,848                                                                   | )                 | (7,480                              | )          |             |       | (109,328         | )              |
|                                                             |       |                 |             |                                           |       |             |       |                                                                       |              |                                |       |             |       |             |           |
| Total US GAAP adjustments before tax effects                     |       | (458,493             | )                | (170,742                                       | )          |             |       | (629,235                                                                   | )                 | (25,226                             | )          |             |       | (654,461         | )              |
| Tax effects on US GAAP adjustments                               |       | 5,101                |             | 151,043                                        |       |             |       | 156,144                                                                    |              | 17,168                              |       |             |       | 173,312          |           |
| Total U.S. GAAP adjustments                                      |       | (453,392             | )                | (19,699                                        | )          |             |       | (473,091                                                                   | )                 | (8,058                              | )          |             |       | (481,149         | )              |
| Equity according to US GAAP                                      | ** ** | **Ps.**              |  10,330,674 | ** **                                     | **Ps.**    |  11,930,730 | ** ** | **Ps.**                                                                    |  (12,029,822 | )                                   | **Ps.**    |  10,231,582 | ** ** | **Ps.**          |  831,913  | ** ** | **Ps.** |  (638,832 | ) | **Ps.** |  10,424,663 | ** ** |

 

F-90

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Table of Contents

 

**Desarrolladora Homex, S.A.B de C.V. and Subsidiaries**

**Supplemental Condensed Statement of Cash Flows — US GAAP**

**Statement of Cash Flows for the Year Ended December 31, 2011**

**(In thousands of Mexican pesos (Ps.))**

 
| ** **                                                         | ** ** | **Parent   company** | ** **   | **Wholly-   owned   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent   company and   wholly-   owned   guarantor   subsidiaries** | ** ** | **Non-   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** **   |
|--------------------------------------------------------------------|------------|----------------------|--------------|------------------------------------------------|------------|------------------|------------|----------------------------------------------------------------------------|------------|-------------------------------------|------------|------------------|------------|------------------|--------------|
| Operating   activities                                             |       |                 |         |                                           |       |             |       |                                                                       |       |                                |       |             |       |             |         |
| Adjusted   consolidated net income                                 |       | Ps.                  | 1,086,809    |                                           | Ps.        | 2,767,976        |       | Ps.                                                                        | (1,494,023 | )                                   | Ps.        | 2,360,762        |       | Ps.              | (408,061     | ) | Ps. |  (1,010,585 | ) | Ps. |  942,116 |   |
| Non-cash items:                                                    |       |                 |         |                                           |       |             |       |                                                                       |       |                                |       |             |       |             |         |
| Depreciation and   amortization                                    |       | 22,919               |         | 317,233                                        |       |             |       | 340,152                                                                    |       | 92,085                              |       |             |       | 432,237          |         |
| Equity income in   subsidiaries                                    |       | (1,493,398           | )            | (625                                           | )          | 1,494,023        |       |                                                                       |       | (1,010,585                          | )          | 1,010,585        |       |             |         |
| Deferred income tax and statutory profit-sharing                   |       | (403,883             | )            | 1,061,653                                      |       |             |       | 657,770                                                                    |       | (94,363                             | )          |             |       | 563,407          |         |
| Exchange loss                                                      |       | 756,368              |         |                                           |       |             |       | 756,368                                                                    |       | 22,741                              |       |             |       | 779,109          |         |
| Changes in valuation effects of financial   derivative instruments |       | (63,973              | )            |                                           |       |             |       | (63,973                                                                    | )          | (3,643                              | )          |             |       | (67,616          | )            |
| Changes in operating assets and liabilities                        |       | 1,662,156            |         | (2,493,948                                     | )          | (1,095,892       | )          | (1,927,676                                                                 | )          | 1,536,534                           |       | (2,634,745       | )          | (3,025,887       | )            |
|                                                               |       |                 |         |                                           |       |             |       |                                                                       |       |                                |       |             |       |             |         |
| Net cash flows (used in) provided by operating   activities        |       | 1,566,998            |         | 1,652,297                                      |       | (1,095,892       | )          | 2,123,403                                                                  |       | 134,709                             |       | (2,634,745       | )          | (376,634         | )            |
|                                                               |       |                 |         |                                           |       |             |       |                                                                       |       |                                |       |             |       |             |         |
| Investing   activities:                                            |       |                 |         |                                           |       |             |       |                                                                       |       |                                |       |             |       |             |         |
