REIMBURSEMENT AGREEMENT

                                     between

                           K-V PHARMACEUTICAL COMPANY

                                       and

                              LASALLE NATIONAL BANK


                          dated as of October 16, 1997



                                  $4,595,000.00
                       Industrial Development Authority of
                        the County of St. Louis, Missouri
           Private Activity Refunding and Revenue Bonds Series 1989(F)
                      (K-V Pharmaceutical Company Project)


<PAGE>


                                TABLE OF CONTENTS
                                                                          PAGE

ARTICLE I     DEFINED TERMS..................................................2

ARTICLE II    REIMBURSEMENT OBLIGATION; OTHER PAYMENTS;
              LETTER OF CREDIT COMMISSION; SECURITY..........................8

Section 2.1.  Reimbursement..................................................8

Section 2.2.  Fees; Interest on Overdue Amounts..............................9

Section 2.3.  Computation of Interest and Fees; 
              Place and Manner of Payment....................................9

Section 2.4.  Payments in Respect of Regulatory Changes......................10

Section 2.5.  Security; Release of Pledged Bonds.............................11

Section 2.6.  Loan in Respect of Certain Draws 
              under the Letter of Credit.....................................12

Section 2.7.  Substitute Letter of Credit....................................12

Section 2.8.  Optional Redemption............................................12

Section 2.9.  Required Deposits for Mandatory 
              Redemption Under Section 302(g)................................13

ARTICLE III   ISSUANCE OF LETTER OF CREDIT;
              CONDITIONS TO ISSUANCE.........................................13

Section 3.1.  Issuance of Letter of Credit...................................13

Section 3.2.  Conditions Precedent to Issuance of Letter of Credit...........13

ARTICLE IV    REPRESENTATIONS AND WARRANTIES; COVENANTS; 
              INDEMNIFICATION; CONTINUING OBLIGATION.........................16

Section 4.1.  Representations and Warranties of the Borrower.................16

Section 4.2.  Affirmative Covenants..........................................20

Section 4.3.  Negative Covenants.............................................26

Section 4.4.  Indemnification................................................28

Section 4.5.  Continuing Obligation; Obligation Absolute.....................29

Section 4.6.  Liability of the Bank..........................................30

ARTICLE V     DEFAULTS AND REMEDIES..........................................32

Section 5.1.  Events of Default; Remedies....................................32

Section 5.2.  No Waiver; Remedies Cumulative.................................34

Section 5.3.  Right of Set-Off...............................................34

ARTICLE VI    MISCELLANEOUS..................................................34

Section 6.1.  Costs, Expenses and Taxes......................................34

Section 6.2.  Term of Letter of Credit and Agreement; 
              Termination by Borrower........................................35

Section 6.3.  Transfer of Letter of Credit...................................35

Section 6.4.  Severability...................................................35

Section 6.5.  Governing Law..................................................35

Section 6.6.  Headings.......................................................36

Section 6.7.  Notices........................................................37

Section 6.8.  Participation..................................................38

Section 6.9.  Counterparts...................................................38

Section 6.10.  Notices and Payments..........................................38

Section 6.11.  Modification..................................................38

<PAGE>

                                    EXHIBITS

Schedule 1.0                        Collateral
Exhibit A to Schedule 1.0           Legal Description
Exhibit A                           Form of Letter of Credit
Exhibit B                           Form of Legal Opinion of Counsel to Borrower


<PAGE>

                             REIMBURSEMENT AGREEMENT


         This  REIMBURSEMENT  AGREEMENT  ("Agreement"),  dated as of October 16,
1997 is made by and between K-V PHARMACEUTICAL  COMPANY, a Delaware  corporation
(the "Borrower"), and LASALLE NATIONAL BANK, a national banking association (the
"Bank").

                                    PREAMBLE

         WHEREAS,  the  Industrial  Development  Authority  of the County of St.
Louis,  Missouri (the  "Issuer") has issued its Private  Activity  Refunding and
Revenue  Bonds,  Series 1989(F) (K-V  Pharmaceutical  Company  Project),  in the
aggregate  principal amount of  $4,595,000.00  (the "Bonds") to provide funds to
refund  $3,200,000  of  Industrial  Development  Revenue  Bonds  Series  of 1981
previously   issued  by  Issuer  and  to  finance  the  acquisition  of  certain
manufacturing equipment (the "Project") pursuant to the terms of an Indenture of
Trust between the Issuer and Mercantile Bank National Association, formerly know
as Mark Twain Bank, as trustee ("Trustee"), dated as of November 1, 1989, as the
same may be amended, modified or supplemented from time to time;

         WHEREAS,  the Issuer  loaned the  proceeds of the Bonds to the Borrower
under the terms and conditions set forth in that certain Loan Agreement  between
Issuer and  Borrower  dated as of November 1, 1989,  as the same may be amended,
modified or supplemented from time to time (the "Loan Agreement");

         WHEREAS, the Bonds are required to be secured by a direct pay Letter of
Credit  pursuant  to Section  3.6 of the Loan  Agreement  for the account of the
Borrower naming Trustee as the beneficiary thereof;

         WHEREAS,  the  Borrower  has  notified  the Trustee  that it intends to
replace the existing Letter of Credit with an alternate  Letter of Credit issued
by the Bank;

         WHEREAS,  the Bank has  agreed to provide a direct pay Letter of Credit
(the  "Letter of  Credit")  in the stated  amount of Two  Million  Five  Hundred
Eighty-Six Thousand Three Hundred Thirty and 00/100 Dollars  ($2,586,330.00) for
the account of the Borrower  naming  Trustee as the  beneficiary  thereof in the
form attached hereto as Exhibit A;

         WHEREAS,  to evidence its  obligation to reimburse the Bank for any and
all draws under the Letter of Credit and fees payable  thereunder,  the Borrower
enters into this Reimbursement Agreement with the Bank;

         WHEREAS, to secure its obligations under this Reimbursement  Agreement,
the Borrower will execute  concurrently  herewith a Missouri Future Advance Deed
of  Trust  and  Security  Agreement  and  an  Assignment  of  Rents  and  Leases
encumbering the real property described therein;


<PAGE>

         WHEREAS,  the  Borrower,  the Bank and the Trustee,  as custodian  (the
"Custodian"),  desire to enter into the Pledge  Agreement  (as  defined  herein)
pursuant to which,  among other things,  the Bonds  purchased from amounts drawn
under the  Letter of Credit  due to a failure  to  remarket  will be held by the
Custodian for the benefit of the Bank in pledge as  collateral  security for the
obligations of the Borrower hereunder and under the Letter of Credit; and

         NOW,  THEREFORE,  in  consideration  of the  premises  and  the  mutual
promises  set forth  herein,  the  receipt and  sufficiency  of which are hereby
acknowledged,  in order to  induce  the Bank to issue the  Letter of Credit  and
intending to be legally bound hereby,  the Borrower and the Bank hereby agree as
follows:

                                    ARTICLE I

                                  DEFINED TERMS

         The following terms shall, unless the context indicates otherwise, have
the meanings provided below (such meanings to be equally  applicable to both the
singular and plural forms of the terms defined):

         "Affiliate"  means any Person (a) that directly or indirectly,  through
one or more  intermediaries,  controls or is  controlled  by, or is under common
control with the Borrower or one or more  Affiliates of the  Borrower,  (b) that
directly or beneficially owns or holds 10% or more of any equity interest in the
Borrower or one or more  Affiliates  of the Borrower or (c) 10% or more of whose
voting stock (or in the case of a Person which is not a corporation, 10% or more
of any  equity  interest)  is  owned  directly  or  beneficially  or held by the
Borrower  or one or  more  Affiliates  of the  Borrower.  For  purposes  of this
definition  and this  Agreement  the term  "control"  shall  mean,  directly  or
indirectly,  the power to direct or cause the  direction  of the  management  or
policies of a Person, whether through ownership interest or otherwise.

         "Agreement" means this Reimbursement Agreement.

         "Assignment of Rents" means the Assignment of Rents and Leases dated of
even date herewith made by Borrower and Bank pursuant to Sections 2.5(a) and 3.2
(g) hereof.

         "Available  Amount" means the "Maximum  Available Credit" as defined in
the Letter of Credit.

         "Bank" means LaSalle National Bank, a national banking association, the
issuer of the Letter of Credit, its successors and assigns.

         "Bonds" means the Bonds defined in the Preamble to this Agreement.

<PAGE>

         "Business Day" means any day other than a Saturday,  Sunday or a day on
which banking  institutions in either the city of New York, New York or Chicago,
Illinois  are required or  authorized  by law to be closed or a day on which the
New York Stock Exchange is closed.

         "Capital Expenditures" means the cost of acquiring any fixed assets, or
any improvements,  replacements,  substitutions, accessions or additions thereto
or therefor  which have a useful life of more than one year,  including  without
limitation, the cost of direct or indirect acquisitions of such assets by way of
purchase, capital lease or otherwise.

         "Code" means the Internal Revenue Code of 1986, as amended.

         "Collateral"  means the  property of the Borrower set forth in Schedule
1.0 hereto.

         "Date of  Issuance"  means the date of issuance of the Letter of Credit
as provided in Section 3.1 hereof.

         "Debt"   means  all  of  a  Person's   liabilities,   obligations   and
indebtedness  to any Person of any and every kind and nature,  whether  primary,
secondary,  direct,  indirect,  absolute,   contingent,   fixed,  or  otherwise,
heretofore, now or hereafter owing, due or payable, however evidenced,  created,
incurred,  acquired or owing and however arising,  whether under written or oral
agreement,  by  operation of law or  otherwise.  Without in any way limiting the
generality of the foregoing,  Debt  specifically  includes (i)  indebtedness for
borrowed money, (ii) obligations evidenced by bonds, debentures,  notes or other
similar  instruments,  (iii)  obligations to pay the deferred  purchase price of
property or services,  (iv)  obligations as lessee under leases which shall have
been or should be, in  accordance  with GAAP,  recorded as capital  leases,  (v)
obligations  under direct or indirect  guaranties in respect of, and obligations
(contingent  or  otherwise)  to purchase or otherwise  acquire,  or otherwise to
assure a creditor  against loss in respect of,  indebtedness  or  obligations of
others of the kinds  referred  to in clauses (i)  through  (iv) above,  and (vi)
liabilities in respect of unfunded vested benefits under Plans and Multiemployer
Plans covered by Title IV of ERISA.

         "Default Rate" shall mean the Prime Rate plus two percent (2%).

         "Documents" means this Agreement,  the Letter of Credit, the Bonds, the
Indenture,  the Loan Agreement, the Remarketing Agreement, the Pledge Agreement,
the Mortgage,  the Assignment of Rents,  the  Environmental  Agreement,  and any
instrument  or  agreement  related  thereto,  and  "Document"  means  any of the
foregoing.

         "EBITDA"   means  with  respect  to  any  fiscal  period  of  Borrower,
Borrower's  aggregate  (a) net income for such  period,  plus (b) the  aggregate
amounts  deducted  in  determining  such net income in  respect of (i)  Interest
Expense,  (ii) income taxes,  (iii) depreciation and (iv) amortization minus (c)
extraordinary  gains, each determined on a consolidated  basis and in accordance
with GAAP consistently applied.

<PAGE>

         "Environmental  Agreement" means the Environmental  Indemnity Agreement
dated of even date  herewith  between  Borrower and Bank  delivered  pursuant to
Sections 2.5(a) and 3.2(g) hereof.

         "Environmental  Claim"  means  any  accusation,  allegation,  notice of
violation,   claim,  demand,   abatement  order  or  other  order  or  direction
(conditional or otherwise) by any  governmental  authority or any Person for any
damage,  including,  without  limitation,  personal injury (including  sickness,
disease  or  death),  tangible  or  intangible  property  damage,  contribution,
indemnity,  indirect  or  consequential  damages,  damage  to  the  environment,
nuisance,  pollution,  contamination or other adverse effects on the environment
or for fines,  penalties or  restrictions  resulting  from or based upon (i) the
existence  of  a  Release   (whether  sudden  or  non-sudden  or  accidental  or
non-accidental) of, or exposure to, any Hazardous Materials in, into or onto the
environment  at, in, by, from,  onto or related to any  Facility,  (ii) the use,
handling, transportation,  storage, treatment or disposal of Hazardous Materials
in connection  with the operation of any Facility,  or (iii) the  violation,  or
alleged violation, of any Environmental Laws or any Governmental  Authorizations
relating to environmental matters in connection with the Facilities.

         "Environmental  Laws" means all statutes,  ordinances,  orders,  rules,
regulations,   plans,  policies,  or  decrees  and  the  like  relating  to  (i)
environmental matters, including,  without limitation,  those relating to fines,
injunctions,  penalties,  damages,  contribution,  cost  recovery  compensation,
losses or injuries resulting from the Release or threatened Release of Hazardous
Materials,  (ii) the generation,  use, storage,  transportation,  or disposal of
Hazardous Materials or (iii) occupational safety and health, industrial hygiene,
land use or the protection of human,  plant or animal health or welfare,  in any
manner  applicable  to the Borrower or an  Affiliate or any of their  respective
properties,  including,  without  limitation,  the  Comprehensive  Environmental
Response,  Compensation,  and  Liability Act (42 U.S.C.  ss. 9601 et seq.),  the
Hazardous  Materials  Transportation  Act (49  U.S.C.  ss.  1801 et  seq.),  the
Resource Conservation and Recovery Act (42 U.S.C. ss. 6901 et seq.), the Federal
Water Pollution  Control Act (33 U.S.C. ss. 1251 et seq.), the Clean Air Act (42
U.S.C. ss. 7401 et seq.),  the Toxic Substances  Control Act (15 U.S.C. ss. 2601
et seq.), the Occupational Safety and Health Act (29 U.S.C. ss. 651 et seq.) and
the Emergency  Planning and Community  Right-To-Know Act (42 U.S.C. ss. 11001 et
seq.),  each as amended or  supplemented,  and any  analogous  present or future
local, state and federal statutes and regulations  promulgated pursuant thereto,
each as in effect as of the date of determination.

         "ERISA" means the Employee  Retirement  Income Security Act of 1974, as
the same may be  amended  from time to time and,  unless the  context  otherwise
requires, the regulations promulgated thereunder and any successor statute.

         "ERISA  Affiliate"  means  each  trade  or  business  (whether  or  not
incorporated)  which  together with the Borrower would be deemed to be a "single
employer"  within the meaning of Section 4001(b) of ERISA or, where  applicable,
would be treated as a "single employer" under Section 412(c)(11) of the Code.

