LLC Operating Agreement

TABLE OF CONTENTS


Preamble

1


Section I
Formation; Name and Office; Purpose; Partnership Treatment

1


Section II
Definitions

2


Section III
Capital Contributions

6


Section IV
Allocations and Distributions

9


Section V
Management

14


Section VI
Members

19


Section VII
Transfers and Withdrawals

21


Section VIII
Dissolution and Termination

25


Section IX
Other Interests of an Interest Holder or Manager

27


Section X
Indemnity

28


Section XI
Miscellaneous

29


Section XII
Arbitration

31


SECTION XIII
Indemnification of Claim by Ascender

32


SECTION XIV
Termination of Prior Venture Agreements

32


OPERATING AGREEMENT

OF

ILX-BRUNO L.L.C.

an Arizona limited liability company


THIS OPERATING AGREEMENT is made and entered into effective as of the _____ day of August, 2005, by and among ILX Resorts Incorporated, an Arizona corporation as the Manager,


James Bruno Enterprises LLC, an Arizona limited liability company as a Member (Bruno) and ILX Resorts Incorporated, an Arizona corporation as a Member (ILX), executing this Agreement as Members, of ILX-Bruno LLC, an Arizona limited liability company (the " Company'').


Preamble


The United States Government, through the Forest Service of the Department of Agriculture, has conducted an auction on approximately 21 acres of land in Sedona, Arizona (the " Property" ). Bruno was the winning bidder at $8,400,000. Bruno and ILX then entered into a series of escrow and other agreements, including the following, which are attached hereto as Group Exhibit A.


1.

Escrow Agreement # 00615489-KB at Pioneer Title Agency in Flagstaff, Arizona for the purchase of the Property by James Bruno Enterprises from the U.S. Forest Service.


2.

Escrow Agreement # 00615490-KB at Pioneer Title Agency in Flagstaff, Arizona for the purchase of the Property from James Bruno Enterprises, LLC.


3.

Venture Agreement made May 11, 2005 by and between James Bruno Enterprises LLC and ILX Resorts Incorporated, an Arizona corporation.


4.

Amendment to Venture Agreement made June 1, 2005 by and between James Bruno Enterprises LLC and ILX Resorts Incorporated,


an Arizona corporation.


Section I

Formation; Name and Office; Purpose; Partnership Treatment


1.1.

Formation . Pursuant to the Arizona Limited Liability Company Act, A.R.S. Sections 29-601 through 29-857 (the " Act''), the parties shall form an Arizona limited liability company effective upon the filing of the Articles of Organization of this Company (the ``Articles'') with the Arizona Corporation Commission. The parties have executed this Agreement to serve as the " Operating Agreement'' of the Company, as that term is defined in A.R.S. Section 29-601(12), and, subject to any applicable restrictions set forth in the Act, the business and affairs of the Company, and the relationships of the parties to one another, shall be operated in accordance with and governed by the terms and conditions set forth in this Agreement. By executing this Agreement, the Manager certifies that the Members executing this Agreement constitute all of the Members of the C ompany at the time of its formation. The parties agree to execute all amendments of the Articles, and do all filing, publication, and other acts as may be appropriate from time to time hereafter to comply with the requirements of the Act.


1.2.

Name and Registered Office . The Company shall be conducted under the name of ILX-Bruno LLC, and the registered office of the Company shall be at 2111 E. Highland, Suite 210, Phoenix, Arizona, or such other place as the Manager may from time to time determine.


1.3.

Purpose . The purpose and business of this Company


shall be to develop the Property. The Company shall have the power to do any and all acts and things necessary, appropriate, or incidental to the furtherance of such purpose. The Company may engage in other business or acquire other assets only on the vote of a Majority in Interest of the Members. The purpose of the company shall be implemented by taking acts that include but are not limited too the conceptualization of a master plan on the Real Property; the approval of entitlements and development agreements with the City of Sedona; and the construction and sale to consumer purchasers of the buildings developed on the Real Property by the Company. The intent of the Company is to accomplish these acts within three to five years after all entitlements are in place.


