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Exhibit 10.7
 
SUBSIDIARY GUARANTEE

SUBSIDIARY GUARANTEE, dated as of March 5, 2008 (this “Guarantee”), made by each
of the signatories hereto (together with any other entity that may become a
party hereto as provided herein, the “Guarantors”, and together with the Company
(as defined below), the “Debtors”), in favor of the purchasers (including such
purchasers’ successors, transferees and assigns, the “Purchasers”) signatory to
the Purchase Agreement (as defined below).
 
W I T N E S S E T H:

WHEREAS, pursuant to that certain Securities Purchase Agreement (“Purchase
Agreement”) dated as of March 5, 2008 by and between Blue Holdings, Inc., a
Nevada corporation (the “Company”), and the Purchasers, the Company has agreed
to sell and issue to the Purchasers, and the Purchasers have agreed to purchase
from the Company the Company’s 8% Senior Secured Convertible Notes (the
“Notes”), subject to the terms and conditions set forth therein;

WHEREAS, each Guarantor is a direct or indirect Subsidiary of the Company, and
as a condition to the Closing of the transactions contemplated by the Purchase
Agreement, and in order to induce the Purchasers to enter into and consummate
the transactions contemplated by the Purchase Agreement (including without
limitation purchasing the Notes and making the loans evidenced thereby), the
Company has agreed that the Guarantors would guaranty the Company’s obligations
under the Notes, Purchase Agreement and other Transaction Documents  in
accordance with the terms set forth in this Guaranty, the Notes, the Purchase
Agreement and other Transaction Documents; and

WHEREAS, each Guarantor will directly benefit from the extension of credit to
the Company represented by the issuance of the Notes;

NOW, THEREFORE, in consideration of the premises and to induce the Purchasers to
enter into the applicable Purchase Agreement and to carry out the transactions
contemplated thereby, each Guarantor hereby agrees with the Purchasers as
follows:

1.             Definitions. Unless otherwise defined herein, initially
capitalized terms defined in the Purchase Agreement and used herein shall have
the meanings given to them in the Purchase Agreement.  The words “hereof,”
“herein,” “hereto” and “hereunder” and words of similar import when used in this
Guarantee shall refer to this Guarantee as a whole and not to any particular
provision of this Guarantee, and Section and Schedule references are to this
Guarantee unless otherwise specified. The meanings given to terms defined herein
shall be equally applicable to both the singular and plural forms of such
terms.  The following terms shall have the following meanings:
 
“Guarantee” means this Subsidiary Guarantee, as the same may be amended,
supplemented or otherwise modified from time to time.

“Obligations” means, in addition to all other costs and expenses of collection
incurred by Purchasers in enforcing any of such Obligations and/or this
Guarantee, all of the liabilities and obligations (primary, secondary, direct,
contingent, sole, joint or several) due or to become due, or that are now or may
be hereafter contracted or acquired, or owing, of any Debtor to the Purchasers,
including without limitation all obligations under the Purchase Agreement, the
Notes, the Warrants, this Guarantee and any other instruments, agreements or
other documents executed and/or delivered in connection herewith or therewith,
in each case, whether now or hereafter existing, voluntary or involuntary,
direct or indirect, absolute or contingent, liquidated or unliquidated, whether
or not jointly owed with others, and whether or not from time to time decreased
or extinguished and later increased, created or incurred, and all or any portion
of such obligations or liabilities that are paid, to the extent all or any part
of such payment is avoided or recovered directly or indirectly from any of the
Purchasers as a preference, fraudulent transfer or otherwise, as such
obligations may be amended, supplemented, converted, extended or modified from
time to time.  Without limiting the generality of the foregoing, the term
“Obligations” shall include without limitation: (i) principal of, and interest
on, the Notes and the loans extended pursuant thereto; (ii) any and all other
fees, indemnities, costs, obligations and liabilities of the Debtors from time
to time under or in connection with the Purchase Agreement, the Notes, the
Warrants, this Guarantee and any other instruments, agreements or other
documents executed and/or delivered in connection herewith or therewith; and
(iii) all amounts (including but not limited to post-petition interest) in
respect of the foregoing that would be payable but for the fact that the
obligations to pay such amounts are unenforceable or not allowable due to the
existence of a bankruptcy, reorganization or similar proceeding involving any
Debtor.