<PAGE>

         "ERISA  Termination  Event" means (i) a "Reportable Event" described in
Section  4043 of ERISA  (other  than a  "Reportable  Event"  not  subject to the
provision for 30-day notice to the PBGC under ERISA or with respect to which the
30-day notice  requirement  has been waived by the PBGC), or (ii) the withdrawal
of the Borrower or any ERISA  Affiliate  from a Plan during a plan year in which
it was a  "substantial  employer,"  both of such  terms as  defined  in  Section
4001(a) of ERISA,  including  a  cessation  of  operations  that is treated as a
withdrawal by a "substantial  employer" under Section 4062(e) of ERISA, or (iii)
the filing of a notice of intent to terminate a Plan or the  treatment of a Plan
amendment as a termination  under Section 4041 of ERISA, or (iv) the institution
of  proceedings  to  terminate  a Plan by the  PBGC or (v) any  other  event  or
condition  which  in the  reasonable  judgment  of the  Borrower  is  likely  to
constitute  grounds under Section 4042 of ERISA for the  termination  of, or the
appointment of a trustee to administer, any Plan or (vi) the partial or complete
withdrawal of the Borrower or any ERISA Affiliate from a Multiemployer Plan.

         "ETHEX"   means  Ethex   Corporation,   a  Missouri   corporation   and
wholly-owned subsidiary of Borrower.

         "Event of Default"  means an Event of Default as defined in Section 5.1
of this Agreement.

         "Facility" or "Facilities" means any and all real property  (including,
without  limitation,  all  buildings,  fixtures  or other  improvements  located
thereon) now, hereafter or heretofore,  owned,  leased,  operated or used by the
Borrower or any  Affiliate  or any of their  respective  successors  and assigns
including,  without limitation, the real property legally described on Exhibit A
to Schedule 1.0 hereto and the Project.

         "GAAP" means generally accepted accounting  principles as pronounced by
the  Financial  Accounting  Standards  Board  and/or the  American  Institute of
Certified Public Accountants, consistently applied and maintained throughout the
periods indicated.

         "Governmental Authorization" means any permit, license,  authorization,
plan, directive,  consent order or consent decree of or from any federal,  state
or local governmental authority, agency or court.

         "Governmental Obligations" means noncallable direct general obligations
of, or  obligations  the payment of the  principal  of and interest on which are
unconditionally guaranteed by, the United States of America.

<PAGE>

         "Hazardous  Materials"  means  any  chemical,  material  or  substance,
exposure  to which is  prohibited,  limited  or  regulated  by any  governmental
authority or the  Environmental  Laws or which may or could pose a hazard to the
health and safety of the owners, occupants or any persons in the vicinity of the
Facilities,  including, without limitation, to the extent so prohibited, limited
or regulated (i) any chemical,  material or substance  defined as or included in
the  definition  of  "hazardous   substances,"  "hazardous  wastes,"  "hazardous
materials,"   "extremely   hazardous  waste,"   "restricted   hazardous  waste,"
"infectious  waste," "toxic  substances" or any other  formulations  intended to
define, list or classify substances by reason of deleterious  properties such as
ignitability, corrosivity, reactivity,  carcinogenicity,  toxicity, reproductive
toxicity,  "TCLP toxicity" or "EP toxicity" or words of similar import under any
applicable Environmental Laws or publications promulgated pursuant thereto, (ii)
any oil,  petroleum or petroleum derived  substance,  (iii) any drilling fluids,
produced waters and other wastes associated with the exploration, development or
production of crude oil, natural gas or geothermal resources, (iv) any flammable
substances or explosives,  (v) any radioactive  materials,  (vi) asbestos in any
form  (which  is  or  could  become  friable),   (vii)  urea  formaldehyde  foam
insulation,  (viii)  electrical  equipment  which contains any oil or dielectric
fluid containing  levels of  polychlorinated  biphenyls in excess of fifty parts
per million, or (ix) pesticides.

         "Indenture" means the Trust Indenture (pursuant to which the Bonds have
been issued) constituting a trust agreement between the Issuer and Trustee dated
as of November 1, 1989,  as amended by that  certain  Amendment  of Indenture of
Trust and Loan  Agreement  dated as of November  1, 1994 among the  Issuer,  the
Borrower, the Trustee and the Remarketing Agent.

         "Issuer"  means the Industrial  Development  Authority of the County of
St. Louis,  Missouri, a public corporation organized and existing under the laws
of the State of Missouri, its successors and assigns.

         "K-V Loan Agreement" means that certain Loan Agreement dated as of June
18,  1997 by and among  Borrower,  ETHEX  and PDI and  Bank,  as the same may be
amended, restated, supplemented or modified from time to time.

         "Letter  of  Credit"  means the  irrevocable,  transferable  direct pay
letter of credit issued by the Bank for the account of the Borrower  pursuant to
this Agreement in the form of Exhibit A hereto with appropriate  insertions,  as
amended.

         "Leverage Ratio" means, as of any date, the ratio of (i) Liabilities to
(ii) Tangible Net Worth.

         "Lien" means, with respect to any asset, any mortgage, pledge, security
interest,  encumbrance,  lien or charge of any kind  (including any agreement to
give  any of the  foregoing,  any  conditional  sale or  other  title  retention
agreement,  any lease in the nature  thereof,  and the filing of or agreement to
give  any  financing   statement  under  the  Uniform  Commercial  Code  of  any
jurisdiction).

         "Loan Agreement" means the Loan Agreement dated as of November 1, 1989,
between the Issuer and the  Borrower,  as amended by that  certain  Amendment of
Indenture  of Trust and Loan  Agreement  dated as of  November 1, 1994 among the
Issuer, the Borrower, the Trustee and the Remarketing Agent.

         "Long-Term Debt" means all Debt which, at the time of incurrence, has a
final maturity or term greater than one year or which is renewable at the option
of the  debtor  for a term  greater  than  one year  from  the date of  original
issuance.

<PAGE>

         "Mortgage" means the Missouri Future Advance Deed of Trust and Security
Agreement  dated of even date  herewith  made by  Borrower to Franklin D. Weike,
Hillsboro Title Company, Highway 21 and 3rd Street,  Hillsboro,  Missouri 63050,
as trustee,  for the benefit of the Bank and  delivered  by the  Borrower to the
Bank pursuant to Sections 2.5(a) and 3.2 (g) hereof.

         "Multiemployer Plan" means a plan defined as such in Section 4001(a)(3)
of ERISA to which  contributions  have  been made by the  Borrower  or any ERISA
Affiliate.

         "PBGC" means the Pension  Benefit  Guaranty  Corporation and any entity
succeeding to any or all of its functions under ERISA.

         "PDI"  means  Particle  Dynamics,  Inc.,  a New  York  corporation  and
wholly-owned subsidiary of Borrower.

         "Person"  means and  includes an  individual,  a  partnership,  a joint
venture,  a corporation  (whether or not for profit), a trust, an unincorporated
organization,  a government  or any  department  or agency  thereof or any other
entity or organization.

         "Plan"  means,  at any time,  any  single-employer  plan, as defined in
Section 4001(a) and subject to Title IV of ERISA, which is maintained, or at any
time  during  the  five  calendar  years  preceding  the  time in  question  was
maintained, for employees of the Borrower or an ERISA Affiliate.

         "Pledge  Agreement"  means the Pledge  Agreement  dated as of even date
herewith between the Bank and the Borrower delivered by the Borrower to the Bank
pursuant to Section 2.5(a) hereof.

         "Prime Rate" means the rate of interest  (expressed as a percentage per
annum) most recently  announced by the Bank from time to time as its U.S. dollar
prime rate, which is not necessarily the Bank's lowest or most favorable rate of
interest at any one time.  The rate of interest shall change  automatically  and
immediately  as and when the Prime  Rate  shall  change,  without  notice to the
Borrower,  and any notice to which it may be entitled is hereby waived,  and any
such  change in the  Bank's  Prime  Rate  shall not  affect any of the terms and
conditions  of this  Agreement,  all of which  shall  remain  in full  force and
effect.

         "Project"  means the land and the  buildings,  improvements,  fixtures,
furnishings, machinery and equipment and related support facilities described in
Schedule  2  of  the  Loan   Agreement,   and  any   additions,   modifications,
improvements,    replacements,    repairs,   reconstruction,    restoration   or
substitutions made pursuant to Sections 5.1 or 5.6 of the Loan Agreement.

         "Release"  means  any  release,  spill,  emission,   leaking,  pumping,
pouring, injection,  escaping, deposit, disposal,  discharge, dumping, leaching,
or  migration  of  Hazardous  Materials  into the indoor or outdoor  environment
(including,  without  limitation,  the  abandonment  or disposal of any barrels,
containers or other closed receptacles  containing any Hazardous Materials),  or
into or out of any Facility.

<PAGE>

         "Remarketing  Agent" means A.G. Edwards & Sons or any Remarketing Agent
appointed and at the time acting as such in accordance with the Indenture.

         "Remarketing Agreement" means the Remarketing Agreement, dated November
1, 1989, between A.G. Edwards and Sons and the Borrower and, with respect to any
other Remarketing  Agent, the agreement pursuant to which such Remarketing Agent
agrees to act in the capacity of Remarketing Agent.

         "Stated  Amount"  means the maximum  available  amount of the Letter of
Credit when issued of Two Million Five Hundred Eighty-Six Thousand Three Hundred
Thirty Dollars (US $2,586,330.00),  as the same may be reduced and reinstated as
provided in the Letter of Credit.

         "Tangible Net Worth" means as of any date,  Net Worth minus  intangible
assets (as defined in accordance with GAAP).

         "Termination Date" means the earliest date on which the Trustee's right
to draw under the Letter of Credit terminates or expires which is referred to in
the Letter of Credit as the "Stated Termination Date".

         "Trustee" means the Trustee appointed and at such time acting under the
Indenture.

         The  definition of any Document  shall be deemed to include any and all
further  modifications,  alterations,  amendments and supplements  thereto.  The
terms "hereof," "hereby,"  "hereto,"  "hereunder" and similar terms mean of, by,
to,  under  and  similarly  to,  respectively,  this  Agreement,  and  the  term
"heretofore"  means before,  and the term "hereafter"  means after the effective
date hereof.  All  accounting  terms not  specifically  defined  herein shall be
construed in accordance  with GAAP applied in the  preparation  of the financial
statements  referred to in Section  4.2(d).  All  capitalized  terms  herein not
defined herein shall bear the same meanings of such terms in the Indenture.

                                   ARTICLE II

                    REIMBURSEMENT OBLIGATION; OTHER PAYMENTS;
                      LETTER OF CREDIT COMMISSION; SECURITY

         Section II.1.  Reimbursement

         (a) The Borrower  hereby agrees to pay to the Bank, not later than 2:00
p.m., Chicago,  Illinois,  time, on each date that any amount is drawn under the
Letter of Credit a sum equal to the amount so drawn plus any fees outstanding.


         (b)  Notwithstanding any provision to the contrary contained herein, as
provided in the Letter of Credit, all payments made by the Bank under the Letter
of Credit  will be made with the  Bank's own funds and not with any funds of the
Borrower or the Issuer.

         Section II.2.  Fees; Interest on Overdue Amounts

         (a) The Borrower agrees to pay to the Bank a  non-refundable  letter of
credit fee in an amount  equal to 1% per annum  payable  quarterly in advance of
the  Available  Amount of the  Letter of Credit as in effect  from time to time.
Such fee shall be payable to the Bank without any requirement of notice from the
Bank in quarterly  installments as follows:  (i) on the Date of Issuance for the
period ending September 30, 1997, and (ii)  thereafter,  quarterly in advance on
the first  Business  Day of each  January,  April,  July and  October and on the
Termination Date (to the extent an portion of the fee remains  outstanding),  in
each instance prorated for any partial quarter.

         (b) The  Borrower  agrees to pay the Bank the greater of $250 or 1/4 of
1% of the amount of each drawing under the Letter of Credit,  plus all customary
incidental expenses, on the date of each such drawing. In addition, the Borrower
agrees to pay the Bank  $1,500  upon the  transfer  of the Letter of Credit to a
successor Trustee under the Indenture.

         (c) The failure by the Borrower to pay when due any amounts  under this
Agreement,  in addition to  constituting  an Event of Default  hereunder,  shall
create an obligation of the Borrower to pay to the Bank, and the Borrower agrees
to pay to the Bank,  interest on any and all such amounts due and not paid under
this  Agreement  from the date such payment  becomes due until paid in full at a
rate of  interest  equal to the  Prime  Rate  plus two  percent  (2%).  All such
interest shall be payable upon demand.

         Section  11.3.  Computation  of Interest and Fees;  Place and Manner of
Payment.  Letter of Credit  fees and all  interest  payable  hereunder  shall be
computed  on the  basis of a year of 360  days  and  actual  days  elapsed.  All
payments by the Borrower to the Bank hereunder  shall be made in lawful currency
of the United States and in immediately available funds on the date such payment
is due at the Bank's  principal  office at 200 West Monroe  Street,  Suite 1100,
Chicago,  Illinois  60606 or as  otherwise  specified  in  writing  by the Bank.
Amounts  received by the Bank from the Borrower  after 2:00 p.m.,  Chicago time,
shall be deemed to have  been  received  on the next  succeeding  Business  Day.
Payments  shall be made to the  following  account by wire  transfer  for direct
debit by the Bank:

<PAGE>
                    LaSalle National Bank (ABA No.071000505)
                    Chicago, Illinois
                    For the account of  K-V Pharmaceutical Company
                    Account Number:  5590011846


         Section II.4.  Payments in Respect of Regulatory Changes

         (a) If any law, treaty regulation,  guideline or directive  (including,
without limitation,  regulations and guidelines with respect to capital adequacy
and  Regulation D promulgated  by the Board of Governors of the Federal  Reserve
System as now and from time to time hereafter in effect), any change in any law,
treaty regulation,  guideline or directive or any interpretation  thereof by any
court or  administrative  or  governmental  authority  charged or claiming to be
charged with the administration thereof, or any change in GAAP applicable to the
Bank shall (i) impose,  modify,  make or deem  applicable  any reserve,  special
deposit, insurance assessment or similar requirement against any assets held by,
deposits with or for the account of, or loans,  letters of credit or commitments
by the Bank,  (ii) change the basis of  taxation of payments  due the Bank under
this  Agreement or the Bonds (other than a change in taxation of the overall net
income of the Bank),  (iii) cause or deem letters of credit to be assets held by
the Bank  and/or as  deposits  on its books,  (iv)  subject  the Bank to any tax
(other than taxes based upon gross revenues or income),  charge,  fee, deduction
or  withholding  of any kind  whatsoever,  or (v)  impose  on the Bank any other
condition regarding this Agreement,  the Letter of Credit or any other Document,
and the result of any such event,  or any similar  measure  shall be to increase
the cost to the Bank of  issuing or  maintaining  the Letter of Credit or making
any  advances  hereunder  or  reduce  the  amount  of any  fee  or  compensation
receivable by the Bank in respect of the Letter of Credit, this Agreement or any
other  Document,  upon written notice by the Bank to the Borrower,  the Borrower
agrees to pay to the  Bank,  from time to time as  specified  by the Bank,  such
additional  amounts  as  shall be  sufficient  to  compensate  the Bank for such
increased costs or reductions.