1.4.

Treatment as a Partnership . It is the intent of the Members that the Company shall always be operated in a manner consistent with its treatment as a partnership for federal and state income tax purposes, but that the Company shall not be operated or treated as a partnership for purposes of the federal Bankruptcy Code. No Member or Manager shall take any action inconsistent with this intent.


Section II

Definitions


The following terms shall have the meanings set forth in this Section II:


" Act" means the Arizona Limited Liability Company Act, A.R.S. Sections 29-601 through 29-857, as amended from time to


time (or any corresponding provisions of succeeding law).


" Adjusted Book Value" means with respect to Company property, the property's Initial Book Value with the adjustments required under this Agreement.


" Adjusted Capital Account Deficit" means, with respect to any Interest Holder, the deficit balance, if any, in the Interest Holder's Capital Account as of the end of the relevant Fiscal Year, after giving effect to the following adjustments:


(i) the Capital Account shall be increased by the amounts which the Interest Holder is obligated to restore under this Agreement or is deemed obligated to restore pursuant to Regulation Sections 1.704-2(g)(1) and (i)(5) ( i.e. , the Interest Holder's share of Minimum Gain and Member Minimum Gain); and


(ii) the Capital Account shall be decreased by the items described in Regulation Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6).


This definition of Adjusted Capital Account Deficit is intended to comply with Section 1.704-1(b)(2)(ii)(d) of the Treasury Regulations and shall be interpreted and applied in a manner consistent with that Regulation.


" Affiliate" means, with respect to any Interest Holder or Manager, any Person: (i) who is a member of the Interest Holder's or Manager's Family; (ii) which owns more than twenty percent


(20%) of the voting or economic interests in the Interest Holder or Manager; (iii) in which the Interest Holder or Manager owns more than twenty percent (20%) of the voting or economic interests; or (iv) in which more than twenty percent (20%) of the voting or economic interests are owned by a Person who has a relationship with the Interest Holder or Manager described in clause (i), (ii), or (iii) above.


" Capital Account" means the account maintained by the Company for each Interest Holder in accordance with the provisions of Section III.


" Capital Contribution" means the total amount of cash and the fair market value of any other assets contributed (or deemed contributed under Regulation Section 1.704-1(b)(2)(iv)(d)) to the Company by an Interest Holder, net of liabilities secured by the contributed Property that the Company is considered to assume or take subject to under Section 752 of the Code.


" Cash Flow" means all cash funds derived from operations of the Company (including interest received on reserves), without reduction for any noncash charges, but less cash funds used to pay current operating expenses and to pay or establish reasonable reserves for future expenses, debt payments, capital improvements, and replacements as determined by the Manager. Cash Flow shall be increased by the reduction of any reserve previously established.


" Code" means the Internal Revenue Code of 1986, as amended, or any corresponding provision of any succeeding law.


" Company Minimum Gain" has the meaning set forth in Regulation Section 1.704-2(b)(2) for " partnership minimum gain."


" Event of Withdrawal" means those events and circumstances listed in Section 29-733 of the Act other than subparagraphs 4 or 5 thereof.


" Family" means a Person's spouse, lineal ancestors or descendants by birth or adoption, siblings, and trusts for the benefit of such Person or any of the foregoing individuals.


" Fiscal Year" or " Annual Period" means the fiscal year of the Company, as determined under Section V.


" Interest" means a Person's share of the Profits and Losses (and specially allocated items of income, gain, and deduction) of, and the right to receive distributions from, the Company.


" Interest Holder" means any Person who holds an Interest, whether as a Member or as an unadmitted assignee of a Member.


" Initial Book Value" means, with respect to Property contributed to the Company by an Interest Holder, the Property's fair market value at the time of contribution and, with respect to all other Property, the Property's adjusted basis for federal income tax purposes at the time of acquisition.


