UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K/A
(Amendment No. 1)

(Mark One)


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission file number 000-32653

JCM Partners, LLC

(Exact Name of Registrant as Specified in Its Charter)


Delaware		94-3364323
(State or Other Jurisdiction of		(I.R.S. Employer Identification No.)
Incorporation or Organization)


2151 Salvio Street, Suite 325
Concord, CA		94520
(Address of Principal Executive Offices)		(Zip Code)

(925) 676-1966
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Units (Consisting of Class 1, Class 2 and Class 3 Units)

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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 o Accelerated filer o Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o No þ

State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant: Not applicable, since the registrant has no established trading market.

As of March 31, 2007, the registrant had the following Units (consisting of Class 1, Class 2 and Class 3 Units) outstanding of which the following number of Units were owned by a wholly-owned subsidiary of the Company:


	Owned by		Owned by		Total
Class of Unit	Members		Subsidiary		Outstanding
Class 1⁽¹⁾		12,801,130		6,260,409		19,061,539
Class 2		14,891,782		7,245,051		22,136,833
Class 3		32,655,539		15,966,961		48,622,500

Total		60,348,451		29,472,421		89,820,872


⁽¹⁾		Includes 9,533,020 Class 1 Units subject to redemption by June 30, 2007. See in the Company’s Form 10-K for the year ended December 31, 2006 Part I — Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Put Rights.

Documents Incorporated by Reference:

Not applicable.

EXPLANTORY NOTE

JCM Partners, LLC is filing this Amendment No.1 on Form 10-K/A to its Form 10-K for the year ended December 31, 2006 to revise the cover page and certain information in Items 1A (“Risk Factors”) and 5 (“Market for Registrant’s Common Equity, Related Security Holder Matters and Issuer Purchases of Equity Securities”) to clarify that we treat our Class 1, Class 2 and Class 3 Units as one class of securities for purposes of registration under Section 12(g) of the Securities Exchange Act of 1934. This Form 10-K/A does not otherwise amend the Form 10-K.

Forward Looking Statements

Certain information included in or incorporated by reference into this Annual Report on Form 10-K contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “intend,” and variations of such words and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” or similar expressions. Forward-looking statements, including those relating to our business strategy, capital expenditures, refinancing activities, occupancy levels, financial performance, and liquidity and capital resources, are subject to risks and uncertainties. Actual results or outcomes may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors. Those risks and factors include unanticipated adverse business developments affecting us or our properties, adverse changes in the real estate markets, increases in interest rates, increased competition, changes in general and local economies, and federal, state and local governmental regulations that affect us. Forward-looking statements speak only as of the date they are made, and we assume no duty to update them.

PART I

Item 1. Business

Background

JCM Partners, LLC, a Delaware limited liability company (“JCM Partners”, “JCM” or the “Company”), was organized on May 15, 2000. We are the reorganized entity which emerged from the bankruptcy proceedings in the United States Bankruptcy Court for the Eastern District of California entitled In re IRM Corporation, et al. (the “IRM entities”). Additional background information about the bankruptcy proceedings from which we emerged is set forth later in this Item 1 – Business, under “The IRM Bankruptcy Proceedings.”

Our principal executive offices are located at 2151 Salvio Street, Suite 325, Concord, California, 94520.

Overview

JCM Partners is a limited liability company with activities related to the ownership, development, acquisition, renovation, management, marketing and strategic disposition of multifamily apartment communities and commercial properties in California. Through our wholly-owned subsidiaries, we currently own 45 properties. Management’s strategy is to be a regional, highly efficient provider of quality apartment communities. We seek to be a market leader by operating a sufficiently sized portfolio of apartments within each of the markets in which we own properties in order to drive down operating costs through economies of scale and management efficiencies.

As of December 31, 2006, our real estate portfolio consisted of:

	•		38 apartment complexes with an aggregate of 4,984 units;

	•		one office/retail property with 36 tenants and approximately 120,000 square feet;

	•		two office properties with 4 tenants and approximately 49,000 square feet; and

	•		four industrial properties with 14 tenants and approximately 103,000 square feet.

All of our real estate assets are located in Northern California, primarily in the Sacramento Metropolitan Area, the Central Valley communities of Tracy, Manteca, Modesto, Turlock and Stockton and the San Francisco Bay Area.

We are subject to the risks inherent in the ownership of real property, such as fluctuating land values, interest rates, vacancy rates and rental values. Further, there could be difficulties in selling the properties as a result of general and local economic conditions, the condition of the properties, the demand for the properties and real property tax rates.

In addition, certain expenditures associated with real estate equity investments (principally mortgage payments, real estate taxes, and maintenance costs) are not necessarily decreased by events adversely affecting our income from the properties. Thus, the cost of operating and holding the properties, or certain of them, may exceed the properties’ resale value and income producing ability, and we therefore may have to borrow funds in order to protect our investment or be required to dispose of the properties, or certain of them, at a loss. Our ability to meet our debt and other obligations, and thereafter to make distributions to our members in accordance with our Operating Agreement and Certificates of Designations, will depend on these and other factors. We are also subject to the rights of our Class 1 and Class 2 Unit holders to require us

to redeem their Units in 2007 and 2012, respectively. See Part I – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Put Rights.

Our Operating Agreement provides that the purposes of JCM Partners are:

	•		to own, exchange, manage, sell and dispose of our properties and to distribute the excess proceeds to the members or reinvest such excess proceeds in any type of investment,

	•		to engage in any other activities relating to, and compatible with, the purposes set forth above, and

	•		to take such other actions, or do such other things, as are necessary or appropriate as determined by the Board of Managers to carry out the provisions of our Operating Agreement.

We have focused our activities on those related to the ownership, development, acquisition, renovation, management, marketing and strategic disposition of multifamily apartment communities and commercial properties in California. We currently intend to continue this focus, but our Board of Managers could, without member approval, decide to engage in other activities. Beginning in August 2004, we also began disposing of selected properties to raise funds to purchase Class 1 Units from our members in 2007. As of December 31, 2006, we had $32,563,000 in cash to meet our redemption obligations to our Class 1 Unit holders and for working capital purposes. We have invested that cash in “AAA” rated commercial paper with maturities of 60 days or less and money market instruments.

Our Board of Managers has broad discretion with respect to our investments and has the power to determine which types of investments are in the best interests of our Company and its members. Although we are not limited by our Operating Agreement, we currently intend to continue our focus on investing in apartment communities and commercial properties primarily in California. We currently hold these properties primarily for capital appreciation and income. However, in connection with the redemption rights of the holders of our Class 2 Units, we may need to sell some of our properties. Although we do not have a policy as to the amount or percentage of assets which will be invested in any specific property, it is our intent to maintain a diversified portfolio of properties.

Policies with Respect to Other Activities

Except as described below, we have not adopted any formal policies regarding the extent to which we will engage in specific activities such as issuing senior securities, borrowing money, making loans, investing in the securities of other issuers for the purpose of exercising control, underwriting securities of other issuers, engaging in the purchase and sale (or turnover) of investments, offering securities in exchange for property, repurchasing or otherwise reacquiring our Units or Preferred Units, or making annual or other reports to our members.

Voluntary Unit and Preferred Unit Repurchases

Under the terms of our Operating Agreement, we have the discretion to repurchase or otherwise reacquire Units from our members. In December 2001, our Board of Managers authorized us from time to time to repurchase Units and Preferred Units from our members, although we are not obligated to do so. In March 2004, our Board of Managers modified our repurchase guidelines to allow us to repurchase up to $20 million of Units and Preferred Units in any single month. In July 2005, our Board of Managers modified the formula, which determines the maximum price at which the Company would be willing to consider repurchasing Units, to include an increase in property values, a deduction of 10% of the value of the properties representing “all anticipated costs and expenses (including but not limited to the estimated costs

and expenses of liquidating all of the Company’s properties)” and a minority/liquidity discount. Units we redeem pursuant to the Class 1 or Class 2 Put Rights will not be counted against the $20,000,000 of funds available for repurchase under this program. Our repurchase guidelines have the following policies:

	•		The Company shall use its best efforts to cause its subsidiary to repurchase Units and Preferred Units at prices that are consistent with the guidelines and any applicable certificates of designations;

	•		The Company shall set aside as non-cumulative cash reserves an amount equal to $100,000 each month to fund repurchases of Units and Preferred Units; and

	•		The Company shall prioritize available funds for repurchases in the following order:

	o		Repurchase of Units and Preferred Units in the case of hardship;

	o		Repurchases of Units and Preferred Units that have the most current “put right” to sell their Units or Preferred Units back to the Company; and

	o		After satisfaction of the above priorities, all Units and Preferred Units shall be treated equally, except where expressly limited by a Certificate of Designations (i.e., Series B Preferred Units may not be repurchased for three years from the date of purchase from the Company, except in the case of hardship).

In 2006, through a wholly-owned subsidiary, we made voluntary repurchases of 57,325 Class 1 Units, 135,603 Class 2 Units and 68,865 Class 3 Units for an aggregate amount of $471,000. We paid the same price for repurchases of Class 1, 2 and 3 Units. From January 1, 2007 through March 31, 2007, through a wholly-owned subsidiary, we made voluntary repurchases of an additional 17,863 Class 1 Units and 48,840 Class 3 Units for an aggregate amount of $124,000. We paid the same price for repurchases of Class 1 and 3 Units. As of March 31, 2007, our wholly-owned subsidiary owned 6,260,409 Class 1 Units, 7,245,051 Class 2 Units and 15,966,961 Class 3 Units.

Purchases of Put Class 1 Units

In July 2005, our Board of Managers adopted the following guidelines for the purchase of Put Class 1 Units, which we are required to purchase by June 30, 2007:

•

No Put Class 1 Units shall be purchased until June 1, 2007, unless the Company has determined that (the “Management Determination”):

	o		The Company has funds available to pay for Put Class 1 Units; and

	o		Purchasing Put Class 1 Units is in the best interest of the Company.

•

After the Management Determination has been made, Put Class 1 Units shall be purchased by the Company according to the following priorities:

	o		In the case of hardship;

	o		To holders of the fewest Put Class 1 Units.