 

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2.             Guarantee.

(a)           Guarantee.

(i)           The Guarantors hereby, jointly and severally, absolutely,
unconditionally and irrevocably, guarantee to the Purchasers and their
respective successors, indorsees, transferees and assigns, the prompt and
complete payment and performance by the Company when due (whether at the stated
maturity, by acceleration or otherwise) of the Obligations.  The Guarantors’
liability under this Guarantee shall be unlimited, open and continuous for so
long as this Guarantee remains in force.

(ii)           Anything herein or in any other Transaction Document to the
contrary notwithstanding, the maximum liability of each Guarantor hereunder and
under the other Transaction Documents shall in no event exceed the amount which
can be guaranteed by such Guarantor under applicable federal and state laws,
including laws relating to the insolvency of debtors, fraudulent conveyance or
transfer or laws affecting the rights of creditors generally (after giving
effect to the right of contribution set forth in Section 2(b)).

(iii)           Each Guarantor agrees that the Obligations may at any time and
from time to time exceed the amount of the liability of such Guarantor hereunder
without impairing the guarantee contained in this Section 2 or affecting the
rights and remedies of the Purchasers hereunder.

(iv)           The guarantee contained in this Section 2 shall remain in full
force and effect until all the Obligations and the obligations of each Guarantor
under the guarantee contained in this Section 2 shall have been satisfied by
payment in full.

 
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(v)           No payment made by the Company, any of the Guarantors, any other
guarantor or any other Person or received or collected by the Purchasers from
the Company, any of the Guarantors, any other guarantor or any other Person by
virtue of any action or proceeding or any set-off or appropriation or
application at any time or from time to time in reduction of or in payment of
the Obligations shall be deemed to modify, reduce, release or otherwise affect
the liability of any Guarantor hereunder which shall, notwithstanding any such
payment (other than any payment made by such Guarantor in respect of the
Obligations or any payment received or collected from such Guarantor in respect
of the Obligations), remain liable for the Obligations up to the maximum
liability of such Guarantor hereunder until the Obligations are paid in full.

(vi)           Notwithstanding anything to the contrary in this Guarantee, with
respect to any defaulted non-monetary Obligations the specific performance of
which by the Guarantors is not reasonably possible (e.g. the issuance of the
Company's Common Stock), the Guarantors shall only be liable for making the
Purchasers whole on a monetary basis for the Company's failure to perform such
Obligations in accordance with the Transaction Documents.

(b)           Right of Contribution.  Each Guarantor hereby agrees that to the
extent that a Guarantor shall have paid more than its proportionate share of any
payment made hereunder, such Guarantor shall be entitled to seek and receive
contribution from and against any other Guarantor hereunder which has not paid
its proportionate share of such payment. Each Guarantor's right of contribution
shall be subject to the terms and conditions of Section 2(c).  The provisions of
this Section 2(b) shall in no respect limit the obligations and liabilities of
any Guarantor to the Purchasers, and each Guarantor shall remain liable to the
Purchasers for the full amount guaranteed by such Guarantor hereunder.