| Investments in:                                                    |       |                 |         |                                           |       |             |       |                                                                       |       |                                |       |             |       |             |         |
| Investment in   associate                                          |       | (18,000              | )            |                                           |       |             |       | (18,000                                                                    | )          |                                |       |             |       | (18,000          | )            |
| Proceeds from sale of property and equipament                      |       |                 |         | 9,436                                          |       |             |       | 9,436                                                                      |       |                                |       |             |       | 9,436            |         |
| Trade accounts receivable from related parties                     |       | (174,073             | )            |                                           |       |             |       | (174,073                                                                   | )          |                                |       |             |       | (174,073         | )            |
| Property and   equipment                                           |       |                 |         | (9,957                                         | )          |             |       | (9,957                                                                     | )          | (28.590                             | )          |             |       | (38,547          | )            |
| Net cash flows used in investing activities                        |       | (192,073             | )            | (521                                           | )          |             |       | (192,594                                                                   | )          | (28,590                             | )          |             |       | (221,184         | )            |
|                                                               |       |                 |         |                                           |       |             |       |                                                                       |       |                                |       |             |       |             |         |
| Financing   activities:                                            |       |                 |         |                                           |       |             |       |                                                                       |       |                                |       |             |       |             |         |
|                                                               |       |                 |         |                                           |       |             |       |                                                                       |       |                                |       |             |       |             |         |
| Net proceeds from   affiliates                                     |       | (1,361,125           | )            | (993,914                                       | )          | 1,095,892        |       | (1,259,147                                                                 | )          | (1,375,599                          | )          | 2,634,745        |       | —           |         |
| Short term proceeds                                                |       |                 |         |                                           |       |             |       |                                                                       |       |                                |       |             |       |             |         |
| Short-term (payments) borrowings, net                              |       |                 |         | 1,043,586                                      |       |             |       | 1,043,586                                                                  |       | 781,442                             |       |             |       | 1,825,028        |         |
| Proceeds from new borrowings                                       |       |                 |         |                                           |       |             |       |                                                                       |       | 1,406,532                           |       |             |       | 1,406,532        |         |
| Proceeds from long-term borrowings                                 |       |                 |         | (1,189,623                                     | )          |             |       | (1,189,623                                                                 | )          | (887,820                            | )          |             |       | (2,077,443       | )            |
| Share repurchased for employee stock option plan                   |       | 2,796                |         |                                           |       |             |       | 2,796                                                                      |       |                                |       |             |       | 2,796            |         |
| Dividends paid by subsidiary                                       |       | (6,437               | )            |                                           |       |             |       | (6,437                                                                     | )          |                                |       |             |       | (6,437           | )            |
| Net cash flows provided by (used in) financing   activities        |       | (1,364,766           | )            | (1,139,951                                     | )          | 1,095,892        |       | (1,408,825                                                                 | )          | (75,445                             | )          | 2,634,745        |       | 1,150,476        |         |
|                                                               |       |                 |         |                                           |       |             |       |                                                                       |       |                                |       |             |       |             |         |
| Net increase in cash and cash equivalents                          |       | 10,159               |         | 511,825                                        |       |             |       | 521,984                                                                    |       | 30,673                              |       |             |       | 552,658          |         |
| Cash and cash equivalents at the beginning of the   year           |       | 3,070                |         | 3,236,515                                      |       |             |       | 3,239,585                                                                  |       | 68,107                              |       |             |       | 3,307,692        |         |
| Cash and cash equivalents at the end of the year                   | ** ** | **Ps.**              |  13,229 | ** **                                     | **Ps.**    |  3,748,340  | ** ** | **Ps.**                                                                    |       | ** **                          | **Ps.**    |  3,761,569  | ** ** | **Ps.**          |  98,780 | ** ** | **Ps.** |   | ** ** | **Ps.** |  3,860,350 |   |

 

F-91

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Table of Contents

 