In 2006, we purchased 83,813 Put Class 1 Units for an aggregate amount of $234,000.

Member to Member Sales of Units

Under guidelines approved by our Board of Managers, we provide information to our members that allow them to contact each other in order to facilitate trading of Units among members.

Conversions of Units held by our Wholly-Owned Subsidiary

Pursuant to a resolution of our Board of Managers, as our members convert their Units into different Classes of Units, we have a policy of converting Units held by our wholly-owned subsidiary into the same Class of Units, so that our wholly-owned subsidiary will proportionately own the same number of different Classes of Units as those owned by our members.

Series B Preferred Units — (“Senior Securities”)

Our Series B Preferred Units are senior in priority to our Class 1, 2 and 3 Units upon our liquidation or if we are involved in a change of control (as defined in the Certificate of Designations of the Series B Preferred Units (the “Series B COD”)). See Sections 6.1.3 and 6.1.4 of our Description of Securities (as revised February 10, 2006) (the “Revised Description of Securities”) for further information. Our Class 1, 2 and 3 Units are senior in priority to our Series B Preferred Units with respect to the payment of mandatory monthly distributions. See Sections 6.1.1 of our Revised Description of Securities for further information. We issued the Series B Preferred Units to accredited investors in connection with our need to raise capital to finance the Class 1 Unit Put Right. Holders of Class 1 Units who were accredited investors, were permitted to pay for Series B Preferred Units in whole, or in part, with Class 1 Units valued at the price at which the Company was willing to repurchase Class 1 Units as of the day of the applicable Series B Preferred Subscription Agreement.

The Apartment Properties

As of December 31, 2006, our apartment properties consisted of 38 apartment complexes located in the following counties: 18 in Sacramento County, 5 in Solano County, 5 in Stanislaus County, 7 in San Joaquin County and 3 in Contra Costa County. The majority of these properties are classified as “second tier” or “class B,” meaning that they are considered to be typically well located, older properties in average to good condition. As of December 31, 2006, 5% of our apartment properties are classified as “first tier” or “class A”.

Revenues from our apartment properties result primarily from rents. These rents are required to be paid on a monthly basis. Our business strategy includes seeking to increase the cash flow generated by our apartment properties through rent increases upon tenant turnover and lease expiration, while maintaining high occupancy rates and prudent management of our operating expenses. Our ability to increase rents is subject to market conditions and general economic conditions. Accordingly, there can be no assurance that we will be able to implement our operating strategy successfully. We do not institute rent increases based on a pre-determined range, nor are such increases based on increased services and/or renovations. Accordingly, existing and even new tenants might resist such rent increases. We will generally make any increased cash flow available for our operating and capital expenses and cash distributions, but may offer some increased services and/or renovations as determined by market conditions. The average occupancy rate of our apartment properties was 95.4% at December 31 2006, 93.8% at December 31, 2005 and 94.6% at December 31, 2004. The apartment occupancy level at December 31, 2005 would have been 94.8% excluding the 272 unit apartment property acquired in September 2005.

In general, the tenants in our apartment properties enter into our standard form of lease, as modified, if necessary, to comply with local ordinances or custom. The term of these leases varies with market conditions, although the vast majority of the leases are between six and twelve months. Generally, the leases provide that unless the parties agree in writing to a renewal, the tenancy will convert at the end of the lease term to a month-to-month tenancy, subject to the terms and conditions of the lease, unless either party gives

the other at least 30 days’ prior notice of termination. All leases are terminable by us for nonpayment of rent, violation of property rules and regulations, or other defaults specified in the lease.

Approximately 55% of the tenants in our apartment properties leave each year, and rents are adjusted to reflect market conditions existing at the time any new rental relationship commences. As a result of the relatively short-term stay of the majority of our tenants, our apartment properties tend not to have long-term leases that lock in current market rates.

Our employees are responsible for marketing, maintenance and leasing activities at our apartment properties. These employees meet with prospective residents, show models or available units, rent vacant units and strive to maintain contact with current tenants to monitor their level of satisfaction. From time to time, we have employed the services of, and paid customary fees to, apartment locator services and existing tenants for locating prospective tenants.

All of our apartment properties are located in developed areas that include other apartment properties serving comparable tenant populations. An increase in the number of competitive apartment properties in a particular area could have a material adverse effect on rents and our ability to maintain occupancy levels. Construction of a significant number of new apartment properties during 2003 and 2004 in Sacramento and Solano Counties, combined with high unemployment, had an adverse effect on occupancy levels of our properties located in those counties. This effect began to temper in late 2005 with an improving unemployment rate and a slowing in new construction. We also compete with providers of other forms of multifamily residential properties and single-family housing. Buying or renting single-family housing was the reason given by 24% of residents who moved out of our apartment properties during 2006.

The Commercial Properties

As of December 31, 2006, our commercial properties consisted of seven sites in Northern California, including the Concord, California building housing our executive offices. Four of our commercial properties are located in Napa County and three are located in Contra Costa County. Additional information regarding our commercial properties can be found in “Item 2 — Properties.”

Revenues from our commercial properties are derived primarily from commercial tenants’ rents and common area maintenance charges. The rents are payable monthly.

As with our apartment properties, we seek to increase cash flow at our commercial properties through periodic rent increases for existing tenants according to the terms of their leases, through rent increases upon tenant turnover and lease expiration, by maintaining high occupancy rates and through prudent management of our operating expenses. Our ability to increase rents is subject to market conditions and general economic conditions. Accordingly, there can be no assurance that we will be able to increase rents or otherwise implement our operating strategy successfully. We do not institute increases based on a pre-determined range, nor based on increased services and/or renovations. We will generally make any increased cash flow available for our operating and capital expenses and cash distributions. The average occupancy rate of our commercial properties was 95.1% as of December 31, 2006, 88.9% as of December 31, 2005 and 86.2% as of December 31, 2004.

We use standard lease forms, modified at each property to the extent necessary to comply with local law or custom and negotiations with tenants. The term of a lease varies with local market conditions, although multi-year leases with annual Consumer Price Index (“CPI”) or fixed rent increases are most common. Some of our leases include an option for the tenant to extend the term of the lease for an additional period.

All leases are terminable by us for nonpayment of rent, violation of property rules and regulations, or other defaults specified in the lease.

Historically, in any given year, 6% to 25% of our existing commercial leases expire. In 2007, 13% of our existing commercial leases are scheduled to expire. Some tenants will exercise their option to extend the term of the lease, others will sign a new lease and extend their tenancy for an additional multi-year period, and others will vacate their spaces. Rents are adjusted to reflect market conditions for spaces that are vacated or when leases are renewed. We may incur substantial costs to improve our vacating or renewing commercial suites for tenant improvements. If we do, we normally will finance, capitalize and amortize these costs over the life of the lease.

Our employees are responsible for marketing, maintenance and leasing activities at the commercial properties. Prospective tenant leads are generated primarily through commercial real estate broker referrals. We strive to maintain contact with our existing commercial tenants to determine their level of satisfaction with property management and operations. We may employ the services of, and pay customary fees to, unaffiliated real estate brokers for leasing services and for locating prospective tenants.

All of our commercial properties are located in developed areas that include other commercial properties serving comparable tenant profiles. An increase in the number of competitive commercial properties in a particular area could have a material adverse effect on our ability to maintain current occupancy levels and maintain or increase the rental rates applicable to the properties.

Insurance

Each of our properties is covered by liability and casualty insurance provided by reputable companies and with commercially reasonable deductibles and limits, with such limits being equal to the replacement value of each property. Our management exercises its discretion in determining amounts, coverage limits and deductibility provisions of insurance, with a view to maintaining appropriate insurance on our investments at a reasonable cost and on suitable terms.

Where required by our lenders, we obtain flood insurance. We do not maintain earthquake insurance coverage due to the high premium cost. Accordingly, a loss resulting from earthquake damage could have a material adverse effect on our financial condition and our operating results. Even if a loss is covered by our insurance, our insurance coverage may not be sufficient to pay the full current market value or replacement cost of our lost investment. Inflation, changes in building codes and ordinances, environmental considerations and other factors also might make it unfeasible to use insurance proceeds to repair or replace a property after it has been damaged or destroyed.

As a general matter, concern about indoor exposure to mold has been increasing as such exposure has been alleged to have a variety of adverse health effects. As a result, there have been a number of lawsuits in our industry against owners and managers of apartment communities relating to moisture infiltration and resulting mold. Mold growth may occur when excessive moisture accumulates in buildings or on building materials, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. To help limit mold growth, we educate residents about the importance of adequate ventilation and require that they notify us when they see what they believe to be mold or excessive moisture. We have established procedures for promptly addressing and remediating mold or excessive moisture from apartment homes when we become aware of its presence regardless of whether we or the resident believe a health risk is present. However, we cannot be sure that mold or excessive moisture will be detected and remediated in a timely manner. If a significant mold problem arises at one of our communities, we could be required to

undertake costly remediation to contain or remove the mold from the affected community and could be exposed to other liabilities.

The presence of, or the failure to properly remedy, mold or other hazardous substances may adversely affect both occupancy at affected apartment communities and also our ability to sell or finance the affected properties. In addition to the costs associated with investigation and remediation, the presence of mold on a property could result in claims by private plaintiffs for personal injury, disease, disability or other infirmities.

The terms of our property and general liability policies exclude mold-related claims. Should an uninsured loss arise against the Company, we would be required to use our own funds to resolve the issue, including litigation costs. Therefore, we can make no assurance that future liabilities resulting from the presence of, or exposure to, mold will not have a material adverse effect on our financial condition or results of operations. To date, we have not incurred any material costs or liabilities relating to claims of mold exposure or to abatement of mold conditions. However, we have been party to alleged moisture infiltration and resulting mold lawsuits at some of our apartment properties. We believe these suits were without merit; nonetheless, in certain instances we negotiated a settlement with certain of the plaintiffs in an effort to expedite the resolution of their claims and avoid potentially protracted litigation and associated attorney’s fees.