(c)           No Subrogation.  Notwithstanding any payment made by any Guarantor
hereunder or any set-off or application of funds of any Guarantor by the
Purchasers, no Guarantor shall be entitled to be subrogated to any of the rights
of the Purchasers against the Company or any other Guarantor or any collateral
security or guarantee or right of offset held by the Purchasers for the payment
of the Obligations, nor shall any Guarantor seek or be entitled to seek any
contribution or reimbursement from the Company or any other Guarantor in respect
of payments made by such Guarantor hereunder, until all amounts owing to the
Purchasers by the Company on account of the Obligations are paid in full.  If
any amount shall be paid to any Guarantor on account of such subrogation rights
at any time when all of the Obligations have not been paid in full, such amount
shall be held by such Guarantor in trust for the Purchasers, segregated from
other funds of such Guarantor, and shall, promptly following receipt by such
Guarantor, be turned over to the Purchasers in the exact form received by such
Guarantor (duly indorsed by such Guarantor to the Purchasers, if required), to
be applied against the Obligations, whether matured or unmatured, in such order
as the Purchasers may determine.

 
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(d)           Amendments, Etc. With Respect to the Obligations.  Each Guarantor
shall remain obligated hereunder notwithstanding that, without any reservation
of rights against any Guarantor and without notice to or further assent by any
Guarantor, any demand for payment of any of the Obligations made by the
Purchasers may be rescinded by the Purchasers and any of the Obligations
continued, and the Obligations, or the liability of any other Person upon or for
any part thereof, or any collateral security or guarantee therefor or right of
offset with respect thereto, may, from time to time, in whole or in part, be
renewed, extended, amended, modified, accelerated, compromised, waived,
surrendered or released by the Purchasers, and the Purchase Agreement, the Notes
and the other Transaction Documents and any other documents executed and
delivered in connection therewith may be amended, modified, supplemented or
terminated, in whole or in part, as the Purchasers may deem advisable from time
to time, and any collateral security, guarantee or right of offset at any time
held by the Purchasers for the payment of the Obligations may be sold,
exchanged, waived, surrendered or released. The Purchasers shall have no
obligation to protect, secure, perfect or insure any Lien at any time held by
them as security for the Obligations or for the guarantee contained in this
Section 2 or any property subject thereto.

(e)           Guarantee Absolute and Unconditional.  Each Guarantor waives any
and all notice of the creation, renewal, extension or accrual of any of the
Obligations and notice of or proof of reliance by the Purchasers upon the
guarantee contained in this Section 2 or acceptance of the guarantee contained
in this Section 2; the Obligations, and any of them, shall conclusively be
deemed to have been created, contracted or incurred, or renewed, extended,
amended or waived, in reliance upon the guarantee contained in this Section 2;
and all dealings between the Company and any of the Guarantors, on the one hand,
and the Purchasers, on the other hand, likewise shall be conclusively presumed
to have been had or consummated in reliance upon the guarantee contained in this
Section 2. Each Guarantor waives, to the fullest extent permitted by law,
diligence, presentment, protest, demand for payment and notice of default or
nonpayment to or upon the Company or any of the Guarantors with respect to the
Obligations. Each Guarantor understands and agrees that the guarantee contained
in this Section 2 shall be construed as a continuing, absolute and unconditional
guarantee of payment without regard to (a) the validity or enforceability of the
Purchase Agreement, the Notes or any other Transaction Document, any of the
Obligations or any other collateral security therefor or guarantee or right of
offset with respect thereto at any time or from time to time held by the
Purchasers, (b) any defense, set-off or counterclaim (other than a defense of
payment and performance in full of the Obligations) which may at any time be
available to or be asserted by the Company or any other Person against the
Purchasers, or (c) any other circumstance whatsoever (with or without notice to
or knowledge of the Company or such Guarantor) which constitutes, or might be
construed to constitute, an equitable or legal discharge of the Company for the
Obligations, or of such Guarantor under the guarantee contained in this Section
2, in bankruptcy or in any other instance. When making any demand hereunder or
otherwise pursuing its rights and remedies hereunder against any Guarantor, the
Purchasers may, but shall be under no obligation to, make a similar demand on or
otherwise pursue such rights and remedies as they may have against the Company,
any other Guarantor or any other Person or against any collateral security or
guarantee for the Obligations or any right of offset with respect thereto, and
any failure by the Purchasers to make any such demand, to pursue such other
rights or remedies or to collect any payments from the Company, any other
Guarantor or any other Person or to realize upon any such collateral security or
guarantee or to exercise any such right of offset, or any release of the
Company, any other Guarantor or any other Person or any such collateral
security, guarantee or right of offset, shall not relieve any Guarantor of any
obligation or liability hereunder, and shall not impair or affect the rights and
remedies, whether express, implied or available as a matter of law, of the
Purchasers against any Guarantor.  For the purposes hereof, “demand” shall
include without limitation the commencement and continuance of any legal
proceedings.