         (b) If the Bank shall have  determined  that the  adoption  of any law,
rule or regulation  regarding capital adequacy (including but not limited to any
United States law, rule or  regulation),  or any change in any  applicable  law,
rule or  regulation,  as the case may be, or any  change in the  enforcement  or
interpretation or administration  thereof by any court or any  administrative or
governmental  authority,  central  bank or  comparable  agency  charged with the
interpretation  or  administration  thereof,  or compliance by the Bank with any
request or directive regarding capital adequacy (whether or not having the force
of law) of any such authority,  central bank or comparable  agency, has or would
have the  effect  of  reducing  the rate of return on the  Bank's  capital  as a
consequence  of its  obligations  hereunder  or under the  Letter of Credit to a
level  below  that which the Bank could  have  achieved  but for such  adoption,
change or compliance (taking into consideration the Bank's policies with respect
to capital adequacy) then, on notice and demand by the Bank given promptly after
such  determination  is made by the Bank, the Borrower agrees to pay to the Bank
from time to time such additional  amount or amounts as will compensate the Bank
for such reduction.


<PAGE>

         (c) The  protections  of Sections  2.4(a) and (b) shall be available to
the Bank regardless of any possible  contention of invalidity or inapplicability
of the law, regulation or condition which has been imposed;  provided,  however,
if it shall  later be  determined  by the Bank  that any  amount  so paid by the
Borrower  pursuant to this Section 2.4 is in excess of the amount  payable under
the provisions  hereof, the Bank shall promptly refund such excess amount to the
Borrower.  Notwithstanding  the foregoing  provisions of this Section 2.4 to the
contrary,  in the event that the Bank has (i)  determined  that an  increase  or
reduction  has occurred and (ii)  provided  notice to the Borrower of additional
amounts  payable to the Bank, in each case in accordance  with Section 2.4(a) or
(b), the Borrower shall have sixty (60) days after the receipt of such notice to
replace  the  Letter  of  Credit  and pay in full  all  outstanding  obligations
hereunder without liability to the Bank for such additional amount from the date
of such notice or for the termination fee set forth in Section 2.7 hereof.

         Section II.5.  Security; Release of Pledged Bonds

         (a) As security  for the  payment of all  obligations  of the  Borrower
under this  Agreement,  (i) the Borrower  has entered into the Pledge  Agreement
under  which it has  pledged  to the Bank,  and  granted  to the Bank a security
interest in its right,  title and interest in and to Bonds delivered to the Bank
or to the Trustee for the account of the  Borrower in  connection  with  certain
drawings  under the Letter of Credit (as  defined in the Pledge  Agreement,  the
"Pledged  Bonds"),  (ii) the  Borrower  hereby  grants  to the  Bank a  security
interest and pledges,  assigns,  transfers  and sets over to the Bank all of its
right,  title and interest in and to the  Collateral,  (iii) the Borrower  shall
enter into the Mortgage  pursuant to which the Bank shall hold a first and prior
mortgage  lien on the real property  legally  described on Exhibit A to Schedule
1.0 hereof,  (iv) the Borrower shall enter into the Assignment of Rents with the
Bank and (v) the Borrower shall enter into the Environmental  Agreement in favor
of the Bank. The Borrower  shall not transfer  Pledged Bonds to any other person
unless  the  Letter of Credit  has been  fully  reinstated  with  respect to the
drawing used to purchase such Bonds.

         (b) The Bank  agrees to release  from the Lien of the Pledge  Agreement
any Pledged  Bonds to the extent that the Bank  receives  reimbursement  in cash
(whether under this Agreement or the Indenture) of an amount equal to the amount
of any Tender  Drawing  (as  defined  in the  Letter of  Credit)  related to the
purchase of such Pledged Bonds in a manner that will permit the reinstatement of
the Letter of Credit in respect of such  Pledged  Bonds in  accordance  with the
terms thereof.

<PAGE>

         (c) The Borrower  shall make  appropriate  entries  upon its  financial
statements and its books and records  disclosing the Bank's security interest in
the  Collateral,  the Mortgage and the  Assignment of Rents.  The Borrower shall
execute and deliver to the Bank, at any time and from time to time  hereafter at
the  request  of the Bank,  all  agreements,  instruments,  documents  and other
written  material that the Bank may  reasonably  request,  in form and substance
satisfactory to the Bank, to perfect and maintain  perfected the Bank's security
interest in the Collateral  and the Mortgage and to consummate the  transactions
contemplated  in or by this  Agreement  or the  other  Documents.  The  Borrower
warrants and  represents  to and  covenants  with the Bank that:  (a) the Bank's
security  interest in the  Collateral  and the  Mortgage is now and at all times
hereafter  shall be perfected and have a first  priority;  and (b) there are no,
and shall not be, Liens on the Collateral,  the Project or any other property of
the Borrower or its Affiliates other than (i) the Liens of the Bank, (ii) leases
of Personalty or Fixtures (as defined in the Mortgage) used on the Project which
according to generally accepted accounting  principles  consistently applied are
capital leases ("Capital  Leases"),  (iii) purchase money security  interests in
Personalty  and  Fixtures (as defined in the  Mortgage)  used on the Project and
(iv)  leases,  which are not Capital  Leases,  of  Personalty  and  Fixtures (as
defined in the  Mortgage)  used on the Project,  provided that the liability for
the  Personalty  and  Fixtures  (as  defined in the  Mortgage)  so leased and so
subject to security  interests does not exceed One Million Five Hundred Thousand
and 00/100 Dollars  ($1,500,000.00).  The foregoing shall not limit the right of
tenants  under Real  Estate  Leases  (as  defined  in the  Mortgage)  to install
removable  fixtures  subject to security  interests on the Project  which can be
removed  without  damage to the  Project  and which  pursuant to the Real Estate
Leases (as defined in the  Mortgage)  and the written  consent of Bank  obtained
prior to installation shall remain the property of such tenants and shall not be
considered part of the Project.

         Section  II.6.  Loan in Respect of  Certain  Draws  under the Letter of
Credit.   Unless  an  Event  of  Default  has   occurred   and  is   continuing,
notwithstanding  Section 2.1  hereof,  if an amount is drawn under the Letter of
Credit as a result of (i) the occurrence of an Event of  Taxability,  as defined
in the Indenture,  pursuant to Section 302(c),  (ii) an optional tender of Bonds
pursuant to Section 302(a) of the Indenture,  (iii) a redemption in the event of
condemnation,  deficiency of title,  fire or other casualty  pursuant to Section
302(b) of the Indenture, or (iv) redemption upon Certain Defaults (as defined in
the Indenture) pursuant to Section 302(d), the Borrower shall pay immediately to
the Bank, a sum equal to the amount so drawn and any fees outstanding  hereunder
plus  interest at a rate per annum equal to the Prime Rate plus two percent (2%)
until such payment is made in full.  The proceeds of any  remarketing of Pledged
Bonds shall be immediately  applied to the repayment of any amounts  outstanding
hereunder first to the payment of fees, then to the payment of interest and then
to the payment of principal.

         Section  II.7.   Substitute  Letter  of  Credit.   Notwithstanding  any
provisions of the Indenture to the contrary,  the Borrower agrees not to replace
the Letter of Credit  prior to the earlier of (i) if the Bonds are then rated by
Moody's  Investors  Service,  the date on which Moody's  Investors Service shall
have  lowered  either  the  long-term  rating on the Bonds  backed by the Bank's
Letter of Credit below "A" or the  short-term  rating on the Bonds backed by the
Bank's  Letter of  Credit  below  "P-1" or (ii) if the  Bonds are then  rated by
Standard & Poor's  Corporation,  the date on which Standard & Poor's Corporation
shall have lowered either the long-term rating on the Bonds backed by the Bank's
Letter of Credit below "A" or the  short-term  rating on the Bonds backed by the
Bank's Letter of Credit below "A-1." As a condition to any such  replacement  of
the Letter of Credit,  the Borrower  shall (A) provide the Bank with ninety (90)
days'  prior  written  notice  of the same  and (B) pay in full all  outstanding
obligations hereunder.

<PAGE>

         Section II.8. Optional  Redemption.  The Borrower agrees in the case of
any redemption of Bonds under Section 302 of the Indenture, to deposit an amount
equal to the amount to be drawn by the Trustee  under the  resulting  Redemption
Drawing (as defined in the Letter of Credit)  with the Bank,  which amount shall
be deposited not later than thirty-one  (31) days prior to the redemption  date.
The  Borrower  hereby  grants to the Bank a security  interest  in and  pledges,
assigns, transfers and sets over to Bank all of its right, title and interest in
and to such deposit.  Such Deposit shall be held as collateral  security for any
and all  indebtedness,  obligations  and liabilities of the Borrower to the Bank
hereunder,  whether  now  existing  or  hereafter  arising  and  whether  due or
contingent,  and shall at the written  direction of the Borrower,  to the extent
permitted  by law,  be  invested  in  Governmental  Obligations  or  such  other
investments  acceptable to the Bank,  provided such Governmental  Obligations or
other  investments  mature at such time as is  necessary  to provide  sufficient
funds to satisfy such indebtedness,  obligations and liabilities of the Borrower
to the Bank  hereunder.  Upon the payment by the Bank of the amount  demanded in
said Redemption Drawing,  the Bank shall immediately  reimburse itself from said
collateral and remit any excess to the Borrower.

         Section 2.9. Required  Deposits for Mandatory  Redemption Under Section
302(g).  On or before each November 1, continuing  through November 1, 2003, the
Borrower  will direct the Trustee to make an  optional  redemption  of the Bonds
pursuant  to  Section  301(g) of the  Indenture.  The  amount of the Bonds to be
redeemed upon each such  mandatory  optional  redemption  shall be in accordance
with the following schedule:

November 1                                Principal Amount
----------                                ----------------
  1997                                        $325,000
  1998                                        $325,000
  1999                                        $325,000
  2000                                        $325,000
  2001                                        $325,000
  2002                                        $325,000
  2003                                        $325,000*


                    * The remaining $205,000 principal amount
                      shall be due on November 1, 2004.


                                   ARTICLE III

                          ISSUANCE OF LETTER OF CREDIT;
                             CONDITIONS TO ISSUANCE

         Section III.1.  Issuance of Letter of Credit.  Upon satisfaction of the
conditions  set forth in  Section  3.2,  the Bank  agrees to issue the Letter of
Credit to the  Trustee  on the Date of  Issuance  in an amount not to exceed the
Stated Amount expiring on November 5, 1998,  unless  terminated prior thereto in
accordance with its terms or unless extended by the Bank pursuant to Section 6.2
hereof.

         Section  III.2.  Conditions  Precedent to Issuance of Letter of Credit.
(i) The Bank shall have received on or before the Date of Issuance,  in form and
substance satisfactory to the Bank and its legal counsel, the following:

<PAGE>

         (a) copies of the Certificate or Articles of Incorporation certified by
the State of incorporation  and copies of the By-laws of the Borrower  certified
by the Secretary of State of the  applicable  jurisdiction  and the secretary or
assistant secretary of the Borrower;

         (b) certified  copies of the  resolutions  of the Board of Directors of
the Borrower evidencing  corporate  authorization for the execution and delivery
of this Agreement and the other Documents to which the Borrower is a party;

         (c)  incumbency  certificates  as to the authority and signature of the
person(s)  signing this Agreement and the other  Documents to which the Borrower
is a party on behalf of the Borrower;

         (d) true and  correct  copies of all  governmental  approvals,  if any,
necessary  for the Borrower to enter into this  Agreement  and the  transactions
contemplated   hereby,   together  with  certified   copies  of  all  approvals,
authorizations,   or  consents  of  or  notices  or   registrations   with,  any
governmental  body or  agency  required  for the  Borrower  to enter  into  this
Agreement and the transactions and consequences contemplated hereby and thereby,
as the case may be;

         (e) the legal  opinion  of  counsel  to the  Borrower,  which  shall be
substantially in the form of Exhibit B to this Agreement;

         (f) accurate and complete  executed  copies of the Indenture,  the Loan
Agreement,  the Remarketing  Agreement,  a specimen Bond and all other documents
and  agreements  furnished  in  connection  with the  closing of the sale of the
Bonds;

         (g)  accurate  and  complete  executed  copies of this  Agreement,  the
Mortgage,  the Environmental  Agreement,  the Assignment of Rents and Form UCC-1
Financing Statements;

         (h) an ALTA Loan  Policy-1992  title  policy  issued by  Chicago  Title
Insurance  Company naming the Borrower as the fee owner of the property  subject
to the  Mortgage  and insuring the Bank in the amount of Two Million Six Hundred
Thousand  and  00/100  Dollars  ($2,600,000.00)  as the  holder  of a valid  and
existing  first  and  prior  mortgage  lien as to the  Mortgage,  with  extended
coverage,  and subject only to those exceptions and exclusions as are acceptable
to the Bank and with the  following  title  endorsements:  (i) Zoning 3.1;  (ii)
Comprehensive l; (iii) letter of credit;  (iv) location no. 1; (v) survey;  (vi)
access;  (vii)  contiguity,  if  applicable;  (viii) usury,  if available;  (ix)
creditor's rights, if available; and (iv) such other special endorsements as the
Bank may require;


<PAGE>

         (i)  an   environmental   assessment   report  in  form  and  substance
satisfactory  to the Bank  from an  experienced  environmental  consulting  firm
satisfactory  to the  Bank.  The  report  shall be  certified  by a  supervising
professional registered engineer or certified professional geologist. The report
shall, among other things, (i) contain a detailed history of the prior ownership
and uses of the Project site and surrounding  properties  within a one-half mile
radius of the Project site, including copies or summaries of hazardous and solid
waste  reporting  documents on file at the  applicable  regulatory  agencies for
present and past  storage and disposal at each site  investigated,  (ii) contain
reports of investigations of federal,  state and local  environmental  agencies,
CERCLIS lists,  National  Priorities'  Lists,  the  registrations of underground
storage  tanks,  landfills  and wetlands  designations,  all with respect to the
Project site and  surrounding  properties  within a one-half  mile radius of the
Project  site,  and  (iii)  indicate  in  the  professional   judgment  of  such
consultant,  that  the  Project  site  and  surrounding  properties  are free of
Environmental  Claims and are in compliance  with all  applicable  Environmental
Laws. The report shall contain  recommendations  of what further study,  if any,
may be  necessary  to define the extent of any  contamination  or  noncompliance
found or suspected to exist at the Project  site,  the Project,  or  surrounding
properties;