**Desarrolladora Homex, S.A.B de C.V. and Subsidiaries**

**Supplemental Condensed Statement of Cash Flows — US GAAP**

**Statement of Cash Flows for the Year Ended December 31, 2010**

**(In thousands of Mexican pesos (Ps.))**

 
| ** **                                                         | ** ** | **Parent   company** | ** **      | **Wholly-   owned   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent   company and   wholly-   owned   guarantor   subsidiaries** | ** **       | **Non-   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** **     |
|--------------------------------------------------------------------|------------|----------------------|-----------------|------------------------------------------------|------------|------------------|------------|----------------------------------------------------------------------------|------------------|-------------------------------------|------------|------------------|------------|------------------|----------------|
| Operating   activities                                             |       |                 |            |                                           |       |             |       |                                                                       |             |                                |       |             |       |             |           |
| Adjusted   consolidated net income                                 |       | Ps.                  |  1,926,008 |                                           | Ps.        |  2,471,793  |       | Ps.                                                                        |  (1,769,828 | )                                   | Ps.        |  2,627,973  |       | Ps.              |  (545,805 | ) | Ps. |  (36,552 | ) | Ps. |  2,045,616 |   |
| Non-cash items:                                                    |       |                 |            |                                           |       |             |       |                                                                       |             |                                |       |             |       |             |           |
| Depreciation and   amortization                                    |       | 67,456               |            | 341,138                                        |       |             |       | 408,594                                                                    |             | 57,020                              |       |             |       | 465,614          |           |
| Equity income in   subsidiaries                                    |       | (1,767,845           | )               | (1,983                                         | )          | 1,769,828        |       |                                                                       |             | (36,552                             | )          | 36,552           |       |             |           |
| Deferred income tax and statutory profit-sharing                   |       | 84,752               |            | 444,516                                        |       |             |       | 529,268                                                                    |             | 397                                 |       |             |       | 529,665          |           |
| Shared-based payment   transactions                                |       |                 |            |                                           |       |             |       |                                                                       |             |                                |       |             |       |             |           |
| Exchange gain                                                      |       | (165,500             | )               |                                           |       |             |       | (165,500                                                                   | )                | (5,330                              | )          |             |       | (170,830         | )              |
| Changes in valuation effects of financial   derivative instruments |       | 70,008               |            |                                           |       |             |       | 70,008                                                                     |             |                                |       |             |       | 70,008           |           |
| Changes in operating assets and liabilities                        |       | 65,029               |            | 1,407,202                                      |       | (1,080,005       | )          | 392,226                                                                    |             | (4,302,225                          | )          | (1,417,814       | )          | (5,327,813,      | )              |
|                                                               |       |                 |            |                                           |       |             |       |                                                                       |             |                                |       |             |       |             |           |
| Net cash flows provided by (used in) operating   activities        |       | 279,908              |            | 4,662,666                                      |       | (1,080,005       | )          | 3,862,569                                                                  |             | (4,832,495                          | )          | (1,417,814       | )          | (2,387,740       | )              |
|                                                               |       |                 |            |                                           |       |             |       |                                                                       |             |                                |       |             |       |             |           |
| Investing activities:                                              |       |                 |            |                                           |       |             |       |                                                                       |             |                                |       |             |       |             |           |