 
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(f)           Reinstatement.  The guarantee contained in this Section 2 shall
continue to be effective, or be reinstated, as the case may be, if at any time
payment, or any part thereof, of any of the Obligations is rescinded or must
otherwise be restored or returned by the Purchasers upon the insolvency,
bankruptcy, dissolution, liquidation or reorganization of the Company or any
Guarantor, or upon or as a result of the appointment of a receiver, intervenor
or conservator of, or trustee or similar officer for, the Company or any
Guarantor or any substantial part of its property, or otherwise, all as though
such payments had not been made.

(g)           Payments.  Each Guarantor hereby guarantees that payments
hereunder will be paid to the Purchasers without set-off or counterclaim in U.S.
dollars at the address set forth or referred to in the Purchase Agreement.

3.             Representations and Warranties. Each Guarantor hereby makes the
following representations and warranties to the Purchasers as of the date
hereof:

(a)           Organization and Qualification. The Guarantor is an entity, duly
organized, validly existing and in good standing under the laws of the
applicable jurisdiction set forth on Schedule 1, with the requisite power and
authority to own and use its properties and assets and to carry on its business
as currently conducted. The Guarantor has no subsidiaries other than those
identified as such on the Disclosure Schedules to the Purchase Agreement.  The
Guarantor is duly qualified to do business and is in good standing as a foreign
corporation in each jurisdiction in which the nature of the business conducted
or property owned by it makes such qualification necessary, except where the
failure to be so qualified or in good standing, as the case may be, could not,
individually or in the aggregate, (x) adversely affect the legality, validity or
enforceability of any of this Guaranty in any material respect, (y) have a
material adverse effect on the results of operations, assets, prospects, or
financial condition of the Guarantor, or (z) adversely impair in any material
respect the Guarantor's ability to perform fully on a timely basis its
obligations under this Guaranty (a “Material Adverse Effect”).

(b)           Authorization; Enforcement.  The Guarantor has the requisite power
and authority to enter into and to consummate the transactions contemplated by
this Guaranty, and otherwise to carry out its obligations hereunder.  The
execution and delivery of this Guaranty by the Guarantor and the consummation by
it of the transactions contemplated hereby have been duly authorized by all
requisite action on the part of the Guarantor.  This Guaranty has been duly
executed and delivered by the Guarantor and constitutes the legal, valid and
binding obligation of the Guarantor enforceable against the Guarantor in
accordance with its terms.

 
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(c)           No Conflicts. The execution, delivery and performance of this
Guaranty by the Guarantor and the consummation by the Guarantor of the
transactions contemplated thereby do not and will not (i) conflict with or
violate any provision of its Articles of Organization or Operating Agreement or
(ii) conflict with, constitute a default (or an event which with notice or lapse
of time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture or instrument to which the Guarantor is a party, or (iii) result in a
violation of any law, rule, regulation, order, judgment, injunction, decree or
other restriction of any court or governmental authority to which the Guarantor
is subject (including federal and state securities laws and regulations), or by
which any material property or asset of the Guarantor is bound or affected,
except in the case of each of clauses (ii) and (iii) such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations as could
not, individually or in the aggregate, have or result in a Material Adverse
Effect.  The business of the Guarantor is not being conducted in violation of
any law, ordinance or regulation of any governmental authority, except for
violations which, individually or in the aggregate, do not have a Material
Adverse Effect.

