Unassociated Document


    SECURED
CONVERTIBLE PROMISSORY NOTE

     

    
      	
              $500,000.000

              (Original
      Principal Amount)

            	
              New York, New
      York 

              July 16,
      2008

            


    

     

     FOR
VALUE RECEIVED, the adequacy of which is hereby acknowledged, the undersigned,
Blue Holdings, Inc., a Nevada corporation having an address at 4901 Zambrano
Street, Commerce, Ca 90040 (the “Maker” or “Borrower”), hereby
promises to pay to Headgear, Inc., having an address at 3409 Chandler Creek
Road, Virginia Beach, VA 23453 (the “Lender”), the
aggregate sum of FIVE HUNDRED THOUSAND UNITED STATES DOLLARS ($500,000.00),
subject to adjustment as provided herein.  This Note shall be due and
payable in full, together with any other charges (if any), on March 15, 2009
(the “Maturity
Date”).

     

    Capitalized
terms used but not defined herein shall have the meanings ascribed to them in
the Loan and Security Agreement executed of even date herewith (the “Loan
Agreement”).

     

    1.          Repayment
Terms.   All sums due to Lender hereunder shall be made as
per the terms of this Section 1.  The Lender has agreed to accept
payment under this Note as follows:  the principal amount of this Note
shall be utilized as a Purchase Order Credit that allows the Lender to acquire
Five Hundred Thousand Dollars worth of Borrower’s goods at a discount of 22.5%
to Borrower’s spring merchandise line wholesale price list (the “Spring Line
Sheets”), which is attached hereto as Exhibit A.  The selection of the
goods shall be in Lender’s sole and absolute discretion from the Spring Line
Sheets, provided that Borrower has the right to change the Spring Line Sheets
from time to time to substitute an item of comparable quality and style for any
item currently on the Sheets.  If the Maker does not provide shipment
of the goods ordered within thirty (30) days of the delivery date prescribed by
Lender which in no event shall be prior to January 15, 2009, this Note shall be
in Default and the Lender shall have the right to demand immediate payment
and/or exercise any and all rights hereunder or under the Loan
Agreement.

    


    2.           Allocation.   Except
as otherwise provided herein, all payments made hereunder (whether in prepayment
or otherwise) shall be applied against principal.

     

    3.           Events of
Default.   Each and any of the following shall constitute
Events of Default:

     

    (a)           The
Maker does not provide shipments of goods ordered by the Lender within sixty
(60) days of the Delivery Date requested by Lender as set forth in Section 1
hereof.

    


    (b)           The
Borrower fails to comply in any material respect with any term, obligation,
covenant, or condition contained in this Note or in the Loan and Security
Agreement within ten (10) days after receipt of written notice from the Lender
demanding such compliance.

    


    (c)           Any
warranty or representation made to the Lender by the Borrower under this Note or
in the Loan and Security Agreement proves to have been false in any material
respect when made or furnished.

    


    (d)           Any
event that results in acceleration of the maturity of any indebtedness of
Borrower in the outstanding principal amount of $50,000 or more, under any note,
indenture, contract, or agreement.

     

    (e)           Any
levy, seizure, attachment, lien, or encumbrance of or on the Collateral which is
not discharged by the Borrower within twenty (20) days and is not being disputed
by the Borrower in good faith, or any sale, transfer, or disposition of any
interest in the Collateral, other than in the ordinary course of business,
without the written consent of the Lender.

    


    
      	
               
      

            	
              (f)

            	
              Lender’s
      insolvency as set forth in the Loan
Agreement.

            


    

    


    
      	
               
      

            	
              (g)

            	
              Any
      other Event of Default as set forth in the Loan
  Agreement.

            


    

    


    If an
Event of Default should occur, Lender, at its option, may declare the
outstanding principal balance of this Note, along with other fees (if any), to
be immediately due and payable without presentment, demand, protest, or notice
of any kind, all of which are hereby expressly waived.

     

    Further,
Maker agrees to pay all fees, costs and expenses, including reasonable
attorneys’ fees and legal expenses, incurred by Lender in endeavoring to collect
any amounts payable hereunder which are not paid when due, whether by
acceleration or otherwise.

     

    4.           Conversion.   If
the Maker remains in default of this Note for over sixty (60) days, then the
Lender shall have the option, but not the obligation, to convert the principal
amount of the Note that remains outstanding at the time Default into fully paid
and non-assessable shares of Common Stock of the Maker at $0.40 per share (the
“Conversion Price”).

     

    In case
the Company shall at any time divide its outstanding shares of Common Stock into
a greater number of shares, the Conversion Price in effect immediately prior to
such subdivision should be proportionately reduced, and, conversely, in the case
of outstanding shares of Common Stock of the Company shall be combined into a
smaller number of shares, the actual conversion price in effect immediately
prior to such combination shall be proportionately increased.