" Majority in Interest" means one or more Members who


own, collectively, a simple majority of the Percentage Interests held by Members.


" Manager" means that person designated as such pursuant to Section V of this Agreement.


" Member" means each Person signing this Agreement and any Person who subsequently is admitted as a member of the Company until such time as an Event of Withdrawal has occurred with respect to such Member.


" Member Nonrecourse Debt" has the meaning set forth in Section 1.704-2(b)(4) of the Treasury Regulations for " partner nonrecourse debt."


" Member Nonrecourse Debt Minimum Gain" has the meaning set forth in Regulation Section 1.704-2(i) for " partner nonrecourse debt minimum gain."


" Member Nonrecourse Deductions" has the meaning set forth in Regulation Section 1.704-2(i) for " partner nonrecourse deductions."


" Membership Rights" means all of the rights of a Member in the Company, including a Member's: (i) Interest, (ii) right to inspect the Company's books and records, and (iii) right to participate in the management of and vote on matters coming before the Company.


" Nonrecourse Deductions" has the meaning set forth in Regulation Section 1.704-2(b)(1). The amount of Nonrecourse Deductions shall be determined according to the provisions of Regulation Section 1.704-2(c).


" Nonrecourse Liability" has the meaning set forth in Regulation Section 1.704-2(b)(3).


" Percentage Interest" means, as to a Member, the percentage set forth after the Member's name in Section 3.2.1, and as amended from time to time, and, as to an Interest Holder who is not a Member, the Percentage of the Member whose Interest has been acquired by such Interest Holder, to the extent the Interest Holder has succeeded to that Member's Interest.


" Person" means and includes an individual, corporation, partnership, association, limited liability company, trust, estate, or other entity.


" Profit" and " Loss" means, for each Fiscal Year of the Company (or other period for which Profit or Loss must be computed), the Company's taxable income or loss determined in accordance with Code Section 703(a), with the following adjustments:


(i) all items of income, gain, loss, deduction, or credit required to be stated separately pursuant to Code Section 703(a)(1) shall be included in computing taxable income or loss;


(ii) any tax-exempt income of the Company, not otherwise


taken into account in computing Profit or Loss, shall be included in computing Profit or Loss;


(iii) any expenditures of the Company described in Code Section 705(a)(2)(B) (or treated as such pursuant to Regulation Section 1.704-1(b)(2)(iv)(i)) and not otherwise taken into account in computing Profit or Loss, shall be included in computing Profit or Loss;


(iv) if the Adjusted Book Value of Company Property differs from its adjusted basis for federal income tax purposes, then gain or loss resulting from any taxable disposition of Company property shall be computed by reference to the Adjusted Book Value of the Property disposed of rather than the adjusted basis of the property for federal income tax purposes;


(v) if the Adjusted Book Value of Company Property differs from its adjusted basis for federal income tax purposes, then in lieu of the depreciation, amortization, or cost recovery deductions allowable in computing taxable income or loss, the depreciation, amortization (or other cost recovery deduction) shall be an amount that bears the same ratio to the Adjusted Book Value of such Property as depreciation, amortization (or other cost recovery deduction) computed for federal income tax purposes for such period bears to the adjusted tax basis of such Property. If the Property has a zero adjusted tax basis, the depreciation, amortization (or other cost recovery deduction) of such Property shall be determined under any reasonable method selected by the Manager; and


(vi) any items which are specially allocated pursuant to Sections 4.2 and 4.3 hereof shall not be taken into account in


computing Profit or Loss.


" Property" means the 21 acres that is described in Exhibit A that is to be acquired from the U.S. Forest Service.