         (j) a complete  and current  spotted plat of survey of the Project site
certified  to the Bank and  Chicago  Title  Insurance  Company  and  prepared in
accordance with the Minimum  Standard  Detail  Requirements of the American Land
Title Association by an independent  surveyor  satisfactory to the Bank, showing
thereon:  (i) the  location of the  perimeter of the Project site by courses and
distances; (ii) the location of all improvements,  rights of way, encroachments,
and visible or recorded utilities and sewers  (delineating,  if possible,  their
course  to the  point of  connection  with the  public  system);  and  (iii) the
location of the lines of the  streets  abutting  the Project  site and the width
thereof;  and whether the Project site is located in a  designated  flood hazard
area;

         (k) a certificate of an executive officer of the Borrower certifying on
behalf of the Borrower  that (i) no Event of Default  shall have occurred and be
continuing  under this Agreement or would result from the issuance of the Letter
of Credit,  and no event has occurred and is continuing  which would  constitute
any such Event of Default but for the  requirement  that notice be given or time
elapse  or  both,  (ii)  the  representations  and  warranties  of the  Borrower
contained  in  this  Agreement  shall  be true  and  correct  as of the  Date of
Issuance, and (iii) all conditions precedent to the issuance,  sale and delivery
of the Bonds and the effectiveness of this Agreement shall have occurred;

         (l) a  Good  Standing  Certificate  for  the  Borrower  issued  by  the
Secretaries  of State of both  Delaware  and Missouri as of a date not more than
three days prior to the Date of Issuance;

         (m) a legal  opinion of Bryan,  Cave,  McPheeters & McRoberts,  as Bond
counsel, relating to the validity and tax exempt status of the Bonds dated as of
the Date of Issuance;

         (n)  such  other  approvals,  opinions  or  documents  as the  Bank may
reasonably request;

         (o) UCC, Tax Lien,  Bankruptcy  and Judgment  searches of the Borrower,
which shall be satisfactory to the Bank;

         (p)  payment  in to the Bank in  respect  of the  letter of credit  fee
required pursuant to Section 2.2(a)(i); and

         (q)  Lender's  Loss  Payable  Endorsement  in  favor  of Bank  for each
insurance policy of Borrower naming Bank as loss payee and additional insured.


<PAGE>

         (ii) The statements set forth in Section 3.2(k) above shall be true and
correct on the Date of Issuance  and upon the date of each draw under the Letter
of Credit.

         (iii) On and before the Date of Issuance,  the Indenture shall continue
to be in full force and  effect  and no  default or event of default  thereunder
shall have occurred thereunder.


                                   ARTICLE IV

                         REPRESENTATIONS AND WARRANTIES;
                COVENANTS; INDEMNIFICATION; CONTINUING OBLIGATION

         Section IV.1.  Representations  and  Warranties  of the  Borrower.  The
Borrower hereby represents and warrants as of (i) the date hereof, (ii) the Date
of the  Issuance,  and (iii) with  respect to  subsections  (a)  through (e) and
subsections (h) through (w) below,  the date of each drawing under the Letter of
Credit, as follows:

         (a) The Borrower is a corporation duly organized,  validly existing and
in good standing  under the laws of the State of Delaware and is duly  qualified
to do business and is in good standing under the laws of each state in which the
ownership  of its  properties  and  the  nature  and  extent  of the  activities
transacted  by it makes  such  qualification  necessary.  The  Borrower  has all
requisite  corporate  power and authority to conduct its activities as presently
conducted,  to own its  properties  and to perform  its  obligations  under this
Agreement.

         (b) The  execution,  delivery and  performance  by the Borrower of this
Agreement  and the  other  Documents  to  which  it is a party  are  within  the
Borrower's  corporate  powers,  have  been  duly  authorized  by  all  necessary
corporate  action  and do not  contravene  (i)  the  Borrower's  Certificate  of
Incorporation  or  By-laws  or  (ii)  in any  material  respect  any  law or any
contractual  restriction binding on or affecting the Borrower or its properties,
and do not  result in or  require  the  creation  of any Lien  (except as may be
created under the Documents) upon or with respect to any of its properties.

         (c) No  authorization  or approval or other action by, and no notice to
or filing with, any  governmental  authority or regulatory  body is required for
the due execution, delivery and performance by the Borrower of this Agreement or
any other Document to which the Borrower is a party.

         (d) This  Agreement  is, and the  Documents  to which the Borrower is a
party when delivered  hereunder will be, legal, valid and binding obligations of
the  Borrower,  enforceable  against  the  Borrower  in  accordance  with  their
respective terms.

<PAGE>

         (e) The Bonds have been duly authorized,  authenticated  and issued and
delivered,  and are the legal, valid and binding  obligations of the Issuer, and
are not in  default.  Interest  on the  Bonds  is  exempt  from  federal  income
taxation,  and the Borrower has taken no action which would adversely affect the
exemption  for such interest  from such  taxation.  The issuance and sale of the
Bonds was and any  remarketing  of the Bonds after their issuance was or will be
in full compliance with all applicable securities laws.

         (f) The balance sheet (including the notes thereto) of the Borrower and
its  Affiliates on a  consolidated  basis as at March 31, 1997,  and the related
statements  of revenues and expenses and changes in net assets  employed for the
benefit of members for the fiscal year then ended, audited by BDO Seidman,  LLP,
are complete and correct and fairly present the combined financial  condition of
the  Borrower  and  its  Affiliates  as at such  date  and  the  results  of the
operations of the Borrower and its  Affiliates for the fiscal year ended on such
date, in accordance  with GAAP, and the balance sheet of the Borrower as at June
30, 1997 and the related  statements of revenues and expenses and changes in net
assets  employed  for the benefit of members for the period ended June 30, 1997,
internally  prepared,  are complete and correct and fairly present the financial
condition of the Borrower as at such date and the results of the  operations  of
the Borrower for the period ended on such date, and since March 31, 1997,  there
has been no  material  adverse  change in the  Borrower's  financial  condition,
business,  properties or operations.  Neither the Borrower nor any Affiliate has
on the  date  hereof,  nor  will  have on the  Date of  Issuance,  any  material
contingent  obligations,  long-term  leases  or  unusual  forward  or  long-term
commitments,  which  are not  reflected  in the  foregoing  statements  (and the
related notes thereto)  except the  obligations  entered into in connection with
the issuance of the Bonds.

         (g) There is no  pending  or, to the best  knowledge  of the  Borrower,
threatened  action,  suit,  inquiry,  investigation,  or  proceeding  affecting,
directly  or  indirectly,  the  Borrower  or any  Affiliate  before  any  court,
governmental  agency or arbitrator,  which,  in any case, may (i) materially and
adversely  affect the  financial  condition  or operation of the Borrower or any
Affiliate,  (ii) which  seeks to  restrain  or would  otherwise  have a material
adverse effect on the  transactions  contemplated  herein,  or (iii) which would
affect the validity or enforceability of the Agreement or any Documents.

         (h) No proceeds of any drawing  under the Letter of Credit will be used
to acquire any security in any transaction  which is subject to Section 13 or 14
of the Securities Exchange Act of 1934, as amended.

         (i) The Borrower is not engaged in the business of extending credit for
the  purpose of  purchasing  or  carrying  margin  stock  (within the meaning of
Regulation U issued by the Board of Governors  of the Federal  Reserve  System),
and no  proceeds  of any  drawing  under the  Letter  of Credit  will be used to
purchase or carry any margin stock or to extend credit to others for the purpose
of purchasing or carrying any margin stock.

         (j) No ERISA  Termination  Event has  occurred nor is expected to occur
with respect to any Plan.


<PAGE>

         (k) Schedule B (Actuarial  Information) to the 1996 annual report (Form
5500 Series) with respect to each Plan, copies of which have been filed with the
Internal  Revenue  Service  and  furnished  to the Bank,  has been signed by the
enrolled actuary for such Plan as complete and accurate and as fairly presenting
the funding status of such Plan, and since the date of such Schedule B there has
been no material adverse change in such funding status.

         (l) Neither the  Borrower  nor any ERISA  Affiliate  has  incurred,  or
expects to incur, any material withdrawal  liability under Section 4201 of ERISA
to any Multiemployer Plan.

         (m) The  Borrower  and  each  Affiliate  have  filed  all  tax  returns
(Federal, state and local) required to be filed and paid all taxes shown thereon
to be due,  including  interest  and  penalties,  other than such taxes that the
Borrower  or an  Affiliate  is  contesting  in good faith by  appropriate  legal
proceedings.

         (n) There are no Liens upon or with respect to any of the properties of
the Borrower or any right to receive  revenues of the  Borrower,  other than (i)
Liens arising under this Agreement,  the Letter of Credit, the Pledge Agreement,
the Indenture or the Loan Agreement and (ii) other Liens  permitted  pursuant to
Section 4.3(a) hereof.

         (o) Neither the Borrower nor any Affiliate is a party to any indenture,
loan  or  credit  agreement  or any  lease  or  other  agreement  or  instrument
(including corporate charters) which is likely to have a material adverse effect
on the ability of the Borrower to perform its respective  obligations  under any
of the  Documents  to which  it is  party  or is to be a party  or  which  would
restrict or otherwise  limit the incurring of the  indebtedness  represented  by
this Agreement and the other Documents.

         (p) (i) The operations of the Borrower and each  Affiliate  (including,
         without limitation, all operations and conditions at or in the Project)
         comply with all Environmental Laws;

                  (ii) the  Borrower  and each  Affiliate  has  obtained  or has
         timely applied for all Governmental  Authorizations under Environmental
         Laws necessary to its operations,  if any, and all such permits as have
         been obtained are in good standing, and the Borrower and each Affiliate
         is in compliance  with all terms and  conditions  of such  Governmental
         Authorizations;

                  (iii) the Borrower and each Affiliate has not received (A) any
         notice or claim to the effect that it is or may be liable to any person
         as a result of the  Release  or  threatened  Release  of any  Hazardous
         Materials or (B) any letter or request for  information  under  Section
         104 of the  Comprehensive  Environmental  Response,  Compensation,  and
         Liability Act (42 U.S.C. ss. 9604) or comparable state laws, and to the
         Borrower's and each  Affiliate's  knowledge,  none of the operations of
         the Borrower and each  Affiliate is the subject of any federal or state
         investigation  evaluating  whether  any  remedial  action  is needed to
         respond to a Release or threatened  Release of any Hazardous  Materials
         at any Facility or at any other location;


<PAGE>

                  (iv) to the best  knowledge of the Borrower and each Affiliate
         after diligent  investigation,  the operations of the Borrower and each
         Affiliate are not subject to any judicial or administrative  proceeding
         alleging the violation of or liability under any Environmental Laws;

                  (v) to the best  knowledge of the Borrower and each  Affiliate
         after  diligent  investigation,  the Borrower and each Affiliate is not
         and the Project is not,  subject to any  outstanding  written  order or
         agreement with any governmental  authority or private party relating to
         (a) any Environmental Laws or (b) any Environmental Claims;

                  (vi) to the best  knowledge of the Borrower and each Affiliate
         after diligent investigation,  the Borrower and each Affiliate does not
         have any  contingent  liability in  connection  with any Release of any
         Hazardous Materials;

                  (vii)  neither the Borrower and each  Affiliate nor any of its
         predecessors  has  filed  any  notice  under  any   Environmental   Law
         indicating past or present treatment or Release of Hazardous  Materials
         at any Facility,  and the Borrower's and each Affiliate's operations do
         not  involve  the  generation,  transportation,  treatment,  storage or
         disposal of hazardous  waste, as defined under 40 C.F.R.  Parts 260-270
         or any state equivalent;

                  (viii) no  Hazardous  Material  exists on,  under or about the
         Project  in a manner  that is known  to give  rise to an  Environmental
         Claim and the Borrower and each  Affiliate  has not filed any notice or
         report of a Release of any Hazardous  Materials that could give rise to
         an Environmental Claim;

                  (ix) neither the Borrower  and each  Affiliate  nor any of its
         predecessors  has disposed of any Hazardous  Materials in a manner that
         is known to give rise to an Environmental Claim;

                  (x) no underground  storage tanks or surface  impoundments are
         on or at the Project; and

                  (xi) no lien in  favor  of any  Person  for (a) any  liability
         under  any  Environmental  Laws or (b)  damages  arising  from or costs
         incurred  by such Person in response to a Release has been filed or has
         been attached to the Project.

         (q) (i) the  Borrower  and each  Affiliate  has not received any notice
         from any  insurance  company  of any  defects  or  inadequacies  in the
         Project which would adversely affect the insurability of the Project or
         which would materially increase the cost of insuring the Project beyond
         that which is customarily  charged for similar property in the vicinity
         of the Project and for a similar purpose; and


<PAGE>

                  (ii) (a) no condemnation of any portion of the Project, (b) no
         condemnation  or relocation of any roadways  abutting the Project,  and
         (c) no denial of access to the Project  from any point of access to the
         Project,  has  commenced of which the Borrower and each  Affiliate  has
         knowledge  after  diligent  investigation  or to which the Borrower and
         each  Affiliate is a party;  and that to the best of the Borrower's and
         each  Affiliate's  knowledge,  none of the foregoing is contemplated by
         any  governmental  authority  which could have an adverse effect on the
         use, occupancy or enjoyment of the Project.

         (r) Neither the Borrower nor any Affiliate is an  "investment  company"
or a company  "controlled by an investment  company,"  within the meaning of the
Investment Company Act of 1940, as amended.

         (s) The Borrower and each  Affiliate is in  compliance  in all material
respects  with all laws,  orders,  regulations  and  ordinances  of all federal,
foreign, state and local governmental  authorities binding upon or affecting the
business, operation or assets of the Borrower and each Affiliate.

         (t) The  Borrower  makes  each of the  representations  and  warranties
contained in the other  Documents to which the Borrower is a party operative and
applicable  for the  benefit of the Bank as if the same were set forth at length
herein.

         (u) The  representations  and  warranties  of the Borrower in the other
Documents to which it is a party are true and correct.

         (v) The Borrower and each Affiliate possess adequate licenses, patents,
patent applications,  copyrights,  service marks,  trademarks and trade names to
conduct  their  operations  and business in all material  respects as heretofore
conducted and as intended to be hereafter  conducted and all such items are, and
will continue to be, owned by the Borrower and/or an Affiliate free and clear of
conflicting claims or uses of any other Person.