     

    In any reclassification or change of
outstanding shares of Common Stock available for issue upon conversion of the
Note (other than a change in stated value or from no par to par value) or in the
case of any consolidation or merger of the Company with any other company, or in
the case of the sale and conveyance to another to another company or person of
the property of the Company in its entirety or substantially as an entirety, the
Company shall, as a condition precedent to such transaction, cause effective
provisions to be made that the Lender shall have the right thereafter to convert
the Notes into the kind and amount of shares of Stock and other securities and
property receivable upon such reclassification, change, consolidation, merger,
sale or conveyance by Lender of the number of shares of Common Stock in the
Company into which the Note might have been converted immediately prior to such
reclassification, change, consolidation, merger, sale or
conveyance.

     

    5.           Waiver.   No
delay or omission of Lender in exercising any right or power hereunder shall
impair such right or power or be a waiver of any default or an acquiescence
therein; and no single or partial exercise of any such right or power shall
preclude other or further exercise thereof, or the exercise of any other right;
and no waiver shall be valid unless in writing signed by Lender, and then only
to the extent specifically set forth in such writing.  All remedies
hereunder or by law afforded shall be cumulative and shall be available to
Lender until the principal amount of and all interest on this Note has been paid
in full.

     

    6.           Security &
Pledge.  Maker hereby acknowledges and affirms its assignment
and pledge to Lender of all of the Collateral described in the Loan
Agreement.

     

    7.           Notices.  All
notices, requests, demands or other communications required or permitted
hereunder shall be in writing, addressed to the appropriate party as
follows:

     

    
      	
               
      

            	
              (i)

            	
              If to Lender,
      to:

            


    

     

    Headgear,
Inc.

    3409
Chandler Creek Road

    Virginia
Beach, VA 23453

    Attention:
Jeff Watson, Chief Executive Officer

     

    With a copy
to:

     

    Marc X.
LoPresti, Esq.

    Tagliaferro
& LoPresti, LLP

    45
Broadway, Suite 2200

    New York,
New York 10006

    


    (ii)         
If to Maker, to Maker’s address listed above, or to such other address as may
have been designated in prior notice.  Notices may be sent by (a)
overnight courier, or (b) registered or certified mail, postage prepaid, return
receipt requested; and shall be deemed given (i) in the case of overnight
courier, the next business day after the day sent, and (ii) in the case of
mailing, three (3) business days after being mailed by registered or certified
mail, and otherwise notices shall be deemed to have been given when
received.

     

    8.           Assignment.  Lender
shall be permitted to assign this Note without the consent of
Maker.

     

    9.           Binding
Effect.  The terms and provisions of this Note shall be binding
upon Maker and its successors and permitted assigns, and shall inure to the
benefit of Lender and its successors and assigns, and any subsequent holder of
this Note.

     

    10.         Governing
Law.  (a) This Note shall be interpreted in accordance with and
governed by the laws of the State of New York (without giving effect to any
choice or conflict of laws provisions thereof).

     

               (b)           Each
party hereto hereby irrevocably and unconditionally submits to the jurisdiction
of any federal and state court in the State of New York sitting in the borough
of Manhattan in the City of New York and irrevocably agrees that all actions or
proceedings arising out of or relating to this Note or the transactions
contemplated hereby shall be litigated exclusively in such
courts.  Each party hereto agrees not to commence any legal proceeding
related hereto or thereto except in such courts.  Each party hereto
irrevocably waives any objection which it may now or hereafter have to the
laying of the venue of any such proceeding in any such court and hereby further
irrevocably and unconditionally waives and agrees not to plead or claim in any
such court that any such action, suit or proceeding brought in any such court
has been brought in an inconvenient forum. Each party hereto consents to process
being served in any such action or proceeding by mailing a copy thereof by
registered or certified mail.

     

                          (c)           EACH
PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW,
ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY
OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS
AGREEMENT.  Each party hereto (a) certifies that no representative,
agent or attorney of any of the other parties has represented, expressly or
otherwise, that any of the other parties would not, in the event of litigation,
seek to enforce the foregoing waiver and (b) acknowledges that it and the other
parties hereto have been induced to enter into this Note, by, among other
things, the mutual waivers and certifications in this Section 9.

     

    11.           Headings.  The
section headings contained in this Note are intended solely for convenience of
reference and do not themselves constitute a part of this Note.

     

    12.           Severability.  If
any provision of this Note or the application thereof to any person or
circumstance should, for any reason and to any extent, be invalid or
unenforceable, the remainder of this Note and the application of such provision
to other persons or circumstances shall not be affected thereby, but rather
shall be enforced to the greatest extent permitted by law.

     

    IN WITNESS WHEREOF, Maker has executed
this Note as of the date first above written.

     

    
      
        	 	MAKER:	 
	 	 	 
	 	

                BLUE
      HOLDINGS, INC.

              	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Glenn
      Palmer	 
	 	Name:  	Glenn
      Palmer	 
	 	Title:  	Chief
      Executive Officer	 
	 	 	 	 


      

       

      
        	 	LENDER: 	 
	 	 	 
	 	

                HEADGEAR,
      INC.

              	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Jeff
      Watson	 
	 	Name:  	Jeff
      Watson	 
	 	Title: 	Chief
      Executive Officer