" Transfer" means, when used as a noun, any voluntary or involuntary sale, hypothecation, pledge, assignment, attachment, or other transfer, and, when used as a verb, means voluntarily or involuntarily to sell, hypothecate, pledge, assign, or otherwise

transfer. [For purposes of this agreement, a Transfer of a majority or controlling interest in a Member or Interest Holder shall be deemed to be a transfer of such Member's or Interest Holder's Interest.]


" Treasury Regulations" or " Regulations" means the income tax regulations, including any temporary regulations, promulgated under the Code as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations).


Section III

Capital Contributions


3.1.

Capital Accounts. A Capital Account shall be maintained for each Interest Holder in accordance with the following provisions:


3.1.1.

An Interest Holder's Capital Account shall be


credited with the amount of money contributed by the Interest Holder to the Company; the fair market value of the Property contributed by the Interest Holder to the Company (net of liabilities secured by such contributed Property that the Company is considered to assume or take subject to under Section 752 of the Code); the Interest Holder's allocable share of Profit and items of income and gain specially allocated to the Interest Holder pursuant to Section IV (other than Section 4.2); and the amount of Company liabilities that are assumed by the Interest Holder under Regulation Section 1.704-1(b)(2)(iv)(c);


3.1.2.

An Interest Holder's Capital Account shall be debited with the amount of money distributed to the Interest Holder; the fair market value of any Company property distributed to the Interest Holder (net of liabilities secured by such distributed property that the Interest Holder is considered to assume or take subject to under Section 752 of the Code); the Interest Holder's allocable share of loss and items of deduction and loss specially allocated to the Interest Holder pursuant to Section IV (other than Section 4.2); and the amount of the Interest Holder's liabilities that are assumed by the Company under Regulation Section 1.704-1(b)(2)(iv)(c);


3.1.3. If Company property is distributed to an Interest Holder, the Capital Accounts of all Interest Holders shall be adjusted as if the distributed Property had been sold in a taxable disposition for the gross fair market value of such Property on the date of distribution (taking into account Section 7701 of the Code) and the Profit or Loss from such disposition allocated to the Interest Holders as provided in Section IV.


3.1.4. If money or other property (other than a de minimis amount) is (i) contributed to the Company by a new or


existing Interest Holder in exchange for an interest in the Company; or (ii) distributed by the Company to a retiring or continuing Interest Holder as consideration for an interest in the Company; then, if the [Manager deems such an adjustment to be necessary to reflect the economic interests of the Interest Holders, the Book Value of the Company's property shall be adjusted to equal its gross fair market value on such date (taking into account Section 7701(g) of the Code) and the Capital Accounts of all Interest Holders shall be adjusted in the same manner as if all the Company property had been sold in a taxable disposition for such amount on such date and the Profit or Loss allocated to the Interest Holders as provided in Section IV.


3.1.5. To the extent an adjustment to the tax basis of any Company asset pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulation Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the Book Value of the Company's property and the Capital Account of the Interest Holders shall be adjusted in a manner consistent with the manner in which the Capital Accounts are required to be adjusted pursuant to that Section of the Regulations.


If any Interest is transferred pursuant to the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent the Capital Account is attributable to the transferred Interest. It is intended that the Capital Accounts of all Interest Holders shall be maintained in compliance with the provisions of Regulation Section 1.704-1(b), and all provisions of this Agreement relating to the maintenance of Capital Accounts or the Adjusted Book Value of Company property shall be interpreted and applied in a manner consistent with that Section of the Regulations.


3.2.

Capital Contributions .