         (w) The Affiliates of the Borrower are PDI and ETHEX.

         Section IV.2.  Affirmative  Covenants.  So long as the Termination Date
has not yet  occurred or any amounts are due or owing to the Bank  hereunder  or
under the Documents, the Borrower hereby covenants that it will, unless the Bank
shall otherwise consent in writing:

         (a) Existence,  Etc. Subject to Section 4.3(b),  do or cause to be done
all  things  necessary  to  preserve  and  keep in full  force  and  effect  the
Borrower's and each Affiliate's corporate existence in good standing.

         (b)  Compliance  with Laws.  Etc.  Comply,  and cause each Affiliate to
comply, in all material  respects with all applicable laws,  rules,  regulations
and orders,  noncompliance  with which may materially  adversely  affect (i) the
financial  condition or  operations of the Borrower or any Affiliate or (ii) the
ability of the Borrower to perform its  obligations  under this Agreement or any
of the Documents.

<PAGE>

         (c)  Payment  of Taxes and Other  Claims.  Subject  to the terms of the
Mortgage  when  delivered  to the Bank,  pay or discharge or cause to be paid or
discharged,  before the same shall become  delinquent,  (i) all material  taxes,
assessments  and  governmental  charges  levied or imposed upon the Borrower and
each Affiliate or upon the income,  surplus or property of the Borrower and each
Affiliate,  and (ii) all lawful claims for labor,  materials and supplies which,
if unpaid, might by law become a lien upon the property of the Borrower and each
Affiliate;  provided, however, that the Borrower shall not be required to pay or
discharge or cause to be paid or discharged any such tax, assessment,  charge or
claim whose amount,  applicability  or validity is being contested in good faith
by appropriate proceedings and in accordance with the terms of the Mortgage.

         (d)  Reporting  Requirements.   Maintain  a  system  of  accounting  in
accordance with GAAP consistently applied and shall furnish to Bank:

                  (i) as soon as possible  and in any event within ten (10) days
         after the  occurrence  of an Event of Default or any event which,  with
         the giving of notice, lapse of time, or both, would constitute an Event
         of Default,  the  statement  of an  Authorized  Officer  setting  forth
         details  of such  Event  of  Default  or  event  and the  action  which
         Borrowers have taken or propose to take to cure the same;

                  (ii) as soon as  available,  copies of the periodic  Form 10-Q
         quarterly report or comparable  successor report filed by Borrower with
         the  Securities  and  Exchange  Commission  or  any  successor  agency;
         provided,  that if such report is not made available within  forty-five
         (45) days after the end of each of the first three quarterly accounting
         periods in each  fiscal  year of  Borrower  beginning  with the quarter
         ending June 30, 1997,  Borrower  shall  immediately  deliver to Bank an
         internally-prepared  balance sheet of Borrower and its  Affiliates on a
         consolidated  basis  as at the end of  such  quarter  and  the  related
         statements of operations  and  statements of cash flows of Borrower and
         its  Affiliates  on a  consolidated  basis for such quarter and for the
         portion of the fiscal  year ended at the end of such  quarter,  setting
         forth  in  each  case  in   comparative   form  the   figures  for  the
         corresponding  quarter and the  corresponding  portion of the  previous
         fiscal year, all in reasonable detail and certified  (subject to normal
         year-end  adjustments)  as to fairness of  presentation,  in accordance
         with GAAP (other than footnotes  thereto),  by an Authorized Officer or
         Controller (if such Controller is a corporate officer) of Borrower;


<PAGE>

                  (iii) as soon as  available,  copies of the Form  10-K  Annual
         Report  or  comparable  successor  report  filed by  Borrower  with the
         Securities and Exchange  Commission or any successor agency;  provided,
         that if such report is not made available within ninety (90) days after
         the close of each fiscal year of Borrower,  Borrower shall  immediately
         deliver to Bank a balance sheet and the related consolidated statements
         of operations and stockholders'  equity and statements of cash flows of
         Borrower and its  Affiliates on a  consolidated  basis as of the end of
         such  fiscal  year,  fairly and  accurately  presenting  the  financial
         condition of Borrower and its Affiliates on a consolidated  basis as at
         such date and the results of operations of Borrower and its  Affiliates
         for such fiscal year and setting forth in each case in comparative form
         the corresponding figures for the corresponding period of the preceding
         fiscal year, all in reasonable detail, prepared in accordance with GAAP
         consistently  applied,  and audited by BDO  Seidman,  LLP or such other
         independent  certified  public  accountants  acceptable  to  Bank  (the
         "Accountants");

                  (iv)  Together  with each  delivery  of the Annual  Reports or
         financial  statements required by subsection (v) above,  Borrower shall
         deliver  to Bank a  certificate  executed  by the  President  or  Chief
         Financial Officer of Borrower stating whether any Event of Default,  or
         event  which,  with the  passage  of time or  giving of notice or both,
         would  constitute  such an Event of  Default,  currently  exists and is
         continuing  and  what  activities,  if any,  Borrowers  are  taking  or
         proposing to take with respect thereto;

                  (v)  concurrently  with the  delivery  of the  reports  and/or
         financial  statements  referred to in Sub-paragraphs  (ii) and (iii), a
         compliance certificate duly completed and executed by both the Chairman
         of the Board or President and the Chief  Financial  Officer of Borrower
         (a)  stating  that  Borrower  has  observed  and  performed  all of its
         covenants and other agreements and satisfied every condition, contained
         in this Agreement,  the K-V Agreement and the Documents to be observed,
         performed  or satisfied by it and that such officer has no knowledge of
         any Event of  Default  except as  specified  in such  certificate,  (b)
         stating  that,  to the  best  of such  officer's  knowledge,  all  such
         financial  statements are complete and correct in all respects and have
         been prepared in accordance with GAAP consistently  applied  throughout
         the  periods  reflected  therein,   and  (c)  showing  calculations  of
         compliance with the financial  covenants set forth in Paragraph  4.2(i)
         below;

                  (vi) promptly upon receipt and, in any event,  within  fifteen
         (15) days after receipt  thereof,  copies of all  auditors'  letters to
         management and management's  response thereto pertaining to the balance
         sheet and related financial statements of Borrower and its Affiliates;

                  (vii) (A) as soon as  possible  and in any  event  (i)  within
         thirty  (30) days after  Borrower or any ERISA  Affiliate  knows or has
         reason to know that any ERISA Termination Event described in clause (i)
         of the definition of ERISA  Termination  Event with respect to any Plan
         has occurred and (ii) within ten (10) days after  Borrower or any ERISA
         Affiliate knows or has reason to know that any other ERISA  Termination
         Event with respect to any Plan has  occurred,  a statement of the Chief
         Financial  Officer  (or  designee)  of Borrower  describing  such ERISA
         Termination Event and the action,  if any, which Borrower,  or any such
         ERISA Affiliate proposes to take with respect thereto;

                           (B)  promptly  and in any event  within  fifteen (15)
         Business Days after receipt  thereof by Borrower or any ERISA Affiliate
         from the PBGC,  copies of each notice received of the PBGC's  intention
         to terminate any Plan or to have a trustee  appointed to administer any
         Plan; and



<PAGE>


                           (C)  promptly  and in any event  within  fifteen (15)
         Business Days after receipt  thereof by Borrower or any ERISA Affiliate
         from a  Multiemployer  Plan  sponsor,  a copy of each  notice  received
         concerning the imposition or amount of withdrawal  liability  which has
         been assessed pursuant to Section 4202 of ERISA;

                  (viii)  within  fifteen (15) Business Days after notice to any
         Borrower  of the  commencement  thereof,  notice,  in  writing,  of any
         action, suit, arbitration or other proceeding instituted,  commenced or
         threatened  against  or  affecting  any  Borrower  with  an  amount  in
         controversy  in excess  of Seven  Hundred  Fifty  Thousand  and  00/100
         Dollars ($750,000.00);

                  (ix) at Bank's request,  Borrower's  federal,  state and local
         tax  returns as soon as said  returns  are  completed  in the form said
         returns will be filed with the Internal  Revenue  Service and any state
         or local department of revenue or taxing authority;

                  (x) promptly upon their becoming available,  copies of (A) all
         registration  statements  and regular  periodic  reports which Borrower
         shall have filed with the  Securities  and Exchange  Commission (or any
         governmental  agency substituted  therefor) or any national  securities
         exchange and (B) all financial statements, reports and proxy statements
         so mailed; and

                  (xi)  such  other  information  respecting  the  condition  or
         operations,  financial or  otherwise,  of Borrower or any  Affiliate as
         Bank may from time to time reasonably request.

         (e) Maintenance of Insurance. Subject to the terms of the Mortgage when
delivered to the Bank, insure and keep insured, with insurance companies meeting
the  standards  set forth in the  Mortgage,  all of its property of an insurable
nature against  liability,  fire and other  casualties in such manner and to the
extent required pursuant to the Mortgage.  If the Borrower, at any time or times
hereafter,  shall  fail to  obtain  or  maintain,  or  cause to be  obtained  or
maintained,  any of the policies of insurance required to be maintained pursuant
to the  Mortgage  or to pay or cause to be paid any  premium in whole or in part
relating thereto,  then the Bank, without waiving or releasing any obligation or
Event of Default by the Borrower hereunder,  may at any time or times thereafter
(but shall be under no obligation to do so) obtain and maintain such policies of
insurance and pay such  premiums and take any other action with respect  thereto
which the Bank deems advisable.

         (f) Compliance With Securities Laws. Cause any remarketing of the Bonds
after  the  Date  of  Issuance  to be in full  compliance  with  all  applicable
securities laws.


<PAGE>

         (g) Visitation Rights. At any time or times during the Borrower's usual
business hours and, prior to an Event of Default, with at least one (1) Business
Day's prior notice, permit the Bank or any agents or representatives thereof, to
examine and make copies of and  abstracts  from the records and books of account
of, and visit the properties of, the Borrower and any Affiliate, all as the Bank
shall reasonably request,  and to discuss the affairs,  finances and accounts of
the Borrower, and any Affiliate with the Borrower's or officers or directors.

         (h)      Environmental Disclosure and Inspection.

                  (i)  Exercise  due  diligence  in  order  to  comply  with all
         Environmental Laws.

                  (ii)  Permit  the Bank,  from time to time and in its sole and
         absolute   discretion,   to  retain,  at  the  Borrower's  expense,  an
         independent  professional  consultant to review any report  relating to
         Hazardous  Materials  prepared by or for the Borrower and at reasonable
         times  and  subject  to  reasonable   conditions  to  conduct  its  own
         investigation  of the Project.  The Borrower hereby grants to the Bank,
         its agents, employees,  consultants, and contractors the right to enter
         into or onto,  with one (1)  Business  Day's prior  notice  prior to an
         Event of Default or at any time without  notice on or after an Event of
         Default,  the  Project to perform  such tests on such  property  as are
         reasonably necessary to conduct such a review and/or investigation.

                  (iii)  Promptly  advise the Bank in writing and in  reasonable
         detail of (i) any  Release of any  Hazardous  Materials  required to be
         reported to any  federal,  state or local  governmental  or  regulatory
         agency  under  any  applicable  Environmental  Laws,  (ii)  any and all
         written  communications  with  respect to  Environmental  Claims or any
         Release of Hazardous  Material  required to be reported to any federal,
         state or local  governmental or regulatory  agency,  (iii) any remedial
         action taken by the Borrower or any other person in response to (1) any
         Hazardous  Material on, under or about any  Facility,  the existence of
         which could result in an Environmental  Claim, or (2) any Environmental
         Claim that could have a material  adverse effect on the Borrower,  (iv)
         the  Borrower's  discovery of any  occurrence  or condition on any real
         property  adjoining or in the vicinity of any Facility that could cause
         such Facility or any part thereof to be subject to any  restrictions on
         the  ownership,  occupancy,  transferability  or use there of under any
         Environmental  Laws,  and (v) any  request  for  information  from  any
         governmental  agency  indicating  that such  agency  has  initiated  an
         investigation as to whether the Borrower may be potentially responsible
         for a Release of Hazardous Materials.

                  (iv) Promptly notify the Bank of (i) any acquisition of stock,
         assets,  or property by the Borrower that reasonably  could be expected
         to expose the  Borrower  to, or result in,  Environmental  Claims  that
         could have a material  adverse effect or that could be expected to have
         a material adverse effect on any Governmental  Authorization  then held
         by the  Borrower,  and (ii) any proposed  action  outside of the normal
         course of business to be taken by the  Borrower to commence  industrial
         or other operations that could subject the Borrower to additional laws,
         rules or regulation,  including,  without  limitation,  laws, rules and
         regulations requiring additional environmental permits or licenses.


<PAGE>
                 (v) At its own expense,  provide  copies of such  documents or
         information  as the Bank may  reasonably  request  in  relation  to any
         matters disclosed pursuant to this Section 4.2(h).

                  (vi) Promptly take any and all  necessary  remedial  action in
         connection with the presence, storage, use, disposal, transportation or
         Release of any  Hazardous  Materials  on, under or about the Project in
         order to comply with all applicable Environmental Laws and Governmental
         Authorizations.  In the  event the  Borrower  undertakes  any  remedial
         action with  respect to any  Hazardous  Material on, under or about the
         Project,  the Borrower shall conduct and complete such remedial  action
         in compliance with all applicable  Environmental Laws and in accordance
         with the  policies,  orders and  directives  of all federal,  state and
         local governmental authorities.

         (i)  Financial  Covenants.  Borrower  warrants  and  represents  to and
covenants with Bank that it shall maintain the following  financial covenants on
a consolidated basis:

                  (i) Maintain,  at all times,  a Tangible Net Worth of not less
         than the amounts set forth below, during the following periods:


                   Fiscal Year Ended                            Amount
                   -----------------                            ------
                         1997                                 $23,000,000

                         1998                                 $23,500,000

                         1999                                 $32,000,000

                  2000 and thereafter                         $40,000,000


                  (ii)  Maintain  EBITDA,  at all  times,  of not less  than the
         amounts  set forth  below,  calculated  each  month  for the  preceding
         twelve-month period on a trailing twelve month basis:


                     Fiscal Year Ended                           Amount
                     -----------------                           ------
                           1997                               $10,000,000

                           1998                               $13,000,000

                           1999                               $25,000,000

                   2000 and thereafter                        $40,000,000


<PAGE>

                  (iii) Maintain a Leverage  Ratio, at all times, of not greater
         than 1.10 to 1.0.