| Investments in:                                                    |       |                 |            |                                           |       |             |       |                                                                       |             |                                |       |             |       |             |           |
| Business   acquisition                                             |       | (290,478             | )               |                                           |       |             |       | (290,478                                                                   | )                |                                |       |             |       | (290,478         | )              |
| Proceeds from sale of property and equipment                       |       |                 |            | 62,222                                         |       |             |       | 62,222                                                                     |             | 18,970                              |       |             |       | 81,192           |           |
| Acquisition of property and equipment                              |       |                 |            | (214,444                                       | )          |             |       | (214,444                                                                   | )                | (65,200                             | )          |             |       | (279,644         | )              |
| Net cash flows used in investing activities                        |       | (290,478             | )               | (152,222                                       | )          |             |       | (442,700                                                                   | )                | (46,230                             | )          |             |       | (488,930         | )              |
|                                                               |       |                 |            |                                           |       |             |       |                                                                       |             |                                |       |             |       |             |           |
| Financing   activities:                                            |       |                 |            |                                           |       |             |       |                                                                       |             |                                |       |             |       |             |           |
| Net proceeds from   affiliates                                     |       | (92,802              | )               | (6,162,997                                     | )          | 1,080,005        |       | (5,175,794                                                                 | )                | 3,757,980                           |       | 1,417,814        |       |             |           |
| Short-term borrowings (payments), net                              |       | (42,582              | )               | 430,602                                        |       |             |       | 388,020                                                                    |             | 355,642                             |       |             |       | 743,662          |           |
| Proceeds from long-term borrowings                                 |       | 141,940              |            | 1,569,789                                      |       |             |       | 1,711,729                                                                  |             | 766,235                             |       |             |       | 2,477,964        |           |
| Repayments of long-term borrowings                                 |       |                 |            | (97,729                                        | )          |             |       | (97,729                                                                    | )                | (67,125                             | )          |             |       | (164,854         | )              |
| Share-based options exercised                                      |       | 5,516                |            |                                           |       |             |       | 5,516                                                                      |             |                                |       |             |       | 5,516            |           |
| Net cash flows provided by (used in) financing   activities        |       | 12,072               |            | (4,260,335                                     | )          | 1,080,005        |       | (3,168,258                                                                 | )                | 4,812,732                           |       | 1,417,814        |       | 3,062,288        |           |
|                                                               |       |                 |            |                                           |       |             |       |                                                                       |             |                                |       |             |       |             |           |
| Net increase (decrease) in cash and cash   equivalents             |       | 1,502                |            | 250,109                                        |       |             |       | 251,611                                                                    |             | (65,993                             | )          |             |       | 185,618          |           |
| Cash and cash equivalents at the beginning of the   year           |       | 1,568                |            | 2,986,406                                      |       |             |       | 2,987,974                                                                  |             | 134,100                             |       |             |       | 3,122,074        |           |
| Cash and cash equivalents at the end of the year                   | ** ** | **Ps.**              |  3,070     | ** **                                     | **Ps.**    |  3,236,515  | ** ** | **Ps.**                                                                    |             | ** **                          | **Ps.**    |  3,239,585  | ** ** | **Ps.**          |  68,107   | ** ** | **Ps.** |   | ** ** | **Ps.** |  3,307,692 | ** ** |