Possible Tax Consequences for Members

Disclaimer

The tax issues associated with the ownership of Units and Preferred Units of JCM Partners are extremely complex and are unique to each member’s own individual tax situation. The following summary of the tax laws may not be applicable to all of our members. Our members should consult their tax advisors concerning their individual tax situations with respect to the federal, state, local and foreign tax consequences arising from their ownership of JCM Partners Units and Preferred Units. For the purposes of this “Possible Tax Consequences for Members” discussion, “Units” means both Units and Preferred Units, except where expressly set forth to the contrary.

Basic Concepts of Partnership Taxation

Definitions

Definitions for many of the terms used throughout this section can be found at the end of the section.

Member’s Income

JCM is treated as a partnership for tax purposes. Therefore, the Company is not subject to federal income tax. Instead, it files an annual information return with the Internal Revenue Service (“IRS”). Each member is required to report on the member’s personal tax return the member’s share of each item of Company income, gain, loss, deduction and credit, if any. Member’s taxable amounts may be different from the income, gain, loss, or deduction reported on the Company’s financial statements. During the first quarter of each year, the Company provides each member with a Form K-1 that reports that member’s pro rata share of the Company’s income, gains and/or losses for the previous calendar year. Each member is subject to tax on the member’s share of JCM income, even if no cash is distributed. Members who dispose of some or all of their Units during the year are allocated a pro rata portion of the income, gain, loss, deduction and credit that they would have otherwise received had they held such Units for the entire year. The proration is based on the portion of the Company’s taxable year that elapses prior to the disposition of the member’s Units.

The amount of any loss or deduction that a member may use in computing the member’s tax liability is limited to the member’s adjusted basis in the member’s Units. In other words, a deduction cannot be taken if it would cause the member’s adjusted basis to become negative. Additionally, losses are limited to the amount “at risk” and the amount of income and loss from other passive activities.

Passive Loss Rules

The tax law restricts the ability of many types of taxpayers (including individuals, most trusts, estates, personal service corporations and closely held corporations) to deduct losses derived from so-called “passive activities”. Passive activities generally include any activity involving a business in which the taxpayer does not actively participate, including membership in limited liability companies such as JCM. For almost all JCM members, their membership interest will be treated as a passive activity. Accordingly, JCM’s income and/or loss will likely constitute passive income and/or loss to its members.

Generally, losses from passive activities are deductible only to the extent the taxpayer has income or gains from other passive activities. Therefore, passive losses are not allowed to offset other income – such as salary, compensation for personal service, active business income, dividends, interest, royalties, annuities or gains from the sale of property held for investment. Passive losses that are not allowed in any tax year are suspended and carried forward indefinitely. Suspended losses may be used in future years to offset future passive income.

Upon the sale or transfer of a taxpayer’s entire interest in a passive activity in a taxable transaction to an unrelated person, suspended losses with respect to that activity will be allowed as a deduction against:

	(i)		First, any remaining income or gain from that activity, including gain recognized on such disposition, then

	(ii)		On income or gain for the taxable year from other passive activities; and finally

	(iii)		Any other non-passive income or gain.

IRS regulations provide that similar investments, which are under common control and owned by a pass-through entity such as JCM, are generally treated as a single investment. Accordingly, suspended passive losses derived from an investment in JCM would not be available to members to offset non-passive income from other sources until the sale of all Company properties has occurred or until a member disposed of the member’s entire interest in JCM.

Member’s Basis

Basic Concepts

The Company maintains a capital account for each member. This capital account is the beginning point in computing a member’s basis in the member’s JCM Units. A member’s adjusted basis in JCM is equal to the amount originally invested in IRM or JCM, plus the cumulative effect of all capital account adjustments reported annually to the investor by both IRM and JCM on Form K—1. More specifically, a member’s adjusted basis is the amount originally invested increased by:

	•		Any increases in a member’s allocable share of the Company’s non-recourse debt;

	•		The member’s allocable share of the Company’s income or gain (including tax-exempt income); and

	•		Any additional contributions to the Company’s capital made by the member;

and decreased by:

•

The member’s allocable share of Company losses;

	•		The member’s allocable share of non-deductible expenses;

	•		The sum of all cash distributions made to the member; and

	•		Any decreases in a member’s share of the Company’s non-recourse debt.

Distributions in excess of a member’s adjusted basis generally will be treated as a gain from the sale of a member’s interest in the Company.

A member may not deduct from the member’s income, losses in an amount exceeding the member’s adjusted basis. If, in any one tax year, a member’s share of Company losses exceeds the member’s adjusted basis at the end of that year, the excess losses must be carried forward and applied against gains in future years. In general, these suspended losses cease being deductible whenever the member’s adjusted basis drops to zero.

Non-recourse Debt

Non-recourse debt is any Company liability in which a member has a pro rata interest, but no personal responsibility (e.g. mortgages on JCM properties). Any increase in non-recourse liabilities allocable to a member is treated as a cash contribution by the member and increases the member’s basis. Any decrease in non-recourse liabilities allocable to a member is treated as a cash distribution to the member and decreases the member’s basis (but not below zero). These rules apply even though a member does not contribute or receive actual cash. Distributions in excess of a member’s adjusted basis generally will be treated as a gain from the sale of a member’s interest in the Company.

A member that puts (sells) units to the Company will have a decrease in his or her share of non-recourse debt, that reduction in debt will be treated as a reduction in the member’s tax basis and will, therefore, increase the gain (or reduce the loss) recognized by the member in the sale.

Sale or Disposition of JCM Property and Member’s Interest

Tax Treatment of Gains and Losses

The gain or loss on the sale of a member’s Units is the difference between the sale amount and the member’s adjusted basis. This basis includes a pro rata portion of the income, gain, loss, deduction and credit that the member would have otherwise received had it held the transferred Units for the entire year. The proration is based on the portion of the Company’s taxable year that elapses prior to the sale of the member’s Units. Generally, gain on the sale of Units that have been held for more than 12 months will be taxed as a long-term capital gain. For non-corporate taxpayers, long-term capital gains are taxed at special federal tax rates. For sales prior to May 6, 2003 and after December 31, 2010, long-term capital gains are subject to a maximum federal tax rate of 20% (10% to the extent the taxpayer’s taxable income is taxed at the 10% or 15% tax rate). The 20% and 10% rates are reduced to 18% and 8%, respectively, if the Units sold were held for more than five years.

For sales after May 5, 2003 and before January 1, 2011, long-term capital gains are subject to a maximum federal tax rate of 15%, 5% to the extent the taxpayer’s taxable income is taxed at the 10% or 15% tax rate The 5% rate is to be replaced with a 0% rate for calendar years 2008, 2009 and 2010.

A capital loss may generally be used to offset other capital gain in the year of the loss. If an individual taxpayer has a net capital loss in a given tax year, the amount of ordinary income against which he or she may deduct the capital loss is the lower of $3,000 ($1,500 for a married taxpayer filing a separate return) or the net amount of the loss. Capital losses in excess of these limitations may be carried forward to future tax years.

There is a separate federal capital gains tax rate applied to “unrecaptured gain” as described in section 1250 of the Internal Revenue Code. This class of gain includes real property that is subject to an allowance for depreciation. Unrecaptured section 1250 gain is currently subject to tax at a 25% federal rate, rather than the current federal long-term capital gain rate of 15% (5% for individuals in the 10% or 15% tax brackets).

The unrecaptured section 1250 gain tax is computed on the portion of the gain attributable to previously taken depreciation. For example, suppose a person bought a rental unit for $100,000, claimed depreciation deductions over several years of $40,000, thus reducing adjusted basis to $60,000, and then sold it for $130,000. There would be a total gain of $70,000 with the following taxes applying:

	•		The difference ($40,000) between what was paid for the property ($100,000) and its depreciated basis ($60,000) would be taxed at the special 25% federal rate.

	•		The difference ($30,000) between what was paid for the property ($100,000) and its sales price ($130,000) would be taxed at the 15% federal long-term capital gain rate.

As of December 31, 2006, JCM had approximately $138,671,000 of aggregate unrecaptured section 1250 gain (the “Existing Unrecaptured Section 1250 Gain”). This amount reflects dollar-for-dollar reductions for the unrecaptured section 1250 gain that has been recognized by members in connection with sales of members’ Units to third parties (i.e. persons other than JCM or JCM’s wholly-owned subsidiary) and also reflects reductions related to transfers of interest upon a member’s death. Based on the current tax rules, the 25% tax rate on unrecaptured gain does not apply to the redemption of a member’s Units (i.e., the purchase of the Units by either JCM or JCM’s wholly-owned limited liability company subsidiary, whether resulting from the Class 1 Put right, the Repurchase Program or otherwise). Instead, upon the redemption of a member’s Units, the current federal long-term capital gain rate of 15% (5% for individuals in the 10% or 15% tax brackets) applies. JCM may be able to reduce the Existing Unrecaptured Section 1250 Gain to some extent due to the redemptions of members’ Units. However, the rules relating to such potential reduction are complex and the Company has not obtained a tax opinion regarding the amount of Existing Unrecaptured Section 1250 Gain that JCM may reduce as a result of the redemptions of members’ Units. Accordingly, there is no guarantee that the IRS will agree with our interpretation. Also, it is possible that members who do not sell their Units to JCM (or its wholly-owned subsidiary) in a put or repurchase transaction may bear the entire cost of the 25% federal tax rate applicable to the Existing Unrecaptured Section 1250 Gain.

Members are subject to paying this special 25% federal tax rate applied to “unrecaptured gain” upon (i) the sale or exchange of a member’s Units to a third party or (ii) JCM’s sale of properties with “unrecaptured gain”. Therefore, upon the sale of a property by JCM, a portion of each member’s allocable share of gain may be subject to the 25% federal tax rate even though members may not actually receive any distribution upon the sale of the property. As discussed above, members whose Units are redeemed, whether resulting from the Class 1 Put Right, the Repurchase Program or otherwise, are not subject to this 25% tax rate as a result of the redemption. However, because JCM prorates the income, gain, loss, deduction and credit that the member would have otherwise received had they remained a member for the entire year, a member is subject to a possible allocation of unrecaptured section 1250 gain for property sales that occur during a year (even after the redemption of the member’s Units). Depending on the member’s individual circumstances and the application of complex netting rules, a member may not be allowed to offset such allocation of unrecaptured Section 1250 gain against any potential capital loss associated with the redemption of the member’s Units.