                  (iv) Not permit Capital  Expenditures  to exceed the following
         amounts for the periods set forth below:


                        Fiscal Year Ended                         Amount
                        -----------------                         ------
                              1997                              $6,500,000

                              1998                              $7,000,000

                              1999                             $14,000,000

                       2000 and thereafter                     $17,000,000

         provided,  however,  that the amount of Capital Expenditures may exceed
the limits set forth above on a cumulative basis so long as the aggregate amount
of Capital Expenditures are (a) made with funds other than Loan (as that term is
defined in the K-V Loan  Agreement)  proceeds or other Funded Debt (as that term
is  defined  in the K-V  Loan  Agreement)  and (b) at all  times  do not  exceed
$7,900,000  plus 75% of Borrower's net income,  in accordance with GAAP, for the
period from the Closing Date (as that term is defined in the K-V Loan Agreement)
and thereafter.

         (j) Recording of Mortgage. The Borrower will, at its expense, cause the
Mortgage and Assignment of Rents to be properly  recorded as a mortgage upon its
interest in the  Project and certain  related  real  property  and will,  at its
expense,  do all things  necessary by way of any additional  filings to continue
and maintain the first lien and priority of the Mortgage.

         (k) Creation of New Affiliate.  Prior to the formation of any Affiliate
other than those disclosed in Section 4.1(w),  the Borrower shall provide notice
to the  Bank  thereof,  which  notice  shall  specify  (i) the  name,  state  or
jurisdiction of incorporation and address of such Affiliate,  (ii) the operating
purpose of such Affiliate and (iii) the assets to be owned by such Affiliate.

         Section IV.3. Negative  Covenants.  So long as the Termination Date has
not  occurred  or any amount is due or owing to the Bank  hereunder,  unless the
Bank shall otherwise consent in writing, the Borrower shall not:

         (a) Liens,  Etc.  Create or suffer to exist any Lien,  other  charge or
encumbrance,  or any other type of preferential arrangement upon or with respect
to any of its properties, whether now owned or hereafter acquired, or assign any
right to receive  income,  in each case to secure or provide  for the payment of
any Debt of any Person, except:

<PAGE>

                  (i)  Liens  existing  prior  to the  date of  this  Agreement,
         provided  such Liens have been  disclosed to the Bank prior to the date
         hereof and are not being paid or  satisfied by any loans to Borrower or
         its Affiliates  from the Bank, and Liens arising under this  Agreement,
         the  Letter  of  Credit,  the  Pledge  Agreement,   the  Mortgage,  the
         Assignment of Rents, the Indenture or the Loan Agreement;

                  (ii)   Liens  for   current   taxes,   assessments   or  other
         governmental charges which are not delinquent or remain payable without
         any penalty,  or the  validity of which are  contested in good faith by
         appropriate  proceedings  upon  stay of  execution  of the  enforcement
         thereof and appropriate reserves are set aside therefor and pursuant to
         and in compliance with the provisions of the Mortgage;

                  (iii) deposits or pledges to secure:

                           (A) statutory obligations;

                           (B) surety or appeal bonds;

                           (C)  bonds  for  release  of   attachment,   stay  of
         execution or injunction; or

                           (D) performance of bids,  tenders,  contracts  (other
         than for the  repayment  of Debt) or leases,  or for  purposes  of like
         general nature in the ordinary course of its business;

                  (iv) other Liens  incidental to the conduct of its  operations
         or the ownership or use of its property (including, without limitation,
         carriers',  warehousemen's,  vendors'  liens,  and other similar liens)
         which do not in the aggregate  materially detract from the value of the
         property or assets of the Borrower or materially  impair its use in the
         operation of the business of the Borrower,  and which encumber only the
         personal property of the Borrower;

                  (v) any Lien placed upon any personal property of the Borrower
         to secure or provide the payment of all or part of the  purchase  price
         of such  property;  provided  that any such Lien shall not encumber any
         other  property of the Borrower other than the property so acquired and
         further  provided  that the Debt  incurred  after the date  hereof  and
         secured thereby shall not exceed $750,000.00 in the aggregate;

                  (vi)     Liens permitted under Section 2.5(c) above; and

                  (vii)  any Lien  renewing,  extending  or  refunding  any Lien
         existing on the date hereof or  permitted  by clauses (i) through  (vi)
         above, provided that the principal amount secured is not increased, and
         the Lien is not extended to other property.


<PAGE>

         (b) Maintain Existence,  Etc. (i) dissolve or liquidate the Borrower or
any Affiliate or amend or modify the Borrower's  Certificate of Incorporation in
any manner  inconsistent  with the  performance  of the  Borrower's  obligations
hereunder; or (ii) convey,  transfer,  lease or otherwise dispose of the Project
or any Collateral (except for Collateral transferred or disposed of in the usual
and  ordinary  course  of  business  to any  person);  or  (iii)  engage  in any
transaction out of the ordinary course of business.

         (c) Amendments to Documents. Enter into or consent to any amendments or
modifications  of,  or  grant  or  accept  the  benefit  of any  waivers  of any
provisions of, any Document.

         (d) Merger, Etc. (i) merge or consolidate with any Person or permit the
merger or  consolidation  of any Affiliate  with any Person;  or (ii)  purchase,
lease or otherwise  acquire all or substantially all of the assets or properties
of, or acquire any capital stock, equity interests,  debt or other securities of
any Person.  Notwithstanding  anything  to the  contrary  in this  Section  4.3,
Borrower  may  enter  into  and  complete  any   acquisition   so  long  as  the
consideration  to be paid in the  acquisition  is solely  stock of  Borrower  or
consists of a combination of stock of Borrower plus net cash of not greater than
Five Million and 00/100 Dollars ($5,000,000.00).

         (e) Indebtedness.  Incur,  create,  assume,  become or be liable in any
manner  with  respect  to or  permit to exist,  any Debt,  obligations  or other
indebtedness,  except (i) the  obligations  under the Documents;  and (ii) trade
obligations  and normal  accruals in the ordinary course of business not yet due
and payable, including indebtedness incurred to purchase machinery and equipment
not exceeding at any time $750,000.00 in the aggregate, or with respect to which
the  Borrower  is  contesting  in good faith the amount or  validity  thereof by
appropriate  proceedings,  and then only to the extent that the Borrower has set
aside on its books adequate reserves therefor, if appropriate under GAAP.

         (f) Investments or Loans.  Make or permit to exist investments or loans
in or to any other Person,  except for Permitted  Investments (as defined in the
Indenture). Notwithstanding the foregoing, the restrictions set forth in Section
4.3(b) and this  Section  4.3(f) shall not be deemed to limit the ability of the
Borrower to make grants,  loans or  investments  in accordance  with law and the
Certificate  of  Incorporation  and  By-laws of the  Borrower  as  currently  in
existence.

         (g) Guaranties.  Enter into any guaranty agreement,  endorsement or any
other agreement which in any way directly, indirectly or contingently causes the
Borrower  to become  liable  for the  obligations  or  liabilities  of any other
Person,  except  endorsements  of negotiable  instruments  for collection in the
ordinary course of business.

         (h)  Arbitrage.  The Borrower shall not make any use nor permit any use
to be made of the  proceeds  of any of the Bonds or any other  funds  which will
cause  any of the  Bonds to be  "arbitrage  bonds"  subject  to  federal  income
taxation by reason of Section 148(a) of the Code and any applicable  regulations
promulgated thereunder.


<PAGE>

         Section IV.4. Indemnification. The Borrower hereby indemnifies, defends
and  holds  harmless  the Bank from and  against  any and all  claims,  damages,
losses,   liabilities   reasonable  costs  and  expenses  whatsoever  (including
attorneys'  fees) which the Bank may incur (or which may be claimed  against the
Bank by any person or entity  whatsoever) by reason of or in connection with (a)
the  execution  and delivery or transfer of, or payment or failure to pay under,
the Letter of  Credit,  (b) the  issuance,  sale and  remarketing  of the Bonds,
including, without limitation, any of the foregoing resulting from any actual or
alleged  misstatement  or omission in any offering  document with respect to the
Bonds,  (c)  the  purchase  of any  of the  Bonds  pursuant  to the  Remarketing
Agreement, (d) any action, suit, proceeding,  claim or loss suffered or incurred
by the Bank,  or resulting  in any Lien  against the  property of the  Borrower,
under or on account of any Environmental  Claims,  Environmental Laws or Release
of any Hazardous  Materials relating to any Facility or any action or failure to
act with respect thereto by the Borrower or any Affiliate,  or (e) the operation
or maintenance of the Project; provided, that the Borrower shall not be required
to indemnify the Bank for any claims,  damages,  losses,  liabilities,  costs or
expenses  to the  extent,  but only to the  extent,  caused  by (i) the  willful
misconduct  or gross  negligence of the Bank in  determining  whether a document
presented  under the Letter of Credit  complied  with the terms of the Letter of
Credit or (ii) the  Bank's  wrongful  failure  to pay under the Letter of Credit
after the  presentation  to it by the Trustee (or a successor  Trustee under the
Indenture to whom the Letter of Credit has been  transferred in accordance  with
its terms) of a document strictly complying with the terms and conditions of the
Letter of Credit  (it being  understood  that in making  any  payment  under the
Letter of Credit,  the Bank's exclusive  reliance on the documents  presented to
the Bank in accordance  with the terms of the Letter of Credit as to any and all
matters  set  forth  therein,  whether  or not  any  statement  or any  document
presented pursuant to the Letter of Credit shall prove to be forged, fraudulent,
invalid or  insufficient  in any respect or any statement  therein  proves to be
untrue  or  inaccurate  in any  respect  whatsoever,  shall  not be deemed to be
willful  misconduct or gross negligence of the Bank). If any proceeding shall be
brought or threatened  against the Bank by reason of or in  connection  with the
events  described  in clause  (a),  (b),  (c),  (d) or (e) above (and  except as
otherwise  provided  in clause (i) or (ii)  above),  the Bank  shall  notify the
Borrower  in  writing,  and the  Borrower  shall  assume  the  defense  thereof,
including the  employment of counsel  reasonably  acceptable to the Bank and the
payment of all costs of litigation. Notwithstanding the preceding sentences, the
Bank shall have the right to employ its own  counsel  and to  determine  its own
defense  of such  action in any such  case,  but the fees and  expenses  of such
counsel  shall be at the expense of the Bank unless (i) the  employment  of such
counsel  shall  have been  authorized  in writing  by the  Borrower  or (ii) the
Borrower, after the aforementioned notice of the action, shall not have employed
counsel  reasonably  acceptable to the Bank to have charge of such  defense,  in
either of which events the reasonable fees and expenses of such counsel shall be
borne by the Borrower.  The Borrower  shall not be liable for any  settlement of
any such action effected  without its consent.  If the Borrower elects to settle
such claim at the sole cost and expense of the  Borrower and the Bank refuses to
permit such settlement,  the obligation of the Borrower to pay fees and expenses
relating to such claim  pursuant to this Section 4.4 shall become null and void.
Nothing in this Section 4.4 is intended to limit the obligations of the Borrower
contained in Article II and Article VI hereof.


<PAGE>

         Section  IV.5.  Continuing   Obligation;   Obligation  Absolute.   This
Agreement is a continuing  obligation and shall (a) be binding upon the Borrower
and its successors and permitted assigns, and (b) inure to the benefit of and be
enforceable by the Bank and its successors,  transferees and assigns;  provided,
that the Borrower may not assign all or any part of this  Agreement  without the
prior written  consent of the Bank.  The  obligations of the Borrower under this
Agreement  shall  be  absolute,  unconditional  and  irrevocable  and  shall  be
satisfied  strictly in accordance  with the terms of this  Agreement,  under all
circumstances   whatsoever,   including,   without  limitation,   the  following
circumstances:

                  (i) any lack of  validity or  enforceability  of the Letter of
         Credit,  the Bonds,  the  Indenture,  the Loan  Agreement  or any other
         Document;

                  (ii) any  amendment  or waiver of or any consent to  departure
         from all or any of the Documents (except an amendment to this Agreement
         in accordance with Section 6.11);

                  (iii) the  existence  of any claim,  setoff,  defense or other
         rights  which the  Borrower  or any other  Person  may have at any time
         against the Trustee or any successor  trustee,  any  beneficiary or any
         transferee of the Letter of Credit (or any persons or entities for whom
         the  Trustee,  any  such  beneficiary  or any  such  transferee  may be
         acting),  the Bank  (other  than the  defense of payment to the Bank in
         accordance  with the terms of this  Agreement)  or any other  Person or
         entity whether in connection with this  Agreement,  the other Documents
         or any unrelated transaction;

                  (iv) any demand,  statement  or any other  document  presented
         under the Letter of Credit proving to be forged, fraudulent, invalid or
         insufficient  in any respect or any  statement  therein being untrue or
         inaccurate in any respect whatsoever;

                  (v)  payment by the Bank,  under the Letter of Credit  against
         presentation  of a demand,  draft or certificate  which does not comply
         with the terms of the Letter of Credit; and

                  (vi)  any  other   circumstance   or   happening  or  omission
         whatsoever, whether or not similar to any of the foregoing.



<PAGE>

         Section IV.6.  Liability of the Bank

         (a) Without  waiving,  for  purposes of this  Section,  any legal right
against parties other than the Bank, the Borrower  assumes all risks of the acts
or  omissions  of the  Trustee and any  transferee  of the Letter of Credit with
respect  to its use of the  Letter of  Credit.  Neither  the Bank nor any of its
officers, directors, employees or agents shall be liable or responsible for: (i)
the use  which  may be made of the  Letter  of  Credit  or by or for any acts or
omissions of the Trustee or any  transferee  in connection  therewith;  (ii) the
validity, sufficiency or genuineness of drafts, certificates or documents, or of
any  endorsement(s)  thereon,  even if such  drafts,  certificates  or documents
should  in  fact  prove  to be in  any or all  respects  invalid,  insufficient,
fraudulent or forged;  (iii) payment by the Bank against  presentation of drafts
or certificates  which do not comply with the terms of the Letter of Credit;  or
(iv) any other  circumstances  whatsoever  in making or failing to make  payment
under the Letter of Credit,  except  only that the  Borrower  shall have a claim
against  the Bank,  and the Bank shall be liable to the  Borrower to the extent,
but only to the extent,  of any  direct,  as opposed to  consequential,  damages
suffered by the Borrower which the Borrower proves were caused by (i) the Bank's
willful   misconduct  or  gross   negligence  in  determining   whether  drafts,
certificates or documents presented under the Letter of Credit complied with the
terms of the Letter of Credit or (ii) the Bank's wrongful and willful failure to
pay under the Letter of Credit after the presentation to it by the Trustee (or a
successor  Trustee  under the  Indenture  to whom the  Letter of Credit has been
transferred in accordance  with its terms) of drafts,  certificates or documents
strictly  complying  with the terms and  conditions  of the Letter of Credit (it
being  understood that in making such payment the Bank's  exclusive  reliance on
the documents  presented to the Bank in accordance  with the terms of the Letter
of  Credit  as to any and all  matters  set forth  therein,  whether  or not any
statement or any document  presented  pursuant to the Letter of Credit proves to
be forged,  fraudulent,  invalid or insufficient in any respect or any statement
therein proves to be untrue or inaccurate in any respect  whatsoever,  shall not
be deemed  willful  misconduct  or gross  negligence  of the Bank).  The Bank is
hereby  expressly  authorized and directed to honor any demand for payment which
is made under the Letter of Credit  without  regard to, and  without any duty on
its part to inquire into the existence of, any disputes or controversies between
the Issuer,  the  Borrower,  the Trustee or any other  person or the  respective
rights,  duties  or  liabilities  of  any of  them,  or  whether  any  facts  or
occurrences  represented in any of the documents  presented  under the Letter of
Credit are true and correct.