3.2.1. Initial Capital Contributions . Upon the execution of this Agreement, the Members shall make the following contributions to the capital of the Company. Prior to the execution of this Operating Agreement, Bruno has placed on deposit with the U.S. Forest Service $588,000, and ILX has placed on deposit with the U.S. Forest Service $252,000 for a total of $840,000. On or before September 21, 2005, Bruno shall contribute an additional $3,912,000 and ILX shall contribute an additional $4,248,000 so that the Initial Capital Contributions of each of ILX and Bruno are $4,500,000 and the total Initial Capital Contributions are $9,000,000. Therefore the initial Percentage Interests shall be:


ILX Resorts Incorporated

50%


James Bruno Enterprises, LLC

50%


3.2.2. Additional Capital Contributions .


3.2.2.1. If the Manager at any time or from time to time determines that the Company requires additional Capital Contributions, then the Manager shall give notice to each Member of (i) the total amount of additional Capital Contributions required, (ii) the reason the additional Capital Contribution is required, (iii) each Member's proportionate share of the total additional Capital Contribution (determined in accordance with this Section), and (iv) the date each Member's additional Capital Contribution is due and payable, which date shall be thirty (30) days after the notice has been given. The total additional Capital Contribution which the


Manager may require the Members to contribute during the term of this Agreement shall not exceed One Million dollars ($1,000,000) in the aggregate. A Member's proportionate share of the total additional Capital Contribution shall be equal to the product obtained by multiplying the Member's Percentage Interest by the total additional Capital Contribution required. A Member's proportionate share shall be payable in cash or by check.


3.2.2.2. Except as provided in Section 3.2.2.1, no Member shall be required to contribute any additional capital to the Company, and no Member shall have any personal liability for any obligation of the Company. Without limiting 3.2.2.1, the Company' s goal is not to have Additional Capital Contributions and, to the extent reasonably available, to utilize debt financing arranged by the Manager and secured by Company property.


3.2.2.3. If any Member fails to make his or her additional Capital Contribution when due, (i) the Manager shall give written notice to the other Members, who shall have the option for a period of thirty (30) days to make some or all of the noncontributing Member's additional Capital Contribution in proportion to their relative Percentage Interests or in such other proportion as they may all agree, (ii) the Percentage Interests of the Members shall be adjusted to equal the percentage which each Member's total Capital Contributions bears to the total Capital Contributions of all the Members, and (iii) the Manager shall give written notice to all of the Members of the adjusted Percentage Interests. This remedy is in addition to any other remedies allowed by law or this Agreement.


3.3.

Withdrawal or Return of Capital Contributions . Except as specifically provided in this Agreement, no Interest Holder shall have the right to withdraw or reduce the Capital Contributions it


makes to the Company. Upon dissolution of the Company or liquidation of its interest in the Company, each Interest Holder shall look solely to the assets of the Company for return of its Capital Contributions and, if the Company's property remaining after the payment or discharge of the debts, obligations, and liabilities of the Company is insufficient to return the Capital Contributions of each Interest Holder, no Interest Holder shall have any recourse against the Company, any Interest Holder, or Manager.


3.4.

Form of Return of Capital. Under circumstances requiring a return of any Capital Contributions, no Interest Holder shall have the right to receive property other than cash except as may be specifically provided herein.


3.5.

Salary or Interest . Except as otherwise expressly provided in Section V of this Agreement, no Interest Holder or Manager shall receive any interest, salary, or drawing with respect to his or her Capital Contributions or his or her Capital Account, or for services rendered on behalf of the Company.


Section IV

Allocations and Distributions


4.1.

Allocations. After making any special allocations contained in Section 4.3, remaining Profits and Losses shall be allocated for any Fiscal Year in the following manner:


4.1.1. Profits .


4.1.1.1. First, Profits shall be allocated among the Interest Holders in proportion to the cumulative Losses previously allocated to the Interest Holder under Section 4.1.2.3 until the cumulative Profits allocated to each Interest Holder under this subparagraph equal the cumulative Losses previously allocated to each Interest Holder under Section 4.1.2.3;


4.1.1.2. Second, Profits shall be allocated proportionately among the Interest Holders until the cumulative Profits allocated to each Interest Holder under this subparagraph equal the cumulative Priority Return each Interest Holder has received through the end of the Fiscal Year plus Losses, if any, allocated to the Interest Holder under Section 4.1.2.2; and