Consequences of Exercise of the “Put” Options in 2005 and 2010 and Possible Liquidation in 2012

Our Certificate of Designations of Class 1 Units (“Class 1 COD”) gave our Class 1 Unit holders the right to require the Company to redeem some or all of their Class 1 Units by June 30, 2007. On September 28, 2005, the rights of the holders of Class 1 Units to exercise their Class 1 Put Rights expired. Our Class 1 COD required our Board of Managers to meet no later than June 30, 2006 to determine whether we should continue operations beyond June 30, 2007. On July 13, 2005, our Board of Managers determined that we should continue operations beyond June 30, 2007.

Our Certificate of Designations of Class 2 Units (“Class 2 COD”) gives our Class 2 Unit holders the right to require the Company to redeem some or all of their Class 2 Units by June 30, 2012. The exercise of this right by a sufficient number of Class 2 Unit holders may also result in the liquidation of the entire Company under the terms of our Class 2 COD. Our management believes it is unlikely that we would be required to liquidate the Company under the Class 2 COD. The redemption of Units or the liquidation of the Company will most likely result in gain to the members whose Units are redeemed or liquidated. This gain will be computed in a manner similar to that described above.

Pre-Contribution Gains

As a result of the IRM bankruptcy proceedings, on June 30, 2000, persons who were equity investors in IRM (“Equity Investors”) and persons who were debt investors in IRM (“Debt Investors”) both became equity owners of JCM. The fact that their JCM Units originated from different types of IRM investments (i.e. equity and/or debt) will affect the determination of their future tax consequences.

Capital gains and unrecaptured section 1250 gains associated with the sale of JCM properties will be allocated back to the former Equity Investors to the extent those gains or losses were unrealized at the time of JCM’s formation. These pre-contribution gains are substantial. Therefore, if JCM sold a large number of properties or liquidated entirely, there would be substantial gains allocated back to the original IRM Equity Investors. Any gains since JCM’s formation that are attributed to the appreciation of real property will be divided among all JCM members in accordance with their ownership interests. In connection with the exercise of the “puts” held by holders of Class 2 Units, JCM might be required to liquidate a large number of properties or to liquidate entirely. This action would cause the recognition of pre-contribution gains.

A large percentage of our Equity Investors who are Class 1 Unit holders have a capital balance that is negative or near negative. This means, by way of illustration, that if a Class 1 Unit holder had a capital account balance of a negative $1.00 per Class 1 Unit and sold those Class 1 Units for $2.78 each, that holder would be subject to taxes on $3.78 per Class 1 Unit.

The pre-contribution rules also require the reduction in the difference between the tax basis of Debt Investors and that of Equity Investors through specific allocations of deductions. Section 704(c) of the Internal Revenue Code may require the allocation of depreciation associated with property contributed to a partnership, away from the contributing partner where the member’s capital account reflects an unrealized gain inherent in the contributed property. It is the responsibility of the Tax Matters Partner to select the method for making the allocations under Section 704(c) of the Tax Code. In general, the Tax Matters Partner has elected not to allocate depreciation to members with negative capital account balances.

Gifts of Units

Generally, no gain or loss is recognized for income tax purposes as a result of a gift of property. However, if a gift of Units is made at a time when a member’s allocable share of non-recourse indebtedness exceeds the member’s adjusted basis in such units, the gifting member will recognize a gain upon the transfer to the extent of such excess. Any such gain will be computed in a manner similar to the tax treatment of gains on the sale of Units as described above. Gifts of Units may also be subject to a gift tax imposed pursuant to the rules generally applicable to all gifted property.

A gift of Units will not cause any suspended passive losses to become deductible. The recipient’s basis in the gifted Units is the same as the donor’s basis at the time of the gifting, plus any suspended passive losses allocable to the gifted Units. It should be remembered, however, that the recipient’s basis, for purposes of determining loss on a later disposition, cannot exceed the fair market value of the Units on the date of the gift. Consequently, if the sum of the donor’s basis in the Units plus the suspended passive losses associated with those units exceeds the fair market value of the Units, the deductibility of a portion of the suspended losses could be permanently lost.

Death of a Member

In general, the basis for inherited property is increased or decreased (“stepped up” or “stepped down”) from the decedent’s basis to the asset’s fair market value at the date of the decedent’s death. This adjustment to basis also applies to inherited JCM units. JCM has elected to reflect this adjustment in the tax basis of the property held by the Company. Any gain, loss or deduction associated with this step up or step down is specifically allocated to the member inheriting a deceased member’s JCM interest. To the extent the adjustment is allocated to depreciable property, the inheriting member is specifically allocated any related depreciation. Under current law, the unlimited “step up” in basis on death is scheduled to expire at the end of 2009 and to be replaced with a more limited “step up”, all in conjunction with the repeal of the federal estate tax effective in 2010. However, these rules are currently effective only for one year, in 2010, unless Congress passes additional legislation. Members are urged to discuss the income and estate tax rules with their own tax advisers in light of their varying situations.

JCM’s Treatment of Depreciation and Prepaid Expenses

Depreciation

Current tax law provides for a Modified Accelerated Cost Recovery System (“MACRS”) of depreciation. Under this system, the cost of eligible residential real property, whether new or used, generally must be depreciated over a 27.5 year period using the straight-line method.

Furthermore, under MACRS, eligible personal property is divided into six classes (i.e. 3-year, 5-year, 7-year, 10-year, 15-year and 20-year). Any property, whether new or used, generally must be depreciated over specified periods using a prescribed accelerated method of depreciation or, if the taxpayer so elects, using the straight-line method over various periods. Property placed in service prior to 1987 was depreciated under an accelerated cost recovery system (“ACRS”), which provided for faster tax depreciation than under MACRS.

Generally, the real property owned by JCM is subject to a 27.5 year recovery period and is depreciated using the straight-line method. JCM’s personal property is generally depreciated over a seven-year period using the double declining balance method, switching to straight-line when appropriate to maximize the depreciation deductions.

Prepaid Expenses

Some expenses may not be deductible in the year they were paid. To the extent this occurs, the taxable income of the partnership may exceed its cash receipts for the year in which the expense is paid. As discussed above, the costs of acquiring properties must generally be recovered through depreciation deductions over a number of years. Prepaid interest and loan fees, and prepaid management fees are other examples of expenses that may not be deducted in the year they were paid.

Tax Information and Returns

Tax Reporting and Filing Issues

Members are required to treat partnership items on their tax returns consistently with the treatment on JCM’s return, unless a member files a statement with the IRS identifying the inconsistency. Failure to satisfy this requirement could result in an adjustment to conform the treatment of the items by the member to its treatment on JCM’s return. In the event such adjustments are imposed, the member may also be subject to interest and penalties.

JCM’s income tax returns may be examined by the IRS or the California Franchise Tax Board. Such examinations may result in the examination of the returns of its members. In an examination audit, various deductions claimed by members on their returns could be disallowed in whole or in part. Such an action would result in an increase in the taxable income or a decrease in the taxable loss of JCM, with no associated increase in distributions with which to pay any resulting increase in the members’ tax liabilities.

Examinations of the Company by the IRS or the California Franchise Tax Board would be conducted at the JCM level in a single proceeding, rather than in separate proceedings with each of JCM’s members. Administrative adjustments to items challenged in an examination can be initiated by JCM’s Tax Matters Partner or by a member. Suits challenging the Service’s determinations may be brought by the Tax Matters Partner or by JCM’s Board of Managers. Only one such action may be litigated. All JCM members generally will be bound by the outcome of final partnership adjustments made by the IRS, as well as the outcome of any judicial review of such adjustments.

State Tax Returns

JCM has California source income. Therefore, members who are non-residents of California will be subject to tax in California with respect to their share of such income. California law requires JCM to withhold taxes from JCM’s non-resident members who:

	•		Do not consent to California’s authority to tax their JCM income by completing a Limited Liability Company Nonresident Members’ Consent (Form 3832);

	•		Do not provide withholding waivers; or

	•		Have more than $1,500 in California taxable source income during a tax year.

JCM must remit the taxes to the California Franchise Tax Board. Withholding waivers can be obtained by members who file required California income tax returns. It is the responsibility of non-resident members to consult with their tax advisors regarding their California income tax return filing requirements. Many non-resident members may be required to file California income tax returns because of their JCM California source income.

Prior to 2005, JCM declared a voluntary distribution to non-resident members in an amount sufficient to pay this tax. JCM then paid this amount to the California Franchise Tax Board and sent JCM’s other members, a cash distribution in an equal and compensating amount per Unit. JCM has not made a similar voluntary distribution since 2005 and does not intend to declare these additional distributions in the future. However, our Board of Managers has the authority to resume these distributions in the future.

As it has in past years, JCM will pay the California Franchise Tax Board the required tax withholding amount on behalf of non-resident members. Since 2005, JCM has recovered this tax from those members over the remainder of the year. So for affected non-resident members, JCM began withholding one-ninth of the total withholding amount paid on each members’ behalf, starting with their April monthly distribution, so that each member repaid the Company by the end of the year. If JCM repurchased or redeemed Units or Preferred Units from one of these members prior to the end of the year, the amount paid to that member was reduced by any remaining amount due to the Company. If such member sold, transferred or gifted Units or Preferred Units to another investor, JCM required payment of the remaining withholding amount due the Company as part of the transfer paperwork.

JCM will not pay the amounts above on behalf of Managers of JCM who are non-resident members, due to the limitations created by the Sarbanes-Oxley Act of 2002, should these amounts be treated as “loans” to our Managers and Executive Officers. Instead, Managers who are non-resident members shall be required to pay JCM these amounts simultaneously or with our payment of these amounts to the California Franchise Tax Board.

Exempt Organizations

Qualified plans (e.g. pension plans, profit sharing plans and IRA’s) and other tax-exempt entities should consult their tax advisors with regard to the tax issues unique to such entities, including, but not limited to, issues relating to the classification of partnership interests as plan assets, unrelated business taxable income (UBTI) and required distributions.