(d)           Consents and Approvals.  The Guarantor is not required to obtain
any consent, waiver, authorization or order of, or make any filing or
registration with, any court or other federal, state, local, foreign or other
governmental authority or other person in connection with the execution,
delivery and performance by the Guarantor of this Guaranty.

(e)           Purchase Agreement.  The representations and warranties of the
Company set forth in the Purchase Agreement as they relate to such Guarantor,
each of which is hereby incorporated herein by reference, are true and correct
as of each time such representations are deemed to be made pursuant to the
Purchase Agreement, and the Purchasers shall be entitled to rely on each of them
as if they were fully set forth herein, provided that each reference in each
such representation and warranty to the Company's knowledge shall, for the
purposes of this Section 3, be deemed to be a reference to such Guarantor's
knowledge.

(f)           Company’s Request.  This Guarantee is executed at the Company’s
request and not at the request of the Purchasers.

(g)           Obtaining Company Information.  The Guarantor has established
adequate means of obtaining from the Company on a continuing basis information
regarding the Company’s financial condition.

(h)           Solvency.  As of the date hereof and after giving effect to the
transactions contemplated hereby (a) the property of the Guarantor, at a fair
valuation, will exceed its debt; (b) the capital of the Guarantor will not be
unreasonably small to conduct its business; (c) the Guarantor will not have
incurred debts, or have intended to incur debts, beyond its ability to pay such
debts as they mature; and (d) the present fair salable value of the assets of
the Guarantor will be greater than the amount that will be required to pay its
probable liabilities (including debts) as they become absolute and matured.  For
purposes of this subsection (i), “debt” means any liability on a claim, and
“claim” means (i) the right to payment, whether or not such right is reduced to
judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured,
undisputed, legal, equitable, secured or unsecured, or (ii) the right to an
equitable remedy for breach of performance if such breach gives rise to a right
to payment, whether or not such right to an equitable remedy is reduced to
judgment, fixed, contingent, matured, unmatured, undisputed, secured or
unsecured.

 
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4.              Covenants.

(a)           Actions.  Each Guarantor covenants and agrees with the Purchasers
that, from and after the date of this Guarantee until the Obligations shall have
been paid in full, such Guarantor shall take, and/or shall refrain from taking,
as the case may be, each commercially reasonable action that is necessary to be
taken or not taken, as the case may be, so that no Event of Default is caused by
the failure to take such action or to refrain from taking such action by such
Guarantor.

(b)           Insurance.  So long as any Notes remain outstanding, the
Guarantors shall have in full force and effect (a) insurance reasonably believed
by the Guarantors to be adequate on all assets and activities, covering property
damage and loss of income by fire or other casualty, and (b) insurance
reasonably believed to be adequate protection against all liabilities, claims
and risks against which it is customary for companies similarly situated as the
Guarantors to insure.

(c)           Compliance with Laws.  So long as any Notes remain outstanding,
Guarantors will use reasonable efforts to comply with all applicable laws,
rules, regulations, orders and decrees of all governmental authorities, except
to the extent non-compliance (in one instance or in the aggregate) would not
have a Material Adverse Effect.

(d)           Corporate Existence; Merger and Consolidation.  So long as any
Notes remain outstanding, the Guarantors shall maintain their corporate
existence.  The Guarantors shall not consolidate with or merge with or into, or
convey, transfer or lease all or substantially all its assets to, any Person,
except to the same extent that the Company is so permitted, and in accordance
with the same provisions applicable to the Company, in the Purchase Agreement or
the Notes (with the assumption of obligations applying to the assumption of the
obligations under this Guarantee).

(e)           Taxes.  The Guarantors shall pay, and shall cause each of its
subsidiaries to pay, prior to delinquency, all material taxes, assessments, and
governmental levies except such as are contested in good faith and by
appropriate proceedings or where the failure to effect such payment is not
adverse in any material respect to the Guarantors or the Purchasers.