 

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Table of Contents

 

**Desarrolladora Homex, S.A.B de C.V. and Subsidiaries**

**Supplemental Condensed Statement of Cash Flows — US GAAP**

**Statement of Cash Flows for the Year Ended December 31, 2009**

**(In thousands of Mexican pesos (Ps.))**

 
| ** **                                                         | ** ** | **Parent   company** | ** **      | **Wholly-   owned   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Parent   company and   wholly-   owned   guarantor   subsidiaries** | ** **       | **Non-   guarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** **     |
|--------------------------------------------------------------------|------------|----------------------|-----------------|------------------------------------------------|------------|------------------|------------|----------------------------------------------------------------------------|------------------|-------------------------------------|------------|------------------|------------|------------------|----------------|
| Operating   activities                                             |       |                 |            |                                           |       |             |       |                                                                       |             |                                |       |             |       |             |           |
| Adjusted   consolidated net income                                 |       | Ps.                  |  1,595,618 |                                           | Ps.        |  2,201,319  |       | Ps.                                                                        |  (2,129,214 | )                                   | Ps.        |  1,667,723  |       | Ps.              |  (195,589 | ) | Ps. |  27,872 |   | Ps. |  1,500,006 |   |
| Non-cash items:                                                    |       |                 |            |                                           |       |             |       |                                                                       |             |                                |       |             |       |             |           |
| Depreciation and   amortization                                    |       | 103,247              |            | 300,472                                        |       |             |       | 403,719                                                                    |             | 79,690                              |       |             |       | 483,409          |           |
| Equity income in   subsidiaries                                    |       | (2,175,721           | )               | 46,507                                         |       | 2,129,214        |       |                                                                       |             |                                |       |             |       |             |           |
| Deferred income tax and statutory profit-sharing                   |       | 77,503               |            | 702,569                                        |       |             |       | 780,072                                                                    |             | 1,106                               |       |             |       | 781,178          |           |
| Shared-based   payment transactions                                |       | 10,638               |            |                                           |       |             |       | 10,638                                                                     |             |                                |       |             |       | 10,638           |           |
| Exchange gain                                                      |       | (182,525             | )               |                                           |       |             |       | (182,525                                                                   | )                | (1,821                              | )          |             |       | (184,346         | )              |
| Changes in valuation effects of financial   derivative instruments |       | 66,451               |            |                                           |       |             |       | 66,451                                                                     |             |                                |       |             |       | 66,451           |           |
| Changes in operating assets and liabilities                        |       | 915,345              |            | (1,629,253                                     | )          | (629,431         | )          | (1,343,339                                                                 | )                | (1,504,900                          | )          | (175,130         | )          | (3,023,369       | )              |
|                                                               |       |                 |            |                                           |       |             |       |                                                                       |             |                                |       |             |       |             |           |
| Net cash flows (used in) provided by operating   activities        |       | 410,556              |            | 1,621,614                                      |       | (629,431         | )          | 1,402,739                                                                  |             | (1,621,514                          | )          | (147,258         | )          | (366,033         | )              |
|                                                               |       |                 |            |                                           |       |             |       |                                                                       |             |                                |       |             |       |             |           |
| Investing   activities:                                            |       |                 |            |                                           |       |             |       |                                                                       |             |                                |       |             |       |             |           |
| Investments in:                                                    |       |                 |            |                                           |       |             |       |                                                                       |             |                                |       |             |       |             |           |
| Proceeds from sale of property and equipment                       |       |                 |            | 22,147                                         |       |             |       | 22,147                                                                     |             | 8,478                               | )          |             |       | 30,625           |           |
| Acquisition of property and equipment                              |       |                 |            | (64,616                                        | )          |             |       | (64,616                                                                    | )                | (24,736                             | )          |             |       | (89,352          | )              |
| Net cash flows used in investing activities                        |       |                 |            | (42,469                                        | )          |             |       | (42,469                                                                    | )                | (16,258                             | )          |             |       | (58,727          | )              |
|                                                               |       |                 |            |                                           |       |             |       |                                                                       |             |                                |       |             |       |             |           |
| Financing   activities:                                            |       |                 |            |                                           |       |             |       |                                                                       |             |                                |       |             |       |             |           |
| Net proceeds from   affiliates                                     |       | (3,051,904           | )               | 833,374                                        |       | 629,431          |       | (1,589,099                                                                 | )                | 1,441,841                           |       | 147,258          |       |             |           |
| Short-term borrowings(payments), net                               |       | (585,434             | )               | (1,259,758                                     | )          |             |       | (1,845,192                                                                 | )                | 172,936                             |       |             |       | (1,672,256       | )              |
| Proceeds from long-term borrowings                                 |       | 3,232,500            |            | 908,219                                        |       |             |       | 4,140,719                                                                  |             | 27,285                              |       |             |       | 4,168,004        |           |
| Repayments of long-term borrowings                                 |       |                 |            | (84,468                                        | )          |             |       | (84,468                                                                    | )                |                                |       |             |       | (84,468          | )              |
| Share repurchased for employee stock option plan                   |       | (4,586               | )               |                                           |       |             |       | (4,586                                                                     | )                |                                |       |             |       | (4,586           | )              |
| Net cash flows provided by (used in) financing   activities        |       | (409,424             | )               | 397,367                                        |       | 629,431          |       | 617,374                                                                    |             | 1,642,062                           |       | 147,258          |       | 2,406,694        |           |
|                                                               |       |                 |            |                                           |       |             |       |                                                                       |             |                                |       |             |       |             |           |
| Net increase in cash and cash equivalents                          |       | 1,133                |            | 1,976,512                                      |       |             |       | 1,977,644                                                                  |             | 4,290                               |       |             |       | 1,981,934        |           |
| Cash and cash equivalents at the beginning of the   year           |       | 435                  |            | 1,009,895                                      |       |             |       | 1,010,330                                                                  |             | 129,810                             |       |             |       | 1,140,140        |           |
| Cash and cash equivalents at the end of the year                   | ** ** | **Ps.**              |  1,568     | ** **                                     | **Ps.**    |  2,986,407  | ** ** | **Ps.**                                                                    |             | ** **                          | **Ps.**    |  2,987,974  | ** ** | **Ps.**          |  134,100  | ** ** | **Ps.** |   | ** ** | **Ps.** |  3,122,074 | ** ** |

 

F-93

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