4.1.1.3. Third, Profits shall be allocated to the Interest Holders in accordance with their Percentage Interests.


4.1.2. Losses .


4.1.2.1. First, Losses shall be allocated to the Interest Holders in proportion to the cumulative Profits previously allocated to the Interest Holders under Section 4.1.1.3 until the cumulative Losses allocated pursuant to this subparagraph to each Interest Holder are equal to the cumulative Profits previously allocated to each Interest Holder under Section 4.1.1.3;


4.1.2.2. Second, Losses shall be allocated to the Interest Holders in proportion to the cumulative Profits previously allocated to the Interest Holders under Section 4.1.1.2 until the cumulative Losses allocated pursuant to this subparagraph to each Interest Holder are equal to the cumulative Profits previously


allocated to each Interest Holder under Section 4.1.1.2; and


4.1.2.3. Third, Losses shall be allocated to the Interest Holders in accordance with their Percentage Interests.


4.1.3. Loss Limitations.


4.1.3.1. No Losses shall be allocated to any Interest Holder pursuant to Section 4.1 if the allocation causes the Interest Holder to have an Adjusted Capital Account Deficit or increases the Interest Holder's Adjusted Capital Account Deficit. All Losses in excess of the limitations set forth in this Subsection shall be allocated to the other Interest Holders in accordance with the other Interest Holders' Percentage Interests until all Interest Holders are subject to the limitation of this Subsection, and thereafter, in accordance with the Interest Holders' interest in the Company as determined by the Manager. If any Losses are allocated to an Interest Holder because of this Subsection, then notwithstanding any other provision of this Agreement, all subsequent Profits shall be allocated to the Interest Holders pro rata based on Losses allocated to them pursuant to this Subsection until each Interest Holder has been allocated an amount of Profits pursuant to this Subsection equal to the Losses previously allocated to that Interest Holder under this Subsection.


4.1.3.2. If the Company is on the cash method of accounting and more than 35% of the Company's Losses in any year would be allocable to Interest

Holders who are limited entrepreneurs (within the meaning of a7 464(e)(2) of the Code), then except as otherwise provided in Section 4.1.3.1, the Losses in excess of 35% otherwise allocable to


those Interest Holders shall be specially allocated among the other Interest Holders in the ratio that each shares in Losses. If any Losses are allocated to an Interest Holder under this Subsection, then notwithstanding any other provision of this Agreement, all subsequent Profits shall be allocated to the Interest Holders pro rata based on Losses allocated to them pursuant to this Subsection until each Interest Holder has been allocated an amount of Profits pursuant to this Subsection in the current and previous Fiscal Years equal to the Losses allocated to that Interest Holder pursuant to this Subsection in previous Fiscal Years.


4.2.

Section 704(c) Allocations.


4.2.1. Contributed Property. In accordance with Code Section 704(c) and the Regulations thereunder, as well as Regulation Section 1.704-1(b)(2)(iv)(d)(3), income, gain, loss, and deduction with respect to any property contributed (or deemed contributed) to the Company shall, solely for tax purposes, be allocated among the Interest Holders so as to take account of any variation between the adjusted basis of the property to the Company for federal income tax purposes and its fair market value at the date of contribution (or deemed contribution).


4.2.2. Adjustments to Book Value. If the Adjusted Book Value of any Company asset is adjusted as provided in Section 3.1.4, subsequent allocations of income, gain, loss, and deduction with respect to the asset shall, solely for tax purposes, take account of any variation between the adjusted basis of the asset for federal income tax purposes and its Adjusted Book Value in the manner as provided under Code Section 704(c) and the Regulations thereunder.


4.3.

Regulatory Allocations. The following allocations shall be made in the following order:


4.3.1. Company Minimum Gain Chargeback. Except as set forth in Regulation Section 1.704-2(f)(2), (3), (4), and (5), if during any Fiscal Year there is a net decrease in Company Minimum Gain, each Interest Holder, prior ...