(f)           Stay, Extension and Usury Laws.  The Guarantors covenant (to the
extent that they may lawfully do so) that they shall not at any time insist
upon, plead, or in any manner whatsoever claim or take the benefit or advantage
of, any stay, extension or usury law wherever enacted, now or at any time
hereafter in force, that may affect the covenants or the performance of this
Guarantee; and the Guarantors (to the extent that they may lawfully do so)
hereby expressly waive all benefit or advantage of any such law, and covenant
that they shall not, by resort to any such law, hinder, delay or impede the
execution of any right herein granted to the Purchasers, but shall suffer and
permit the execution of every such right as though no such law has been enacted.

(g)           Negative Covenants.  So long as any of the Obligations are
outstanding, unless Purchasers holding at least a majority-in-interest of the
aggregate principal amount of the then outstanding Notes shall otherwise consent
in writing, each Guarantor will not directly or indirectly on or after the date
of this Guarantee:
 
 
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i.           enter into, create, incur, assume or suffer to exist any
indebtedness for borrowed money of any kind, including but not limited to, a
guarantee, on or with respect to any of its property or assets now owned or
hereafter acquired or any interest therein or any income or profits therefrom;

ii.           enter into, create, incur, assume or suffer to exist any liens of
any kind, on or with respect to any of its property or assets now owned or
hereafter acquired or any interest therein or any income or profits therefrom;

iii.           amend its certificate of incorporation, bylaws or other charter
documents so as to adversely affect any rights of the Purchasers hereunder;

iv.           repay, repurchase or offer to repay, repurchase or otherwise
acquire more than a de minimis number of shares of its securities or debt
obligations;

v.           pay cash dividends on any equity securities of the Company;

vi.          enter into any transaction with any Affiliate of the Guarantor
which would be required to be disclosed in any public filing of the Company with
the Commission, unless such transaction is made on an arm’s-length basis and
expressly approved by a majority of the disinterested directors of the Company
(even if less than a quorum otherwise required for board approval); or

vii.         enter into any agreement with respect to any of the foregoing;

provided, however, that the Guarantor shall not be prohibited from undertaking
any of the actions described above that the Company is permitted to undertake
pursuant to the terms of the Purchase Agreement, Notes and any and all other
agreements or other documents entered into in connection with the financings
contemplated by the Purchase Agreement.

5.              Miscellaneous.

(a)           Amendments in Writing.   None of the terms or provisions of this
Guarantee may be waived, amended, supplemented or otherwise modified except in
writing by Purchasers holding a majority-in-interest of the principal amount of
Notes then outstanding.

(b)           Notices.  All notices, requests and demands to or upon the
Purchasers or any Guarantor hereunder shall be effected in the manner provided
for in the Purchase Agreement, provided that any such notice, request or demand
to or upon any Guarantor shall be addressed to such Guarantor at its notice
address set forth on Schedule 1.

(c)           No Waiver by Course of Conduct; Cumulative Remedies. The
Purchasers shall not by any act (except by a written instrument pursuant to
Section 5(a)), delay, indulgence, omission or otherwise be deemed to have waived
any right or remedy hereunder or to have acquiesced in any default under the
Transaction Documents or Event of Default.  No failure to exercise, nor any
delay in exercising, on the part of the Purchasers any right, power or privilege
hereunder shall operate as a waiver thereof.  No single or partial exercise of
any right, power or privilege hereunder shall preclude any other or further
exercise thereof or the exercise of any other right, power or privilege.  A
waiver by the Purchasers of any right or remedy hereunder on any one occasion
shall not be construed as a bar to any right or remedy which the Purchasers
would otherwise have on any future occasion.  The rights and remedies provided
herein are cumulative, may be exercised singly or concurrently and are not
exclusive of any other rights or remedies provided by law.