         (b  The Bank may, under the Letter of Credit,  receive,  accept and pay
any drafts or  certificates  or other  documents and  instruments  (otherwise in
order) signed by or issued to the  receiver,  trustee in bankruptcy or custodian
of  anyone  named  in the  Letter  of  Credit  as the  person  by  whom  drafts,
certificates  and other documents and instruments are to be made or issued.  The
Bank may accept drafts or certificates or documents that appear on their face to
be in order, without responsibility for further investigation.


<PAGE>

         (c  The Bank  shall  not have any  liability  to the  Borrower  for the
solvency,  standing and  responsibility  of any Person  whomsoever  and the Bank
shall not have any  liability  to the  Borrower,  and the  Borrower  assumes all
responsibility,   for  (i)  the  form,   sufficiency,   correctness,   validity,
genuineness,  falsification  and legal  effect of any drafts,  certificates  and
other documents, instruments and other papers relating thereto, (ii) the general
and particular conditions  stipulated therein,  (iii) the good faith and acts of
any Person (other than the Bank),  (iv) the  existence,  form,  sufficiency  and
breach of contracts of any nature whatsoever,  including the Documents,  (v) any
delay in giving or  failure  to give any  notice,  demand or  protest,  (vi) the
failure  of any  Person  (other  than the Bank) to comply  with the terms of the
Letter of Credit,  (vii) errors,  omissions,  delays in or  non-delivery  of any
message,  however sent, and (viii) any other error, neglect or omission,  except
only that the Borrower  shall have a claim against the Bank,  and the Bank shall
be liable to the Borrower to the extent,  but only to the extent, of any direct,
as opposed to consequential, damages suffered by the Borrower which the Borrower
proves were caused by (i) the Bank's willful  misconduct or gross  negligence in
determining whether drafts, certificates or documents presented under the Letter
of Credit  complied  with the terms of the  Letter of Credit or (ii) the  Bank's
wrongful  failure to pay under the Letter of Credit after the presentation to it
by the Trustee (or a successor Trustee under the Indenture to whom the Letter of
Credit  has  been   transferred  in  accordance   with  its  terms)  of  drafts,
certificates  or documents  strictly  complying with the terms and conditions of
the Letter of Credit (it being understood that in making such payment the Bank's
exclusive reliance on the documents presented to the Bank in accordance with the
terms of the  Letter  of  Credit as to any and all  matters  set forth  therein,
whether or not any statement or any document presented pursuant to the Letter of
Credit proves to be forged,  fraudulent,  invalid or insufficient in any respect
or any  statement  therein  proves  to be untrue or  inaccurate  in any  respect
whatsoever,  shall not be deemed wilful  misconduct  or gross  negligence of the
Bank).

         (d  The Bank shall not have any  liability to the Borrower for, and the
Borrower  hereby  waives any right to object to payment made under the Letter of
Credit  against,  a draft,  certificate  or document  under the Letter of Credit
varying in punctuation, capitalization, spelling or similar matters of form. The
determination  whether a draft,  certificate  or document has been made prior to
the  expiration  of the Letter of Credit  and  whether a draft,  certificate  or
document  is in proper and  sufficient  form for  compliance  with the Letter of
Credit shall be made by the Bank in its sole  discretion,  which  determination,
absent manifest error,  shall be conclusive and binding upon the Borrower except
as otherwise provided in this Agreement.

                                    ARTICLE V

                              DEFAULTS AND REMEDIES

         Section V.1. Events of Default;  Remedies. Unless waived by the Bank in
the  manner  provided  in  Section  5.2  hereof,  each  of the  following  shall
constitute an "Event of Default" hereunder:

         (a  the  Borrower  shall  fail to pay on the  date due any fee or other
amount required to be paid or reimbursed under this Agreement; or

         (b any  representation  or warranty made or deemed made by the Borrower
herein or in any  certificate,  financial  or other  statement  furnished by the
Borrower  pursuant to this Agreement shall prove to have been untrue,  incorrect
or incomplete in any material respect when made or deemed made; or

         (c  the breach by the  Borrower of any term or provision of Section 4.2
or Section 4.3 or any other term or  provision  of this  Agreement  which is not
remedied within 30 days thereafter; or

         (d  any  default  or Event of  Default  shall  occur and be  continuing
(after the expiration of all applicable grace periods) under the other Documents
or any other  agreement now or hereafter  entered into evidencing any obligation
owed to the Bank by the Borrower or any Affiliate; or

         (e  the Borrower or any  Affiliate  shall fail to pay any principal of,
premium or interest  on, or other  amount owing in respect of any of its Debt in
excess of Seven Hundred Fifty Thousand and 00/100 Dollars ($750,000.00) when due
(whether by scheduled maturity,  required  prepayment,  acceleration,  demand or
otherwise) and such failure shall continue after the applicable grace period, if
any, specified in the agreement or instrument relating to such Debt; or


<PAGE>

         (f  (i) the Borrower or any Affiliate shall (A) apply for or consent to
the appointment of a receiver,  trustee or liquidator,  (B) admit in writing its
inability  to pay its debts  generally  as they become  due,  (C) make a general
assignment  for  the  benefit  of  creditors,  (D) be  adjudicated  bankrupt  or
insolvent,  or (E) commence a voluntary case under applicable bankruptcy laws or
file a voluntary petition or answer seeking reorganization,  an arrangement with
creditors or an order for relief or seeking to take  advantage of an  insolvency
law or file an answer  admitting the material  allegations  of a petition  filed
against  it in any  bankruptcy,  reorganization  or  insolvency  proceeding;  or
corporate  action shall be taken by it for the purpose of  effecting  any of the
foregoing;  or (ii) if,  without  the  application,  approval  or consent of the
Borrower or any  Affiliate,  a proceeding  shall be  instituted  in any court of
competent  jurisdiction,  under  any law  relating  to  bankruptcy,  insolvency,
reorganization,   dissolution,   winding  up,  liquidation,   a  composition  or
arrangement  with  creditors,  a  readjustment  of debts,  the  appointment of a
trustee,  receiver,  liquidator  or custodian or the like of the Borrower or any
Affiliate,  as the case may be, or of all or any substantial  part of any of the
Borrower's or such Affiliate's  assets,  or other like relief in respect thereof
under any  bankruptcy  or  insolvency  law,  and,  if such  proceeding  is being
contested in good faith,  the same shall (i) result in the entry of an order for
relief or any such  adjudication  or appointment  or (ii) continue  undismissed,
pending and unstayed, for any period of forty-five (45) consecutive days; or

         (g) a  material  portion of  Borrower's  or any  Affiliate's  assets is
attached, seized, subjected to a writ or distress warrant or is levied upon; or

         (h) any approval of any governmental  body, public board or public body
related to this Agreement or the other Documents  shall be modified,  rescinded,
revoked  or set aside or  otherwise  cease to remain in full force and effect or
shall  otherwise  not  authorize  the entirety of the drawings and other amounts
outstanding hereunder; or

         (i) any provision of this  Agreement or the other  Documents,  shall at
any time for any reason  cease to be valid and  binding on the  Borrower  or any
other  Affiliate,  as the case may be, or shall be declared to be null and void,
or the validity or  enforceability  thereof  shall be denied or contested by the
Borrower or any other  Affiliate,  as the case may be, or a proceeding  shall be
commenced by any governmental  agency or authority having  jurisdiction over the
Borrower   or  any   Affiliate   seeking  to   establish   the   invalidity   or
unenforceability  thereof and the Borrower or any Affiliate, as the case may be,
shall fail diligently or successfully to defend such proceeding; or

         (j) any  default  or Event of  Default  shall  occur and be  continuing
(after  the  expiration  of all  applicable  grace  periods)  under the K-V Loan
Agreement.

<PAGE>

         Upon the occurrence of an Event of Default hereunder,  by notice to the
Borrower  (except  in the case of an Event of  Default  described  in clause (f)
above,  notice  of  which  shall  not be  required)  the Bank  may,  in its sole
discretion,  but shall  not be  obligated  to take one or more of the  following
actions: (i) declare all amounts due and payable hereunder by the Borrower to be
forthwith due and payable,  and the same shall thereupon become  immediately due
and payable without demand,  presentment,  protest or further notice of any kind
all of which are hereby expressly  waived,  (ii) require the Borrower to provide
cash  collateral  in an amount  equal to the amount of the Letter of Credit,  in
which case the Borrower shall  immediately  provide such cash collateral,  (iii)
exercise its rights and remedies hereunder and under the Pledge Agreement and/or
the  Mortgage  and/or the  Assignment  of Rents and all rights and remedies of a
secured  party on default  under the  Uniform  Commercial  Code in effect in the
State of Missouri at that time or (iv) notify the Trustee of the  occurrence and
continuance  of an Event of Default  hereunder by sending to the Trustee (to the
address  specified in or pursuant to the Indenture) a notice to redeem the Bonds
as referenced in Section 302(d) of the Indenture.

         Section V.2. No Waiver; Remedies Cumulative.  No failure by the Bank to
exercise,  and no delay in  exercising,  any right  against any party  hereunder
shall operate as a waiver thereof;  nor shall any single or partial  exercise of
any right hereunder  preclude any other further exercise thereof or the exercise
of any other right. No waiver  hereunder shall be valid unless in writing signed
by the parties  hereto.  The remedies  herein  provided are  cumulative  and not
exclusive of any remedies provided by law or equity.

         Section  V.3.  Right of  Set-Off.  Upon the  occurrence  and during the
continuance of any Event of Default,  the Bank is hereby  authorized at any time
and from time to time,  to the fullest  extent  permitted by law, to set off and
apply any and all deposits (general or special,  time or demand,  provisional or
final), at any time held and other indebtedness at any time owing by the Bank to
or for the credit or the account of the Borrower or any other Affiliate  against
any and all of the  obligations of the Borrower now or hereafter  existing under
this  Agreement,  irrespective  of  whether  or not the Bank shall have made any
demand hereunder and although such obligations may be contingent or unmatured.


                                   ARTICLE VI

                                  MISCELLANEOUS

         Section VI.1. Costs,  Expenses and Taxes. The Borrower hereby agrees to
pay on  demand  all  reasonable  costs  and  expenses  incurred  by the  Bank in
connection  with the  preparation,  execution and delivery of this Agreement and
any other documents which may be delivered in connection with this Agreement and
all reasonable costs and expenses, if any, in connection with the enforcement of
this  Agreement  and such other  documents  which may be delivered in connection
with this  Agreement,  including,  without  limitation,  the reasonable fees and
expenses  of  counsel  for the Bank with  respect  thereto  and with  respect to
advising the Bank as to its rights and responsibilities under this Agreement. In
addition,  the Borrower  hereby  agrees to pay any and all stamp and other taxes
and fees payable or determined to be payable in connection  with the  execution,
delivery,  filing and recording of this Agreement,  the Documents and such other
documents  and agrees to save the Bank  harmless  from and  against  any and all
liabilities with respect to or resulting from any delay in paying or omission to
pay such taxes and fees, provided that the conduct of the Bank in so delaying or
omitting to pay does not constitutes willful misconduct or gross negligence.



<PAGE>


         Section VI.2.  Term of Letter of Credit and  Agreement;  Termination by
Borrower

         (a  The Stated  Termination  Date shall be  November 5, 1998 unless the
Borrower and the Bank shall mutually agree to extend the Stated Termination Date
as provided in paragraph (b) of this Section 6.2. This Agreement shall remain in
full force and effect so long as the Letter of Credit is in effect and until all
amounts  owed  by  the  Borrower  to  the  Bank  hereunder  are  paid  in  full.
Notwithstanding  the  foregoing,  the  provisions  of Sections 4.4 and 6.1 shall
survive the termination of this Agreement.

         (b  This Letter of Credit shall be automatically renewed for additional
terms of one year  beginning  November 6, 1998 and  terminating on the following
November 5, unless the Bank,  in its sole  discretion,  elects not to renew this
Letter of Credit following  expiration of the then existing term. In such event,
Bank shall  provide the  Borrower  and the Trustee  with  written  notice of its
election not to renew the Letter of Credit at least sixty (60) days prior to the
then Stated Termination Date.

         (c  In evaluating  whether or not to extend the Stated Termination Date
of the Letter of Credit in  accordance  with the  foregoing  provisions  of this
Section  6.2,  the Bank agrees to evaluate  the  possibility  of such  extension
pursuant to the then  current  underwriting  standards  in effect at the Bank at
such time.  Notwithstanding the foregoing,  the Bank shall have no obligation to
extend the Stated Termination Date of the Letter of Credit beyond one year.

         Section VI.3. Transfer of Letter of Credit. The Letter of Credit may be
transferred to a successor trustee acceptable to the Bank in accordance with the
terms of the Indenture.

         Section VI.4.  Severability.  Any provision of this Agreement  which is
prohibited,  unenforceable  or not authorized in any  jurisdiction  shall, as to
such   jurisdiction,   be  ineffective  to  the  extent  of  such   prohibition,
unenforceability   or  nonauthorization   without   invalidating  the  remaining
provisions hereof or affecting the validity,  enforceability or legality of such
provision in any other jurisdiction.

         Section VI.5.  Governing Law. This Agreement  shall be governed by, and
construed in accordance  with,  the internal law and not the choice of law rules
of the State of Illinois.