Any person who is a fiduciary of an IRA, Keogh Plan, Qualified Plan or other tax-exempt entity with an investment in JCM should be aware that most JCM properties are debt-financed properties. This indebtedness is considered acquisition indebtedness, creating UBTI. A trustee of a charitable remainder trust should be aware that if any portion of the income derived from its ownership of Units is deemed to be UBTI, the trust will lose its exemption from income taxation.

Subsidiary Limited Liability Companies

JCM Partners, LLC is the single member in approximately 46 separate entities organized as California limited liability companies (LLCs), of which 45 are providing rental revenues as of December 31, 2006. These LLCs were established at the inception of JCM or for the acquisition of a new property to hold title to the individual properties. The California Secretary of State accepted the applications for dissolution for five of these inactive LLCs during 2006. For federal tax purposes, these LLCs are disregarded and treated as if they did not exist. In general, California also disregards these entities, but imposes a minimum tax of $800 and a fee on the gross income of a limited liability company. This fee is a function of the LLC’s gross income and currently ranges from $900 where gross income is at least $250,000 to $11,790 where gross income is $5,000,000 or more. For purposes of the California tax returns for years 2000, 2001 and 2002, JCM took the position that these LLCs were mere agents of JCM and, therefore, had no gross income. Based on this, these entities paid the minimum tax but did not pay the LLC fee. The California taxing authorities may not concur with this position. For 2005 and 2004, JCM paid $196,000 and $184,000, respectively,

based on the gross income for JCM and all of the LLCs. For 2006, JCM is expecting to pay $197,000 based on gross income for JCM and all of the LLCs. JCM intends to pay the California taxing authorities based on gross income for JCM and the LLCs in future years. JCM may consider restructuring options regarding the LLCs in order to reduce the amount of these fees in the future, although the Company is not currently engaged in any active restructuring planning.

Certain Considerations Regarding Taxation Disclosure

Rulings from the Internal Revenue Service

In August 2003, JCM received a private letter ruling from the IRS confirming that the conversion from Class 1 Units to Class 2 or Class 3 Units is a non-taxable event. As such, converting members do not recognize gain or loss on the conversion and JCM disregards the conversion for tax purposes. Other than as discussed above, JCM has not obtained any rulings from the IRS regarding the tax issues discussed above. On certain issues, the Company has consulted with its tax advisors. Their advice is based upon representations and assumptions and is conditioned upon the existence of specified facts. The advice is not binding on the IRS or the courts.

Publicly-Traded Partnership

If JCM becomes classified as a “publicly-traded partnership”, we would be taxed as a corporation and our net income could be treated as portfolio income rather than passive income. The application of “publicly-traded partnership” rules to us will be based upon future facts. The IRS may determine that we should be treated as a “publicly-traded partnership” if our Units are readily tradable on a secondary market.

If JCM is classified as a publicly-traded partnership, but substantially all of its income is passive, it will avoid being treated as a corporation. However, in this situation, members would only be allowed to deduct JCM losses against JCM income. Any unused losses would be suspended and carried forward until they are either used against future JCM income or the member disposes of their entire interest in JCM.

Our issuance of the Series B Preferred Units increased our risk of the IRS determining that we should be treated as a “publicly-traded partnership”, since it removed a safe-harbor that we had previously relied upon. However, the application of publicly-traded partnership rules to JCM is based on an analysis of all surrounding facts and circumstances. Based on the advice of our tax advisors, we do not believe that we should be classified as a publicly-traded partnership. However, we have not obtained a legal opinion on this issue and there is no guarantee that the IRS will agree with us.

Challenges to Allocations

Taxing authorities may challenge our allocations of income, gain, loss and deductions. JCM’s Operating Agreement provides for the allocation of income, gain, loss and deductions among the members. The rules regarding partnership allocations are complex. It is possible that the taxing authorities could successfully challenge the allocations in the Operating Agreement and reallocate items of income, gain, loss or deductions in a manner which reduces benefits or increases income allocable to JCM’s members.

The taxing authorities may disallow our deduction of some or all fees and expenses. The IRS could seek to reallocate our basis in properties among land, improvements and personal property. Such reallocation could result in reduced tax losses or increased income without a corresponding increase in net cash flow to JCM’s members.

Income in Excess of Distributions

Members may be taxed on income which exceeds the cash distributions received by them. In any year in which we report income or gain in excess of expenses, members will be required to report their share of such net income on their personal tax returns even though they may have received total cash distributions which are less than the amount of net income they must report.

Alternative Minimum Tax

Members may be subject to alternative minimum tax which could reduce the tax benefits, or increase the tax costs, of owning Units. The effect of the alternative minimum tax upon members depends on their particular overall tax and financial situation. Members should consult with their tax advisor regarding the possible application of this tax.

Examination of Member Returns

An IRS examination of a member’s return could result in adjustments to items on the return that may or may not be related to JCM. There are special procedures pertaining to examinations of partnership tax returns which may reduce the control members would otherwise have over proceedings concerning any proposed adjustment of their tax items by the IRS. If the IRS determines that a member has underpaid taxes, that member would be required to pay the amount of the underpayment plus interest. Members may also be liable for penalties from the date the tax originally was due.

Future Events

Future events may result in federal income tax treatment of JCM and its members that is materially and adversely different from the treatment described here. This discussion of the federal income tax aspects of an ownership interest in JCM is based on current law, including the Internal Revenue Code, the treasury regulations, administrative interpretations and court decisions. Changes could affect taxable years arising before and after such events. We cannot assure members that future legislation and administrative interpretations will not be applied retroactively.

Positions Taken During the IRM Bankruptcy Proceedings

Due to the history of the IRM entities that preceded the formation of JCM and the lack of specific tax law addressing the related issues, risks remain associated with the tax positions taken during the formation of JCM. Although these positions were believed to be reasonable, neither the taxing authorities nor the courts are bound by them. Therefore, there is a continuing risk that the taxing authorities and courts will not concur with these positions. All these risks were disclosed to the original investors in connection with the Plan of Reorganization that was approved by investors during IRM’s bankruptcy proceedings. JCM believes that any risks inherent in the positions taken during those proceedings apply only to those original investors and not to individuals who have subsequently become JCM members through a cash purchase or investment.

Definitions

Adjusted Basis

The amount you use to determine your profit or loss from a sale or exchange of property. To determine your adjusted basis for an asset owned directly, start with the original cost. Add your cost of improvements to the original cost and subtract deductions you have taken, such as depreciation.

Capital Gain

Capital gain is profit on the sale of a capital asset. Capital gains receive favorable tax treatment. Depending on your tax bracket and on how long you held a capital asset, you may pay about one to two-thirds less tax on a capital gain than you would have paid on the same amount of ordinary income.

Depreciation

A deduction you are allowed for the wearing away over time of assets such as office equipment, vehicles, buildings and furniture. For assets that have an expected useful life of more than one year, the cost of the asset is spread over its estimated useful life rather than deducting the entire cost in the year the asset was placed in service. For tax purposes, tax law specifies the depreciation term for specific types of assets.

Disposition

The sale or other disposal of property that causes a gain or a loss.

Gain or Loss

The difference between your adjusted basis in an asset and the value you receive when you sell or otherwise dispose of the asset.

Non-recourse Debt

A type of debt for which a borrower is not personally liable. If you default on a non-recourse loan, the lender must recover the amount you owe by foreclosing on the property by which the loan is secured. At-risk rules limit the amount of loss you can take from activities with non-recourse financing.

Partnership

An unincorporated business or investment organization having two or more owners. A partnership is not subject to income tax, but passes income, losses and other tax items through to its partners.

Passive Activity

An activity in which you do not materially participate. Real estate rentals and limited partnerships are examples of passive activities. Passive loss rules apply to losses from passive activities.

Portfolio Income

Income such as interest, dividends, royalties and gains or losses from investments.

Publicly-Traded Partnership

A limited partnership or LLC (normally taxed as a partnership) that has limited partnership or membership interests traded in an organized securities market or a substantial equivalent. Publicly-traded partnerships are taxed as corporations, except under certain circumstances.

Section 1250

The section of the Internal Revenue Code that deals with depreciable real estate.

Tax Matters Partner

The partner responsible for representing the partnership in IRS audit proceedings.

The IRM Bankruptcy Proceedings

As discussed above under “Background,” JCM Partners is the reorganized entity which emerged from the IRM entities bankruptcy proceedings (Case Number 98-32231-A-11). Pursuant to the plan of reorganization confirmed on June 5, 2000, all of the assets of the IRM entities were vested in JCM Partners on June 30, 2000. We commenced operations on June 30, 2000 pursuant to the confirmation order and the plan. The creditors of the IRM entities were divided into classes, as set forth in the plan of reorganization, with Classes 21 through 25 (representing certain investors in the equity and loan partnerships) receiving preferred or common membership interests in JCM Partners in satisfaction of their claims against the IRM entities. Creditors in other classes were treated as specified in the plan of reorganization, with many receiving immediate or deferred cash payment of all or part of their claims.

We adopted “fresh start” accounting rules as of June 30, 2000 in accordance with AICPA Statement of Position 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code.” Accordingly, all of the assets and liabilities of JCM Partners were reflected at their reorganization value, which approximated fair value at the date of the reorganization, June 30, 2000.

Further information related to the terms of the IRM bankruptcy proceedings are set forth in our prior filings with the SEC.

Environmental Matters

Under various federal, state and local environmental laws, ordinances and regulations, a current or former owner of real estate may be required to investigate, remove and clean up hazardous or toxic substances or petroleum product releases at such property or may be held liable to governmental entities or to third parties for property or natural resource damage and for investigation, removal, clean-up and other costs incurred by such parties in connection with the contamination. Such laws often impose clean-up responsibility and liability without regard to whether the owner knew of or caused the presence of the contamination. The liability under such laws has been interpreted to be joint and several, unless the harm is capable of apportionment and there is a reasonable basis for allocation of responsibility. Recently, indoor air quality issues, including mold, have been highlighted in the media and the industry is seeing mold claims from apartment residents rising. California state agencies are attempting to assess this issue.