 
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(d)           Enforcement Expenses; Indemnification.

(i)           Each Guarantor agrees to pay, or reimburse the Purchasers for, all
costs and expenses incurred in collecting against such Guarantor under the
guarantee contained in Section 2 or otherwise enforcing or preserving any rights
under this Guarantee and the other Transaction Documents to which such Guarantor
is a party, including without limitation the reasonable fees and disbursements
of counsel to the Purchasers.

(ii)           Each Guarantor agrees to pay, and to save the Purchasers harmless
from, any and all liabilities with respect to, or resulting from any delay in
paying, any and all stamp, excise, sales or other taxes which may be payable or
determined to be payable in connection with any of the transactions contemplated
by this Guarantee.

(iii)           Each Guarantor agrees to pay, and to save the Purchasers
harmless from, any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind or
nature whatsoever with respect to the execution, delivery, enforcement,
performance and administration of this Guarantee to the extent the Company would
be required to do so pursuant to the Purchase Agreement.

(iv)           The agreements in this Section shall survive repayment of the
Obligations and all other amounts payable under the Purchase Agreement, the
Notes and the other Transaction Documents.

(e)           Successor and Assigns. This Guarantee shall be binding upon the
successors and assigns of each Guarantor and shall inure to the benefit of the
Purchasers and their respective successors and assigns; provided that no
Guarantor may assign, transfer or delegate any of its rights or obligations
under this Guarantee without the prior written consent of the Purchasers.

(f)           Set-Off.  Each Guarantor hereby irrevocably authorizes the
Purchasers at any time and from time to time while an Event of Default under any
of the Transaction Documents shall have occurred and be continuing, without
notice to such Guarantor or any other Guarantor, any such notice being expressly
waived by each Guarantor, to set-off and appropriate and apply any and all
deposits, credits, indebtedness or claims, in any currency, in each case whether
direct or indirect, absolute or contingent, matured or unmatured, at any time
held or owing by the Purchasers to or for the credit or the account of such
Guarantor, or any part thereof in such amounts as the Purchasers may elect,
against and on account of the obligations and liabilities of such Guarantor to
the Purchasers hereunder and claims of every nature and description of the
Purchasers against such Guarantor, in any currency, whether arising hereunder,
under the Purchase Agreement, any other Transaction Document or otherwise, as
the Purchasers may elect, whether or not the Purchasers have made any demand for
payment and although such obligations, liabilities and claims may be contingent
or unmatured.  The Purchasers shall notify such Guarantor promptly of any such
set-off and the application made by the Purchasers of the proceeds thereof,
provided that the failure to give such notice shall not affect the validity of
such set-off and application.  The rights of the Purchasers under this Section
are in addition to other rights and remedies (including without limitation other
rights of set-off) which the Purchasers may have.

 
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(g)           Counterparts.  This Guarantee may be executed by one or more of
the parties to this Guarantee on any number of separate counterparts (including
by fax or PDF), and all of said counterparts taken together shall be deemed to
constitute one and the same instrument.

(h)           Severability.  Any provision of this Guarantee which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.

(i)           Section Headings.  The Section headings used in this Guarantee are
for convenience of reference only and are not to affect the construction hereof
or be taken into consideration in the interpretation hereof.

(j)           Integration.  This Guarantee and the other Transaction Documents
represent the agreement of the Guarantors and the Purchasers with respect to the
subject matter hereof and thereof, and there are no promises, undertakings,
representations or warranties by the Purchasers relative to subject matter
hereof and thereof not expressly set forth or referred to herein or in the other
Transaction Documents.

(k)           Governing Law.  This guarantee shall be governed by, and construed
and interpreted in accordance with, the law of the state of New York without
regard to any principles of conflicts of laws.