<PAGE>

BORROWER HEREBY AGREES THAT ALL ACTIONS OR PROCEEDINGS INITIATED BY BORROWER AND
ARISING  DIRECTLY OR  INDIRECTLY  OUT OF THIS  AGREEMENT OR THE OTHER  DOCUMENTS
SHALL BE LITIGATED IN THE CIRCUIT  COURT OF COOK COUNTY,  ILLINOIS OR THE UNITED
STATES  DISTRICT  COURT  FOR THE  NORTHERN  DISTRICT  OF  ILLINOIS  OR,  IF BANK
INITIATES  SUCH ACTION,  IN ADDITION TO THE FOREGOING  COURTS ANY COURT IN WHICH
BANK SHALL  INITIATE  SUCH  ACTION,  TO THE EXTENT SUCH COURT HAS  JURISDICTION.
BORROWER HEREBY EXPRESSLY  SUBMITS AND CONSENTS IN ADVANCE TO SUCH  JURISDICTION
IN ANY ACTION OR  PROCEEDING  COMMENCED BY BANK IN ANY OF SUCH COURTS AND HEREBY
WAIVES PERSONAL SERVICE OF THE SUMMONS AND COMPLAINT, OR OTHER PROCESS OR PAPERS
ISSUED  THEREIN,  AND AGREES THAT SERVICE OF SUCH SUMMONS AND COMPLAINT OR OTHER
PROCESS OR PAPERS MAY BE MADE BY ACTUAL  DELIVERY  OR  REGISTERED  OR  CERTIFIED
MAIL,  RETURN RECEIPT  REQUESTED,  ADDRESSED TO BORROWER AT THE ADDRESS TO WHICH
NOTICES  ARE  TO BE  SENT  HEREIN.  BORROWER  HEREBY  IRREVOCABLY  APPOINTS  AND
DESIGNATES KURTIS B. REEG OF GALLOP,  JOHNSON AND NEUMAN, L.C., WHOSE ADDRESS IS
33 BRONZE POINT, SUITE 1D, BELLEVILLE,  ILLINOIS, OR ANY OTHER PERSON HAVING AND
MAINTAINING A PLACE OF BUSINESS IN ILLINOIS,  WHOM  BORROWER MAY HEREAFTER  FROM
TIME TO TIME  DESIGNATE  (HAVING GIVEN FIVE (5) DAYS WRITTEN  NOTICE  THEREOF TO
BANK) AS  BORROWER'S  TRUE AND LAWFUL  ATTORNEY  AND DULY  AUTHORIZED  AGENT FOR
ACCEPTANCE OF SERVICE OF PROCESS.  BORROWER AGREES THAT NOTWITHSTANDING ANYTHING
CONTAINED HEREIN TO THE CONTRARY, SUCH SERVICE OF PROCESS UPON SUCH PERSON SHALL
CONSTITUTE PERSONAL SERVICE OF PROCESS UPON BORROWER.  BORROWER WAIVES ANY CLAIM
THAT  COOK  COUNTY,  ILLINOIS  OR  THE  NORTHERN  DISTRICT  OF  ILLINOIS  IS  AN
INCONVENIENT FORUM OR AN IMPROPER FORUM BASED ON LACK OF VENUE. SHOULD BORROWER,
AFTER  BEING SO  SERVED,  FAIL TO APPEAR OR  ANSWER TO ANY  SUMMONS,  COMPLAINT,
PROCESS OR PAPERS SO SERVED  WITHIN THE NUMBER OF DAYS  PRESCRIBED  BY LAW AFTER
THE MAILING  THEREOF,  BORROWER  SHALL BE DEEMED IN DEFAULT AND AN ORDER  AND/OR
JUDGMENT  MAY BE ENTERED BY BANK  AGAINST  BORROWER AS DEMANDED OR PRAYED FOR IN
SUCH SUMMONS, COMPLAINT, PROCESS OR PAPERS, PROVIDED, HOWEVER, BANK MAY NOT SEEK
A DEFAULT  JUDGMENT  FOR AT LEAST  THIRTY  (30) DAYS  AFTER THE DATE OF PROOF OF
SERVICE.  THE EXCLUSIVE  CHOICE OF FORUM FOR BORROWER SET FORTH HEREIN SHALL NOT
BE DEEMED TO PRECLUDE THE ENFORCEMENT,  BY BANK, OF ANY JUDGMENT OBTAINED IN ANY
OTHER  FORUM OR THE  TAKING,  BY BANK,  OF ANY ACTION TO ENFORCE THE SAME IN ANY
OTHER  APPROPRIATE  JURISDICTION,  AND  BORROWER  HEREBY  WAIVES  THE  RIGHT  TO
COLLATERALLY ATTACK ANY SUCH JUDGMENT OR ACTION.

         BANK AND BORROWER  ACKNOWLEDGE AND AGREE THAT ANY CONTROVERSY WHICH MAY
ARISE UNDER THIS AGREEMENT OR ANY OF THE OTHER  DOCUMENTS OR WITH RESPECT TO THE
TRANSACTION  CONTEMPLATED  THEREBY  WOULD BE BASED UPON  DIFFICULT  AND  COMPLEX
ISSUES AND,  THEREFORE,  THE PARTIES  AGREE THAT ANY LAWSUIT  ARISING OUT OF ANY
SUCH CONTROVERSY SHALL BE TRIED IN A COURT OF COMPETENT  JURISDICTION BY A JUDGE
SITTING WITHOUT A JURY.

         Section VI.6. Headings. Section headings in this Agreement are included
herein for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.



<PAGE>


         Section VI.7. Notices.  All notices and other  communications  provided
for  hereunder  shall be in writing,  shall be  personally  delivered or sent by
United States  registered or certified mail, return receipt  requested,  postage
prepaid,  and shall be addressed to the appropriate  party as set forth below or
to such other address as shall be  designated by a party in a written  notice to
the other party pursuant hereto. All such notices and other communications shall
be effective upon their delivery to the applicable address.

         (a       If to the Bank:

                  LaSalle National Bank
                  135 South LaSalle Street
                  Chicago, Illinois  60603
                  Attention:  Commercial Loans

                  Telephone:  (312) 904-5415
                  Telecopy:   (312) 750-6353

                  with a copy to:

                  Vedder, Price, Kaufman & Kammholz
                  222 North LaSalle Street
                  Suite 2600
                  Chicago, Illinois 60601
                  Attention:  Michael A. Nemeroff, Esq.

                  Telephone:  (312) 609-7858
                  Telecopy:    (312) 609-5005

         (b       If to the Borrower:

                  K-V Pharmaceutical Company
                  2503 South Hanley Road
                  St. Louis, Missouri
                  Attention:  Gerald R. Mitchell

                  Telephone:  (314) 645-6600
                  Telecopy:    (314) 645-6732


<PAGE>

                  with a copy to:

                  Gallop, Johnson & Neuman, L.C.
                  101 South Hanley
                  St. Louis, Missouri
                  Attention:  John P. Walsh

                  Telephone:  (214) 862-1200
                  Telecopy:    (214) 862-1219


Except as otherwise  specifically required herein, notice of the exercise of any
right,  power or option granted to the Bank by this Agreement is not required to
be given.  Rejection  or refusal to accept or  inability  to deliver  because of
changed address when no notice of changed address was given,  shall be deemed to
be receipt.

         Section VI.8. Participation. The Borrower understands that the Bank may
enter into a  participation  agreement  with certain  other banks  providing for
participation  in the  payments  made by the Bank  under the  Letter of  Credit;
provided,  however,  the Bank shall retain such portion of the Stated  Amount of
the Letter of Credit which is larger than such portion of any such participating
bank, and provided  further,  that any such  participation  shall not affect the
Bank's  obligations under the Letter of Credit.  The Borrower hereby consents to
such participation. The Borrower further agrees that to the extent that any such
other bank so  participates,  the  Borrower  shall have in respect of such other
participating  bank all the concomitant duties and obligations set forth in this
Agreement  as if  such  duties  and  obligations  ran  directly  to  such  other
participating  bank had signed  this  Agreement,  save that all  payments by the
Borrower  in respect of such duties and  obligations  shall be made to the Bank.
Such participation shall not expand the obligations of the Borrower beyond those
which the Borrower expressly assumes in the Loan Agreement and this Agreement.

         Section VI.9.  Counterparts.  This Agreement may be executed in several
counterparts,  each of which shall be regarded as the  original and all of which
shall constitute one and the same Agreement.

         Section VI.10. Notices and Payments.  The Bank will give prompt written
notice to the Trustee of its receipt of  reimbursement  for Tender  Drawings (as
defined in the Letter of Credit).

         Section  VI.11.  Modification.  This  Agreement  may  not be  modified,
altered or amended  except by an agreement in writing signed by the Bank and the
Borrower.

<PAGE>
         IN  WITNESS  WHEREOF,  the  Borrower  and the Bank have  executed  this
Agreement as of the date first above written.



                                          K-V PHARMACEUTICAL COMPANY



                                          By:
                                                Its:


ATTEST:



By:
      Its:

                                          LASALLE NATIONAL BANK



                                          By:
                                                Its:


<PAGE>

                                  SCHEDULE 1.0

                                   Collateral

         All right,  title and  interest of the  Borrower,  in and to all of the
following  purchased with the proceeds from the sale of the Bonds and located at
2303 Schuetz Road, St. Louis, Missouri 63043.

         (i  Improvements and Fixtures. All buildings, structures, replacements,
furnishings,  fixtures,  fittings and other  improvements  and property of every
kind and  character  now or  hereafter  located or  erected  on the Real  Estate
(hereinafter  defined)  and  owned or  purported  to be  owned by the  Borrower,
together with all building or  construction  materials,  equipment,  appliances,
machinery, plant equipment,  fittings,  apparati, fixtures and other articles of
any kind or nature  whatsoever now or hereafter found on, affixed to or attached
to the Real Estate and owned or purported to be owned by the Borrower, including
(without limitation) all motors, boilers,  engines and devices for the operation
of  pumps,  and  all  heating,   electrical,   lighting,  power,  plumbing,  air
conditioning,  refrigeration and ventilation  equipment (all of the foregoing is
herein referred to collectively as the "Improvements");

         (ii   Personal   Property.   All  furniture,   furnishings,   equipment
(including,  without limitation,  telephone and other communications  equipment,
window cleaning, building cleaning, monitoring,  garbage, air conditioning, pest
control  and other  equipment)  and all other  tangible  property of any kind or
character located on the Real Estate including,  without limitation,  all rights
of the Borrower as lessee under any lease for furniture,  furnishings,  fixtures
and other items of  personal  property at any time during the term of such lease
(all of the foregoing is herein referred to collectively as the "Goods");

         (iii  Intangibles.  All option rights,  purchase  contracts,  books and
records and general  intangibles of the Borrower  relating to the Real Estate or
the Improvements and all accounts, contract rights,  instruments,  chattel paper
and other rights of the Borrower for payment of money to it for property sold or
lent by it, for  services  rendered by it, for money lent by it, or for advances
or deposits made by it, and any other intangible property of the Borrower to the
extent  that  any  of  the  foregoing  is  related  to the  Real  Estate  or the
Improvements  (all of the foregoing is herein  referred to  collectively  as the
"Intangibles");

         (iv  Rents. All rents, issues, profits,  royalties,  avails, income and
other benefits derived or owned by the Borrower  directly or indirectly from the
Real Estate or the  Improvements  (all of the  foregoing is herein  collectively
called the "Rents");

<PAGE>


         (v  Leases.  All rights of the  Borrower  under all  leases,  licenses,
occupancy  agreements,  concessions or other  arrangements,  whether  written or
oral,  whether now existing or entered into at any time  hereafter,  whereby any
person  agrees to pay money to the  Borrower or any  consideration  for the use,
possession  or  occupancy  of,  or  any  estate  in,  the  Real  Estate  or  the
Improvements  or any part thereof,  and all rents,  income,  profits,  benefits,
avails,  advantages and claims against  guarantors under any thereof (all of the
foregoing is herein  referred to  collectively  as the  "Leases"),  which Leases
shall be deemed to include,  without limitation,  any lease entered into between
the Borrower and the Guarantor in respect of the Real Estate and Improvements;

         (vi  Contracts for Services.  All rights of the Borrower, if any, under
any  contracts  executed by the Borrower  with any provider of goods or services
for or in connection  with  services  performed or to be performed in connection
with the Real Estate or the  Improvements  (all of the  foregoing  being  herein
referred to collectively as the "Contracts");

         (vii  Other  Property.  All other property or rights of the Borrower of
any kind or character  related to the Real Estate or the  Improvements,  and all
proceeds (including insurance and condemnation  proceeds) and products of any of
the  foregoing.  (All of the Real  Estate  and the  Improvements,  and any other
property  which is real estate under  applicable  law, is sometimes  referred to
collectively herein as the "Premises");

         (viii  Secured Assignment of Deposit Accounts. All accounts established
with the Bank  and  identified  on the  books of the Bank as an  account  of the
Borrower (the "Account"),  any and all deposits at any time or from time to time
credited to or deposited in the Account,  and all property which may, prior to a
permitted withdrawal,  be acquired directly or indirectly using the proceeds (or
any part thereof) of any of the foregoing, any and all interest and other income
distributions  on or  with  respect  to any of the  foregoing  and  any  and all
substitutions for and proceeds of any of the foregoing;  provided, however, that
Collateral  shall not  include  any funds or  proceeds  thereof  donated  to the
Borrower,  the use of which is  restricted  to a  specific  purpose by the donor
thereof.

         The term "Real Estate" shall mean and include the following:

                  All of  the  land  described  on  Exhibit  A to  Schedule  1.0
         attached  hereto  (the  "Land"),  together  with all and  singular  the
         tenements, rights, easements, hereditaments, rights of way, privileges,
         liberties, appendages and appurtenances to the Land (including, without
         limitation,  all rights  relating to storm and sanitary  sewer,  water,
         gas, electric, railway and telephone services); all development rights,
         air rights, water, water rights, water stock, gas, oil, minerals,  coal
         and other substances of any kind or character underlying or relating to
         the Land; all estate,  claim,  demand,  right, title or interest of the
         Borrower  in and to any street,  road,  highway,  or alley  (vacated or
         otherwise) adjoining the Land or any part thereof; all strips and gores
         belonging,  adjacent or pertaining to the Land; and any  after-acquired
         title to any of the foregoing.

<PAGE>
                            Exhibit A to Schedule 1.0

                        Legal Description of Real Estate

         Lot 2 of WESTPORT INDUSTRIAL  SUBDIVISION FIRST ADDITION,  according to
the  plat  thereof  recorded  in  Book  106,  page 12 in the  St.  Louis  County
Recorder's Office.


<PAGE>
                                    Exhibit A

                                Letter of Credit



                                  SEE ATTACHED


<PAGE>


                                    Exhibit B

                  Form of Legal Opinion of Counsel to Borrower



                                  SEE ATTACHED