Our leases generally provide that the tenant is responsible for compliance with applicable laws and regulations. However, this contractual arrangement does not eliminate our statutory liability or preclude claims against us by governmental authorities or persons who are not parties to such arrangement. The cost of an investigation and clean-up of site contamination can be substantial, and the fact that the property is or has been contaminated, even if remediated, may adversely affect the value of the property and the owner’s ability to sell or lease the property or to borrow using the property as collateral. In addition, some

environmental laws create a lien on the contaminated site in favor of the government for damages and costs that it incurs in connection with the contamination. Some state laws provide that such lien has priority over all other encumbrances on the property or that a lien can be imposed on any other property owned by the liable party. Finally, the owner of a site may be subject to common law claims by governmental agencies or third parties based on damages and costs resulting from the environmental contamination emanating from the site.

Other federal, state and local laws, regulations and ordinances govern the removal or encapsulation of asbestos-containing material when such material is either in poor condition or in the event of building remodeling, renovation or demolition. Still other federal, state and local laws, regulations and ordinances may require the removal or upgrade of underground storage tanks that are out of service or out of compliance. In addition, federal, state and local laws, regulations and ordinances may impose prohibitions, limitations and operational standards on, or require permits, licenses, approvals, or submission of reports or notifications in connection with, the discharge of wastewater and other water pollutants, the emission of air pollutants, the operation of air or water pollution equipment, the generation, storage, transportation, disposal and management of materials classified as hazardous or nonhazardous substances or waste, the use of electrical equipment containing polychlorinated biphenyls, the storage or release of toxic or hazardous chemicals, substances, or waste, the ownership or operation of underground storage tanks and workplace health and safety. Noncompliance with environmental or health and safety requirements may also result in the need to cease or alter operations at a property which could affect the financial health of a tenant and its ability to make lease payments. Furthermore, if there is a violation of such a requirement in connection with the tenant’s operations, it is possible that we, as the owner of the property, could be held accountable by governmental authorities, or as the result of a third party action, for such violation and could be required to correct the violation.

Such laws and regulations have not historically had a material effect on the operation of our properties. We are not aware of any environmental condition on any of our properties which would be likely to have a material adverse effect on our financial condition and results of operations. There may be, however, environmental problems that may have developed since our properties were acquired which remain latent or of which we are otherwise unaware.

In connection with the disposition of any of our properties, we must investigate environmental conditions and we may be required to take certain corrective action prior or pursuant to any such disposition.

Competition

The real estate industry in Northern California is generally fragmented and characterized by significant competition. Numerous developers, owners of apartment, industrial, office and retail properties and managers compete with us in seeking properties for acquisition, development or management and in attracting and retaining tenants. No one competitor owns a majority of the apartment units in any county in which our properties are located. Competition for tenants is principally on the basis of location, physical condition, amenities and rental rates. There are competitors in each area in which we operate that have greater capital resources than we do. In addition, we compete for residential tenants with the housing market. When home mortgage rates are low, as they have been recently, we lose some of our most qualified tenants to home ownership. There can be no assurance that the existence of such competition will not have a material adverse effect on our business operations and cash flow.

Employees

As of December 31, 2006, we had 191 employees. None of our employees are covered by collective bargaining agreements. We consider our relationships with our employees to be good.

Executive Officers of the Registrant

The executive officers of JCM Partners are set forth below:


Name	Age		Offices
Gayle M. Ing		57	Manager, Chief Executive Officer, President, Secretary and Tax Matters Partner
Michael W. Vanni		67	Manager and Chairman of the Board
Marvin J. Helder		57	Manager and Vice Chairman of the Board
Brian S. Rein		49	Chief Operating Officer
Douglas Toovey		51	Chief Financial Officer

Gayle M. Ing has been a manager and our President, Chief Executive Officer, Secretary and Tax Matters Partner since April 11, 2001. From April 11, 2001 until October 2, 2002 and from July 26, 2006 until December 13, 2006, Ms. Ing was also our Chief Financial Officer. From March 15, 2001 until April 11, 2001, Ms. Ing served as a consultant to JCM Partners through Computer Management Corporation. Prior to that, from December 1996 until March 2001, Ms. Ing was a management consultant, also through Computer Management Corporation, and was a volunteer with a child services facility. Ms. Ing served as the Vice President and Business Manager for Electronic Banking at Bank of America from January 1994 to November 1996.

Michael W. Vanni has been a manager of JCM Partners and Chairman of our Board since June 2000. Since 1978, Mr. Vanni has been the President of Computer Management Corporation, a data processing consulting company.

Marvin J. Helder has been a manager of JCM Partners and Vice Chairman of our Board since June 2000. Mr. Helder has been the President of Helder Construction, a commercial and residential construction and property management company, for the past eleven years.

Brian S. Rein has been our Chief Operating Officer since June 2000. Mr. Rein was the Chief Operating Officer of JCM Partners’ predecessor, IRM Corporation, from October 1998 through June 2000. For the ten years prior to his employment with IRM and JCM Partners, Mr. Rein had similar operations and management responsibilities serving as Vice President of John Connolly IV & Company where he directed the management of multifamily and commercial properties for institutional clients.

Douglas Toovey has been our Chief Financial Officer since December 13, 2006. From September 22, 2006 until December 13, 2006, Mr. Toovey was our Principal Accounting Officer. Mr. Toovey has 16 years of finance and accounting experience primarily with a privately held real estate development and property management company. From June to September 2006 pursuant to a consulting arrangement, he was the Interim Director of Real Estate for Citrix Online, a division of Citrix Systems, Inc., a NASDAQ listed company. From July 2005 to June 2006 pursuant to a consulting arrangement, he was a Strategy and Financial Advisor to Wilsey Bennett, Inc., a privately-held diversified holding company. From November 2004 to July 2005, on a consulting basis he was the Chief Financial Officer for Channel Islands Logistics, a

privately-held start-up logistics and distribution company. From 2000 to November 2004 he was the Vice President and Treasurer of Wilsey Bennett, Inc., where he was also employed in various capacities from 1990 to 2000, including as Controller, Chief Operating Officer and Division Co President. Prior experience includes five years of public accounting experience with the certified public accounting firm of Deloitte & Touche (formerly Deloitte Haskins & Sells).

Mr. Vanni and Ms. Ing are husband and wife. There are no other family relationships among executive officers or managers, or persons chosen by us to be nominated as a manager or appointed as an executive officer of JCM Partners or any of its subsidiaries.

Item 1A. Risk Factors

We believe the risks and uncertainties described below are the most significant risks we face. If any of the following risks actually materialize, our business could be harmed. Additional risks and uncertainties not presently known to us, or that we currently consider immaterial, may also impair our operations or results. In any of those cases, the value of our Units and Preferred Units could decline, and a member may lose all or part of the member’s investment in JCM.

Risks Related to Our Business

In addition to general economic conditions, we are subject to a number of risks and uncertainties that are specific to us or the businesses we operate.

Our business is geographically concentrated, which makes us more susceptible to business interruption and financial loss due to natural disasters, inclement weather or other regional events outside of our control.

Presently, all of our real estate assets are located in Northern California. Our geographic concentration makes us vulnerable to the effects of regional disasters in California, such as earthquakes, floods, harsh weather, wildfires or other events outside of our control. These events could cause us to sustain a business interruption or other financial loss that would be greater than if our business were more geographically dispersed.

Unfavorable changes in the leasing market for apartment and commercial properties could adversely affect occupancy levels, rental rates and our operating results.

Market and economic conditions in the communities in which we operate may significantly affect occupancy levels and rental rates and therefore our profitability. All of our properties are located in developed areas that include other apartment and commercial properties serving comparable tenant populations. An increase in the number of competitive apartment and commercial properties in a particular area could have a material adverse effect on rents and our ability to maintain occupancy levels. Construction of a significant number of new apartment properties during 2003 and 2004 in Sacramento and Solano Counties, combined with high unemployment and the general slowdown in the California economy, has had an adverse effect on occupancy levels of our properties located in those counties. In addition, we compete with providers of other forms of multifamily residential properties and single-family housing. Recent favorable mortgage rates that allow potential renters to instead purchase homes decreases the pool of quality tenants available. Buying or renting single-family housing was the reason given by 24% of residents who moved out of our apartment properties during 2006.

We are subject to the risks normally associated with debt financing and may need to incur additional debt.

We finance our real estate investments with mortgage debt. In addition, the existing terms of certain of our mortgages payable require that only a small portion of the principal of the debt will be repaid prior to maturity. Therefore, we are likely to need to refinance at least a portion of our outstanding debt as it matures if we intend to continue owning the property. If needed to meet certain liquidity obligations, including repurchase of Units or capital improvements, we may increase our debt by, among other things, drawing on our line of credit, refinancing certain mortgage obligations or mortgage borrowing on our debt-free properties, and we may need to incur additional debt to help finance the redemption of the Class 2 Units that we are required to redeem by June 30, 2012. Therefore, we face market risk exposure from changes in interest rates on our debt obligations. We are vulnerable to increases in the interest rates on our variable rate mortgage notes and line of credit. We are also vulnerable to significant increases in interest rates to the extent we refinance our fixed rate mortgage notes or incur additional debt in the future. In addition, there is a risk that refinancing will not be available to us when needed on favorable terms or at all. If we were unable to refinance our indebtedness on acceptable terms, or at all, we might be forced to dispose of one or more properties on disadvantageous terms, which might result in losses to us. Furthermore, if a property is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments, the mortgage holder could foreclose upon the property, appoint a receiver and receive an assignment of rents and leases or pursue other remedies, all with a consequent loss of our revenues and asset value. Foreclosures could also create taxable income to our members without accompanying cash proceeds. Our ability to incur additional debt is constrained, in part, due to our obligation to pay mandatory monthly distributions to our members.

Our multifamily apartment and commercial properties may be illiquid and their values may decrease; therefore, if we need to sell our properties to repurchase Units or otherwise meet our obligations for cash, we may not be able to sell our properties at prices or on terms that are favorable to us.