(l)           Submission to Jurisdictional; Waiver. Each Guarantor hereby
irrevocably and unconditionally:

(i)           submits for itself and its property in any legal action or
proceeding relating to this Guarantee and the other Transaction Documents to
which it is a party, or for recognition and enforcement of any judgment in
respect thereof, to the non-exclusive general jurisdiction of the Courts of the
State of New York, located in New York County, New York, the courts of the
United States of America for the Southern District of New York, and appellate
courts from any thereof;

(ii)           consents that any such action or proceeding may be brought in
such courts and waives any objection that it may now or hereafter have to the
venue of any such action or proceeding in any such court or that such action or
proceeding was brought in an inconvenient court and agrees not to plead or claim
the same;

 
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(iii)           agrees that service of process in any such action or proceeding
may be effected by mailing a copy thereof by registered or certified mail (or
any substantially similar form of mail), postage prepaid, to such Guarantor at
its address referred to in Schedule 1 below or at such other address of which
the Purchasers shall have been notified pursuant thereto;

(iv)           agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the right
to sue in any other jurisdiction; and

(v)           waives, to the maximum extent not prohibited by law, any right it
may have to claim or recover in any legal action or proceeding referred to in
this Section any special, exemplary, punitive or consequential damages.

(m)           Acknowledgements.  Each Guarantor hereby acknowledges that:

(i)           it has been advised by counsel in the negotiation, execution and
delivery of this Guarantee and the other Transaction Documents to which it is a
party;

(ii)           the Purchasers have no fiduciary relationship with or duty to any
Guarantor arising out of or in connection with this Guarantee or any of the
other Transaction Documents, and the relationship between the Guarantors, on the
one hand, and the Purchasers, on the other hand, in connection herewith or
therewith is solely that of debtor and creditor; and

(iii)           no joint venture is created hereby or by the other Transaction
Documents or otherwise exists by virtue of the transactions contemplated hereby
among the Guarantors and the Purchasers.

(n)           Release of Guarantors. Subject to Section 2, each Guarantor will
be released from all liability hereunder concurrently with the repayment in full
of all amounts owed under the Purchase Agreement, the Notes and the other
Transaction Documents.

(o)           Waiver of Jury Trial.  EACH GUARANTOR AND, BY ACCEPTANCE OF THE
BENEFITS HEREOF, THE PURCHASERS, HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE
TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS GUARANTEE AND
FOR ANY COUNTERCLAIM THEREIN.

(p)           Security.  The Obligations and Guarantors’ obligations hereunder
and under the other Transaction Documents are secured by the assets of the
Guarantors pursuant to the terms of the Security Documents.

(q)           Multiple Closings.  For clarification, the Guarantors acknowledge
and agree that there may be more than one Closing under the Purchase Agreement
and that this Guarantee guarantees all Obligations regardless of when (1) any
Purchaser executes the Purchase Agreement, (2) any Closing occurs or (3) any
Notes are issued, without any need for the Guarantors to execute any further
documentation or be notified of any Closing or for any other action to occur.

*****************

 
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IN WITNESS WHEREOF, each of the undersigned has caused this Guarantee to be duly
executed and delivered as of the date first above written.
 

 
ANTIK DENIM, LLC
                   
By:
/s/ Glenn S. Palmer
   
Name: 
Glenn S. Palmer
   
Title:
Chief Executive Officer
                   
TAVERNITI SO JEANS, LLC
                   
By:
/s/ Glenn S. Palmer
   
Name:  
Glenn S. Palmer
   
Title:
Chief Executive Officer
 

 
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SCHEDULE 1

GUARANTORS

The following are the names, notice addresses, jurisdiction of organization and
percentage ownership of each Guarantor.

NAME
ADDRESS FOR NOTICE
JURISDICTION OF
INCORPORATION
PERCENTAGE
 OWNED BY
COMPANY
       
ANTIK DENIM, LLC
5804 East Slauson Avenue
Commerce, California 90040
California
100%
       
TAVERNITI SO JEANS, LLC
5804 East Slauson Avenue
Commerce, California 90040
California
100%

 
 
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