Collateral Agreement

COLLATERAL AGREEMENT
(MHW, LTD.)


THIS AGREEMENT made as of the 1st day of June, 2004 by and among MHW, LTD., a New York corporation ("Collateral Agent") with its principal place of business located at 272 Plandome Road, Manhasset, New York 11030, CASTLE BRANDS (USA) CORP., a Delaware corporation ("CB-US"), with its principal place of business located at 85-47 Eliot Avenue, Suite G, Rego Park, NY 11374 and JPMORGAN CHASE BANK, a New York banking organization, as Trustee, ("Trustee"), with a corporate trust office located at 700 Lavaca, 2nd Floor, Austin, Texas 78701.


WITNESSETH:


WHEREAS, Collateral Agent is an importer, marketer and distributor of distilled spirits, wines and malt beverages throughout the United States of America and holds such regulatory licenses as are necessary in each of the States in or into which it conducts business; and


WHEREAS, CB-US possesses the exclusive rights to import and market certain beverage alcohol products in the United States (as identified in Exhibit "A" hereto as such exhibit may be amended from time to time, hereinafter the "Alcoholic Beverages") and utilizes the services of Collateral Agent to distribute the Alcoholic Beverages in the United States of America; and


WHEREAS, CB-US and Collateral Agent have entered into a "Distribution Services Agreement" restated as of December 1, 2003, by letter agreement of even date herewith ("Services Agreement"), a true copy of which is attached hereto as Exhibit "B", and


WHEREAS, pursuant to the terms of the Services Agreement, Collateral Agent sells the Alcoholic Beverages beneficially owned by CB-US to CB-US's customers;


WHEREAS, Collateral Agent takes or may take title to the Inventory of Alcoholic Beverages, exercises custody and control over the accounts arising from the sale thereof and collects the proceeds thereof (the "Accounts"); and


WHEREAS, CB-US seeks to enter into a Trust Indenture (the "Trust Indenture") of even date herewith with Trustee for the purpose of issuing certain 8% Senior Secured Notes, Series 2004 (the "Secured Notes") of CB-US thereunder, pursuant to which CB-US's inventory and accounts receivable shall be pledged to Trustee as collateral for CB-US's indebtedness and other obligations; and


WHEREAS, it is in the best interest of Collateral Agent that CB-US cause the issuance of the Secured Notes under the Trust Indenture in order that CB-US may continue and expand its business, in general, and specifically with Collateral Agent; and


WHEREAS, as a condition to the issuance of the Secured Notes, the Trust Indenture contemplates that Trustee shall have a first priority and sole security interest in the Alcoholic Beverages, Accounts and other assets of CB-US in the possession or under the control of Collateral Agent; and
WHEREAS, in order to provide Trustee with the required security interest, Collateral Agent has agreed to consent to the assignment of the Services Agreement with CB-US and, to and for the benefit of Trustee and the owners from time to time of the Secured Notes, to enter into this Agreement; and


NOW, THEREFORE, for and in consideration of the one dollar and other valuable consideration, receipt of which is hereby acknowledged, it is hereby agreed as follows:


I. DEFINITIONS:


"Accounts" for the purposes of this Agreement, shall mean all items described in the UCC definition thereof and all of the following, whether or not so described (in all cases whether now existing or hereafter created), solely to the extent to which they arise from the sale of the Alcoholic Beverages by Collateral Agent: all obligations of any kind at any time due or owing to CB-US or Collateral Agent and all rights of CB-US or Collateral Agent to receive payment or any other consideration (whether classified under the UCC or the law of any other state as accounts, Accounts, contract rights, chattel paper, General Intangibles, or otherwise) including without limitation invoices, contract rights, Accounts, general intangibles, choses-in-action, notes, drafts, acceptances, instruments and all other debts, obligations and liabilities in whatever form owing to CB-US or Collateral Agent from any person, firm, corporation, governmental authority or other entity, together with all security for any thereof, and all of CB-US's or Collateral Agent's rights to goods sold (whether delivered, undelivered, in transit or returns), represented by any thereof, together with all proceeds and products of any of the foregoing.


"Agreement" shall mean this Agreement together with any and all amendments, modifications, and supplements hereto as same are executed among the parties from time to time.


"Alcoholic Beverages" shall have the same meaning as set forth in the preamble of this Agreement, together with all packing materials, labels and the like related thereto and paid tax stamps affixed thereto.


"Business Day" or "Business Days" shall mean any day except Saturdays, Sundays or legal holidays for banks in the State of New York on which commercial banks located in the State of New York are open and conducting business.


"CB-US Security Agreement" shall mean that certain General Security Agreement of even date herewith by and among CB-US and Trustee.


"Collateral" shall mean all the following, wherever located and whether now existing or hereafter created or arising and whether now owned or hereafter acquired by CB-US or Collateral Agent: (i) Accounts arising from the sale of the Alcoholic Beverages; (ii) Inventory of the Alcoholic Beverages, and shall include, without limitation: (a) all documents of title, policies or certificates of insurance, securities, chattel paper and other documents and instruments evidencing or pertaining to any thereof; all claims of CB-US or Collateral Agent against third parties for loss of or damage to, or otherwise relating to, any of the Collateral; (b) any moneys, drafts, notes, items, leases, general or special deposits, balances, sums, proceeds and credits of CB-US or Collateral Agent arising from the Collateral; (iii) all rights and remedies which CB US


2 or Collateral Agent might exercise with respect to any of the Collateral; and (iv) all accessions and additions to, replacements and substitutions for, and proceeds and products of, the Collateral.


"MHW Security Agreement" shall mean that certain Security Agreement of Even date herewith by and among Collateral Agent and Trustee.


"Obligations" shall mean and include the Secured Notes, together with all loans, advances, debts, liabilities, obligations, covenants and duties owing by CB-US to Trustee or any Affiliate of Trustee of any kind or nature, present or future, whether or not evidenced by any note, guaranty or other instrument, arising under any agreement or by operation of law, whether or not for the payment of money, whether arising by reason of an extension of credit, loan, guaranty, indemnification or in any other manner, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now due or hereafter arising and however acquired, including, without limitation, all interest, charges, expenses, commitment, facility, collateral management or other fees, reasonable attorneys' fees and expenses, consulting fees and expenses and any other sum chargeable to CB-US under this Agreement, the other Secured Notes Document, or the Trust Indenture.


"Secured Notes Documents" shall mean this Agreement, the MHW Security Agreement, the CB-US Security Agreement and the Trust Indenture, together with promissory notes issued thereunder, and any and all other documents, instruments or agreements executed in connection therewith or herewith as the same may be modified, amended, restated or replaced from time to time.


"Services Agreement" shall have the same meaning as set forth in the preamble to this Agreement.


"UCC" shall mean the Uniform Commercial Code as in effect in the State of New York, and, as to issues of perfection and exercise of remedies only, the Uniform Commercial Code as in effect from time to time in the jurisdiction (i) wherein any of the Collateral is located or (ii) governing the Collateral.


II. INTEREST OF COLLATERAL AGENT IN COLLATERAL:


It is hereby understood, agreed, and acknowledged that:


(a) Collateral Agent and CB-US have entered into the Services Agreement;


(b) pursuant to the Services Agreement Collateral Agent shall sell Alcoholic Beverages beneficially owned by CB-US to customers of and at the request of CB-US;


(c) Collateral Agent's interest in the Inventory of Alcoholic Beverages, the Accounts, the proceeds thereof or other assets of CB-US coming into Collateral Agent's possession shall be for the benefit of itself; CB-US and Trustee;


(d) to the extent Collateral is ...