We expect to meet most of our liquidity requirements through cash provided by operations and available cash. However, if required for certain liquidity needs, including the repurchase of Units, capital improvements, “bridge” funding needs for Section 1031 acquisitions or redemptions of the Class 2 Units in 2012, we may sell some of our properties. Our investments in multifamily apartment properties and commercial properties, however, are relatively illiquid. The ability to sell these assets and the price received upon sale are affected by a number of factors including general and local economic conditions, the condition of the properties, the demand for the properties and the number of competing properties on the market in the area, real property tax rates, and a number of other market conditions. As a result, we may not be able to sell our properties when desirable or at a level at or above the original purchase price or a price we otherwise deem acceptable.

We are subject to risks inherent in the ownership and leasing of real property.

We are subject to the risks inherent in the ownership and leasing of real property, such as fluctuating land values, interest rates, vacancy rates and rental values. Other factors that could negatively impact our operating results include the need for and costs of repairs and maintenance of our properties, government regulations and the cost of complying with them, property tax rates imposed by local taxing authorities, utility rates and property insurance rates. Further, there could be difficulties in selling our properties as discussed above. In addition, certain expenditures associated with real estate investments (principally, mortgage payments, real estate taxes, and maintenance costs) are not necessarily decreased by events adversely affecting our income from the properties. Thus, the cost of operating and holding the properties, or certain of them, may exceed the properties’ resale value and income producing ability, and we therefore may have to borrow funds in order to protect our investment or be required to dispose of the properties, or certain

of them, at a loss. Our operating results and our ability to meet our debt and other obligations, and thereafter to make distributions to our members in accordance with our Operating Agreement and Certificates of Designations, will depend on these and other factors.

Compliance with the Americans with Disabilities Act could have a material adverse impact on our operating results.

Our commercial properties and the rental offices of our residential properties are required to comply with Title III of the Americans with Disabilities Act (“ADA”) to the extent that such properties are public accommodations as defined by the ADA. The ADA requires the removal of structural barriers to the extent that they are readily achievable in older buildings, and building upgrades to current construction standards whenever facilities are modified. The ADA does not, however, consider residential properties, such as our apartment properties, to be public accommodations. Residential common and living areas of apartment complexes are governed by the Fair Housing Act, which also requires certain accommodation for handicapped individuals. To comply with the ADA, we have adopted an ADA Compliance Program, which included an evaluation of all properties and a multi-year plan to make readily achievable upgrades to accommodate the disabled. Failing to comply with the ADA could result in imposition of fines or an award of damages to private litigants. If we are required to make material changes to our properties to comply with the ADA our operating results could be materially adversely affected.

Risks Related to our Units and Preferred Units

There is no trading market for our Units and Preferred Units, and Members may be unable to sell their Units and Preferred Units.

There is no established trading market for our Units and Preferred Units and we do not expect one to develop. Currently, the opportunities for members to sell their Units and Preferred Units are limited to:

	•		Sales under the terms of our repurchase program in effect;

	•		Sales by members to other members or other persons in privately negotiated transactions;

	•		Sales by members who exercised their Class 1 Put Rights;

	•		Required redemptions under the terms of the Put Rights set forth in the Class 2 COD and the Series B COD;

	•		Any third party tender offers that may be made to holders of our Units; and

	•		The terms of any extraordinary transaction approved by our Board of Managers and members, as applicable.

Therefore, members may be unable to sell their Units and Preferred Units when or at a price they desire or think is reasonable.

The value of our Units and Preferred Units may be uncertain.

Our properties were appraised in connection with the IRM bankruptcy proceeding in 2000 and in June 2005 in connection with the Class 1 Put Rights, as required by the Class 1 COD. Our assets are also required to be appraised in 2010 in connection with similar obligations that we have to the holders of the Class 2 Units under the Class 2 COD. Other than required by the Class 2 COD, we are not required to appraise our properties again, and may or may not do so in the future. Our Units and Preferred Units do not trade in any organized trading markets.

The appraisal values obtained in June 2005 in connection with the Class 1 Units Put Rights were reflective of the markets for each of our properties at that time and resulted in substantially higher values than previously used by us in determining the price we were willing to pay for Units under our repurchase program. Appraisal values are dependent on a variety of factors including, but not limited to, supply and demand for like properties, competition from other properties and other forms of housing, zoning and regulatory conditions, prevailing interest rates and net operating income of the property. Accordingly, we can give no assurance that the 2005 appraised values for our properties is an accurate indicator of the future value of our properties.

Ownership of our Units and Preferred Units could result in adverse tax consequences.

JCM is treated as a partnership for tax purposes. Therefore, each member is required to report on the member’s personal tax return the member’s share of each item of JCM’s income, gain, loss, deduction and credit, if any. A member’s taxable amounts may be different from the income, gain, loss, or deduction reported on our financial statements. The tax issues associated with ownership of our Units and Preferred Units are extremely complex and unique to each of our member’s own individual tax situation. Our Members should read the discussion in Part I, Item 1-Business under the heading “Possible Tax Consequences for Members” .

We could be classified as a publicly traded partnership, which could limit the amount of losses attributable to ownership of Units or Preferred Units that members could deduct.

Certain conditions, including our issuance of additional Units or Preferred Units, could result in our being classified as a publicly traded partnership. The Internal Revenue Code of 1986, as amended, imposes certain limitations on the current deductibility of losses attributable to investments in publicly traded partnerships and treats certain publicly traded partnerships as corporations for federal income tax purposes. If we are classified as a publicly traded partnership, but substantially all of our income is passive, we will avoid classification as a corporation. However, in this situation, members could only deduct JCM losses against JCM income and not the member’s other income. Any unused losses are suspended and carried forward until they are either used against future JCM income or the member disposes of their entire interest in JCM.

Potential adverse tax consequences may impact our future plans.

Many of our members are likely to have serious tax consequences upon a sale of our properties or a sale of their Units. We believe that our members will factor any potential individual adverse tax consequences into their decisions in any member vote for approval of a proposed transaction. Accordingly, our members may not approve a transaction that would result in adverse consequences even if such transaction is otherwise in the best interests of our members or our Company.

Risks Related to our Company

Certain provisions of our operating documents could have the effect of discouraging tender offers and takeover attempts.

As we have previously disclosed, certain provisions in our Operating Agreement, Bylaws and Transfer Application could have the effect of discouraging tender offers or takeover attempts. These provisions include the following:

	•		Limitations on the amount of Units and Preferred Units that may be owned by any person or a group of persons;

	•		Limitations on a member’s ability to transfer Units and Preferred Units;

	•		Grouping our Elected Managers into three groups with three-year terms each;

	•		Our requirements for cumulative voting for Elected Managers, if requested by a member;

	•		Our requirements that Unit holders must comply with in order to nominate persons for our Board;

	•		Requiring that proposals by Unit holders receive the vote of a majority of the outstanding Units and/or Preferred Units, as applicable, in order to be approved;

	•		Requiring that proposals by Unit holders be voted on at a meeting of Unit holders, rather than approved by written consent;

	•		Requiring proposals by Unit holders to conform to our notice procedures;

	•		The ability of our Board of Managers to create classes of Units or series of Preferred Units without further member approval;

	•		The requirement for our Board of Managers to first approve any merger or consolidation where we are not the surviving entity, before our members may vote on such transaction; and

	•		The rights of classes of Units and/or series of Preferred Units to vote as a class on certain matters.

These provisions in our Operating Agreement, Bylaws and Transfer Application could reduce the price that investors might be willing to pay for our Units and Preferred Units and the price members could sell their Units and Preferred Units for being lower than they would be without these provisions, and could discourage or prevent a potential takeover attempt, even if favored by a majority of our members.

We will need substantial funds to redeem the Class 1 and Class 2 Units that are put to the Company; we may have to liquidate substantial assets to satisfy our repurchase obligations with respect to the Class 2 Units.

The holders of our Class 1 and Class 2 Units have rights that allow them to require us to repurchase their Units at certain times pursuant to the terms thereof. The rights of the holders of Class 1 Units to exercise their Put Rights expired on September 28, 2005. The holders of Class 2 Units will have the option to exercise their Class 2 Put Rights in 2010. Holders of 9,864,299 Class 1 Units exercised their Class 1 Put Rights at a price of $2.78 per Class 1 Unit, for an aggregate amount of $27,422,751, which will be reduced by an amount equal to all distributions paid (on a per Class 1 Unit basis) to the holders of Put Class 1 Units from July 1, 2005 through June 30, 2006, or by $777,000. In December 2005, we redeemed 247,466 Put Class 1 Units for a net cash amount of $680,000, representing gross redemptions of $688,000 less $8,000 of distributions from July through November 2005. In 2006, we redeemed 83,813 Put Class 1 Units for a net cash amount of $226,000, representing gross redemptions of $234,000 less $7,000 of distributions from July 2005 through June 2006. The Company is obligated to purchase all of the Put Class 1 Units by June 30, 2007, and to redeem all Put Class 2 Units by June 30, 2012. We currently have cash in excess of the amount required to purchase the remaining Put Class 1 Units.

We believe that it is too early for us to evaluate our liquidity requirements related to the Class 2 redemptions. However, to the extent additional funding is not available, we may be required to liquidate some of our assets in order to fund the Class 2 redemptions.

We cannot be certain that our Class 1, 2 and 3 Units are the same class of securities pursuant to Section 12(g)(5) of the Exchange Act for purposes of registration under Section 12(g) of the Exchange Act.

Initially, we registered our Common Units under Section 12(g) of the Exchange Act. When our Common Units were reclassified into Class 1 Units, our Class 1 Units became the class of securities registered under

the Exchange Act. We later issued Class 2 and Class 3 Units with some similar, but not identical, terms to the Class 1 Units. While we are treating our Class 1, Class 2 and Class 3 Units as the same class of securities for purposes of registration under the Exchange Act, there is little guidance as to what constitutes a separate class of securities for purposes of Section 12(g)(5) under the Exchange Act. As a result, there can be no assurance that the Class 1, Class 2 and Class 3 Units are in fact the same class of securities for purposes of registration under the Exchange Act.

If one or more of our Class 1, Class 2 and Class 3 Units were considered separate classes of securities under the Exchange Act, a tender offer for a class of our Units could exclude the holders of the other Classes of our Units without violating certain provisions of the Exchange Act. This could make it easier for a person to acquire a controlling interest in one or more of our Classes of Units. In addition, if one or more of our Class 1, Class 2 and Class 3 Units were considered a separate class of securities, which was (were) not registered under the Exchange Act, a tender offer could be made without compliance with certain provisions of the Exchange Act that apply only to tender offers for securities registered under Section 12 thereof, including the filing of certain information with the SEC and provisions requiring that holders who tender in such an offer be allowed to withdraw tendered securities while the offer remains open.

If any of our Classes of Units were considered a separate class from our other Classes of Units, it also would make it easier for us to engage in a “going private” transaction to deregister our Class(es) of Units that are registered and terminate our SEC reporting obligations under the Exchange Act.

Finally, if our Classes of Units were considered separate classes for purposes of Section 12(g)(5) of the Exchange Act, Forms 4 and 5 that our executive officers, members of our Board of Managers and more than 10% beneficial owners file to report transactions in our securities would not have to report such filers’ total holdings for each class of Units, but only for the Class(es) in which they are reporting a transaction.

If we deregister our Units under the Exchange Act, it could reduce the amount of information about us that is publicly available.

We may be eligible to terminate the registration of our Units under the Exchange Act if we have fewer than 300 holders of record of our Units (or, if we reclassify our Units into separate classes under the Exchange Act, if we have fewer than 300 holders of record of each separate Class of Units) as determined under the Exchange Act.

If we deregistered our Units and were not required to register any of our other equity securities under the Exchange Act, we would no longer be required to file information with the SEC or provide certain information to our members under the Exchange Act, and many provisions of the Exchange Act would become inapplicable to us. Therefore, deregistration could substantially reduce the information we would be required to furnish to our members. However, under Section 17453 of the California Beverly-Killea Limited Liability Company Act, if California residents represent 25% or more of the voting interests of our members, those members will be entitled to the information and inspection rights in Section 17106 of such Act, which includes the right to receive an annual report containing a balance sheet and income statement and changes in financial position for the last fiscal year. In addition, our members have the information rights provided for in the Delaware Limited Liability Company Act (see, e.g., Section 18-305) and in the Company’s Bylaws (see, e.g., Section 3.13).

On March 21, 2007, at its regular Board meeting, our Board of Managers approved submitting to our members proposed amendments to the Certificates of Designations of our Class 1, Class 2 and Class 3 Units

that would reclassify our Units to ensure that they are separate classes under the Exchange Act in order to enable us to deregister our Units under the Exchange Act. We anticipate that this proposed reclassification transaction will be submitted to a vote of our members in the fourth quarter of 2007 at a special meeting of our members after we have filed a definitive proxy statement and other “going private” documents with the SEC, provided the proxy statement to our members and provided legal notice of the meeting. Additional information regarding the proposed reclassification and going private transaction is set forth in our Current Report on Form 8-K (March 21, 2007 event date), that we filed with the SEC on March 27, 2007.

If we deregister our Units, we currently intend to provide all of our members with audited annual financial statements, along with other information we deem appropriate and consistent with applicable laws. This may be more or less information than is currently required.

PART II


Item 5.		Market for Registrant’s Common Equity, Related Security Holder Matters and Issuer Purchases of Equity Securities

Market Information

There is no public trading market for any of our Classes of Units or series of Preferred Units and there can be no assurance that a market will ever develop for any of our Classes of Units or series of Preferred Units.

Holders

We consider our Classes of Units to be a single class of Units under Section 12(g)(5) of the Exchange Act. As of March 31, 2007, the approximate holders of record of our Units, by Class, and Preferred Units were as follows:


Class 1			191
Class 2			206
Class 3			299
Series B Preferred			26

As set forth in Part I-Item 1A-Risk Factors, on March 21, 2007 our Board of Managers approved submitting a reclassification transaction to our members in order to enable us to deregister our Units under the Exchange Act. Accordingly, if this transaction is approved by our members, we intend to file a Form 15 with the SEC when we have less than 300 holders of each class of Units (as determined under Section 12(g)(5) of the Exchange Act). We anticipate that this would occur during the first quarter of 2008.

Purchases of Equity Securities

The table below summarizes our repurchases of equity securities during the fourth quarter of 2006.

ISSUER PURCHASES OF EQUITY SECURITIES


						Approximate Dollar
				Total Number of Units		Value that May Yet
		Average		Purchased as Part of		Be Purchased Under
	Total Number of Units	Price Paid		Publicly Announced		the Plan or
Period	Purchased ⁽¹⁾	per Unit ⁽²⁾		Plans or Programs		Programs ⁽³⁾
October 1-31, 2006	Class 1 - 13,105	$	1.83		13,105	$	45,870,938
	Class 2 - None	$	—		—
	Class 3 - 20,000	$	1.83		20,000

November 1-30, 2006	Class 1 - None	$	—		—	$	45,870,938
	Class 2 - None	$	—		—
	Class 3 - 16,380	$	1.83		16,380

December 1-31, 2006	Class 1 - 50,775	$	2.67		50,775	$	45,739,154
	Class 2 - 20,967	$	1.84		20,967
	Class 3 - None	$	—		—

Total Fourth Quarter	Class 1 - 63,880	$	2.50		63,880
	Class 2 - 20,967	$	1.84		20,967
	Class 3 - 36,380	$	1.83		36,380


⁽¹⁾		Includes a total for this quarter of 48,809 Put Class 1 Units that were redeemed by the Company.

⁽²⁾		The average price paid during the quarter for repurchases of Class 1, 2 and 3 Units, excluding any redeemed Put Class 1 Units was $1.83, $1.84 and $1.83 per Unit, respectively. The average price paid during the quarter for redeemed Put Class 1 Units was $2.70, which gives effect to an offset for distributions paid from July 1, 2005 through June 30, 2006 to the holders of Class 1 Units.

⁽³⁾		In addition to the Units that may be repurchased as described below, the Company is obligated to redeem Class 1 and Class 2 Units that are put to the Company in accordance with the put rights of the Class 1 and Class 2 Units, respectively. See the Company’s Revised Description of Securities, filed as Exhibit 99.1 to our Form 8-K filed with the Securities and Exchange Commission on February 10, 2006. The Company is obligated to redeem the 9,864,299 Put Class 1 Units by June 30, 2007, of which 9,533,020 remain outstanding. See Note 9 of our Notes to Consolidated Financial Statements in Item 8 and Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Put Rights in Item 7. The full amount of the Company’s obligations for the 9,864,299 Put Class 1 Units was $27,422,751 (9,864,299 x $2.78 exercise price). The amount set forth in this column reflects the sum of (i) the $20,000,000 amount available for voluntary unit repurchases described below plus (ii) (a) the $27,422,751 amount required to redeem Put Class 1 Units, as adjusted for distribution offsets minus (b) any Put Class 1 Units redeemed by the Company. In addition, upon a change of control of the Company, as defined in the Series B COD, the Company is obligated to repurchase the Series B Preferred Units. See the Company’s Revised Description of Securities.

		In March 2004, the Board of Managers authorized the repurchase of up to $20,000,000 of Units in any given month, superseding the previous authorization set in December 2001. The authorization will remain in effect until modified or terminated by the Board of Managers. The Company, through its wholly-owned subsidiary, may repurchase its Units from Members, when opportunities exist to buy at prices which are consistent with the Company’s unit repurchase guidelines. See Part I — Item 1. Business—Voluntary Unit and Preferred Unit Repurchases for additional information.

Distributions

Distributions for the Past Two Years

Units

Pursuant to the terms of our Class 1 Units, we are required to pay a monthly mandatory distribution equal to 1/12 of $0.0775 ($0.006458) per Class 1 Unit. In December 2002 our Board of Managers declared a voluntary monthly distribution to be paid in addition to the mandatory monthly distribution on an ongoing basis of 1/12 of $0.0025 ($0.00021) per Class 1 Unit. Accordingly, in 2005 and 2006 we paid monthly distributions of $0.00667 per Class 1 Unit. Pursuant to the terms of our Class 2 Units, we are required to pay a monthly mandatory distribution equal to 1/12 of $0.08 ($0.006667) per Class 2 Unit. Pursuant to the terms of our Class 3 Units, we are required to pay a monthly mandatory distribution equal to 1/12 of $0.0825 ($0.006875) per Class 3 Unit. We are required to pay our Class 2 and 3 Units the same voluntary distribution that we pay to the Class 1 Units. Accordingly, in 2005 and 2006, we paid monthly distributions of $0.006875 and $0.007083 per Class 2 and Class 3 Unit, respectively.

Preferred Units

Pursuant to the terms of our Series B Preferred Units, we are required to pay a monthly mandatory distribution equal to 1/12 of $0.0825 ($0.006875) per Series B Preferred Unit. We are required to pay our Series B Preferred Units the same voluntary distribution that we pay to the Class 3 Units. In 2005 and 2006, we paid monthly distributions of $0.0070833 per Series B Preferred Unit.

Additional Information Regarding our Units and Preferred Units

Additional information regarding the other rights of our Units and Preferred Units are set forth in our Revised Description of Securities and our updated Summary of Operating Agreement (as revised February 10, 2006), which we filed as exhibit 99.2 to our Form 8-K, dated February 10, 2006 (the “Revised Summary of Operating Agreement”). In addition, on March 21, 2007, our Board of Managers added a 1:1 record holder to record holder transfer restriction on all of our Units and Preferred Units. See our Current Report on Form 8-K filed on March 27, 2007 with the SEC.

PART IV

Item 15. Exhibits, Consolidated Financial Statements and Schedules


Exhibit
No.		Description
31.1		— Rule 13-14(a) Certification of the Chief Executive Officer

31.2		— Rule 13-14(a) Certification of the Chief Financial Officer

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 30, 2007.


		JCM PARTNERS, LLC,
		A Delaware limited liability company

		By:		/s/ Gayle M. Ing

				Gayle M. Ing, President and
				Chief Executive Officer
				Date: May 30, 2007

INDEX TO EXHIBITS


Exhibit
No.		Description
31.1		— Rule 13-14(a) Certification of the Chief Executive Officer

31.2		— Rule 13-14(a) Certification of the Chief Financial Officer

JCM PARTNERS LLC 10-K/A