<PAGE>
 
                               CREDIT AGREEMENT
                               ----------------

     THIS CREDIT AGREEMENT ("Agreement") is entered into as of April ___, 1997,
by and among WILD OATS MARKETS, INC., a Delaware corporation (the "Borrower"),
the banks listed on the signature pages hereof (collectively, the "Banks" and
each individually a "Bank"), and BANK ONE, INDIANAPOLIS, NATIONAL ASSOCIATION, a
national banking association, as agent for the Banks (in such capacity, the
"Agent").  The Borrower, the Banks, and the Agent agree as follows:

                                    CONTEXT

     WHEREAS, the Borrower and Bank One, Indianapolis NA ("Bank One") are
parties to a Credit Agreement dated March 15, 1995 (as amended from time to
time, the "Original Agreement"); and

     WHEREAS, the Borrower has requested that Bank One terminate the loans
provided to the Borrower under the Original Agreement, and has further requested
that Banks provide certain credit facilities to the Borrower; and

     WHEREAS, the Banks have agreed to the request of the Borrower, subject to
certain terms and conditions.

     NOW, THEREFORE, the parties agree as follows:

     Section 1.  ACCOUNTING TERMS -- DEFINITIONS.  All accounting and financial
terms used in this Agreement are used with the meanings such terms would be
given in accordance with GAAP except as may be otherwise specifically provided
in this Agreement. The definitions set forth in the recitals above are
incorporated herein by reference. In addition to the above and to the terms
defined elsewhere in this Agreement, the following terms have the meanings
indicated when used in this Agreement with their initial letters capitalized:

     .  "Advance" means a disbursement of proceeds of the Revolving Loan.
         -------                                                         

     .  "Affiliate" means, as to any Person, any other Person directly or
         ---------                                                       
        indirectly controlling, controlled by, or under direct or indirect
        common control with such Person. A Person shall be deemed to control a
        corporation or other business entity if such Person possesses, directly
        or indirectly, the power to direct or cause the direction of the
        management and policies of such corporation or business entity, whether
        through the ownership of voting securities, by contract, or otherwise.

     .  "Agent" is used as defined in the Preamble and includes any successor
         -----                                                               
        agent appointed pursuant to Section 10.

     .  "Aggregate Commitment" has the meaning set forth in Scetion 2(a)(i) of
         --------------------                                                 
        this Agreement.

     .  "Agreement" means this Credit Agreement among the Borrower, the Banks,
         ---------                                  
        and the Agent, as it may from time to time be amended, modified, or
        supplemented.

     .  "Applicable Rate" means any of the Applicable Commission Rate, the
         ---------------                                                  
        Applicable 
<PAGE>
 
        Unused Fee, or the Applicable Spread, as the context requires, and when
        used in the plural form refers to two or more of the Applicable
        Commission, the Applicable Facility Percentage, or the Applicable
        Spread, as the context requires. The Applicable Rate shall be determined
        by reference to the ratio of the Borrower's Funded Debt to EBITDA in
        accordance with the following table:

<TABLE>
<CAPTION>
                                        Applicable                        
        Ratio of Funded                 Facility            Applicable Spread   Applicable              
        Debt to EBITDA                  Percentage       Prime Rate LIBOR Commission 
        --------------                  ----------       ---------- ----- ---------- 
        <S>                             <C>              <C>        <C>   <C>        
        3.0 to 1.0 and above            0.25%            0%         2.00%  1.250%
                                                                                                 
        2.5 to 2.99 to 1.0              0.25%            0%         1.75%  1.125%
                                                                                                 
        2.0 to 2.49                     0.25%            0%         1.50%  1.125%
                                                                                                 
        1.00 to 1.0 and below           0.25%            0%         1.25%  1.000% 
</TABLE>

        After the Closing Date, the Applicable Rate shall be determined on the
        basis of the financial statements of the Borrower for each fiscal
        quarter furnished to the Bank pursuant to the requirements of the
        Agreement, with prospective effect for the following fiscal quarter;
        provided that at any time the Borrower makes an acquisition, the
        Applicable Rate shall be determined on the basis of the pro-forma
        financial statements of the Borrower prepared in accordance with GAAP
        furnished to the Bank at the time of such acquisition with prospective
        effect for the remainder of the fiscal quarter in which such acquisition
        occurred. Interest and fees will accrue and be payable in any fiscal
        quarter on the basis of the Applicable Rate in effect during the
        preceding fiscal quarter or partial fiscal quarter until an adjustment
        is made under the provisions of this subsection. The Applicable Rate
        shall be adjusted on the first day of the calendar month which follows
        receipt by the Bank of the financial statements upon which such
        adjustment is based, but such adjustment shall not be effective as to
        any LIBOR-based Rate elected prior to the date of such adjustment until
        the expiration of the period of time for which such LIBOR-based Rate
        shall have been elected by the Borrower. In the event that the Borrower
        fails to deliver the financial statements and compliance certificates
        required under the Agreement for any month which ends a fiscal quarter,
        then the Applicable Rate shall be the largest spread shown on the above
        table from the date such financial statements were required to be
        delivered until the first day of the calendar month which follows
        delivery to the Bank of such financial statements. For the avoidance of
        doubt, it is agreed that it is the intent of the parties that the Bank
        shall be free to exercise all remedies otherwise provided for in this
        Agreement in the event of the violation by the Borrower of the covenant
        stated in Section 5(g)(ii) hereof notwithstanding the accrual of
        interest upon the Loan at a rate determined in accordance with this
        definition.

     .  "Applicable Commission" means the rate at which the fee for each letter
         --------------------- 
        of credit issued for the account of the Borrower under the terms of this
        Agreement will be calculated.

                                       2
<PAGE>
 
     .  "Applicable Spread" means the number of percentage points to be taken
         -----------------                                                  
        into account in calculating the per annum rate at which interest will
        accrue on the Loan.

     .  "Applicable Facility Percentage" means the percentage to be taken into
         ------------------------------                                       
        account in calculating the unused facility fee.

     .  "Application for Advance" or "Application" means a written application
         -----------------------      -----------      
        of the Borrower for a disbursement of proceeds of the Revolving Loan,
        substantially in the form of Exhibit "A" attached hereto.
                                     -----------                 

     .  "Authorized Officer" means the Chief Financial Officer, the Chief
         ------------------                                              
        Executive Officer or the Secretary of the Borrower or such other officer
        whose authority to perform acts to be performed only by an Authorized
        Officer under the terms of this Agreement is evidenced to the Agent by a
        certified copy of an appropriate resolution of the Board of Directors of
        the Borrower.

     .  "Bank One" is used as defined in the Preamble.
         --------                                     

     .  "Banking Day" means a day on which the principal offices of the Agent
         ----------- 
        and the Banks are open for the purpose of conducting substantially all
        of their business activities and, in the case of a LIBOR Advance, which
        is also a day on which commercial banks are open for the dealing of U.S.
        dollar deposits in London, England.

     .  "Banks" is used as defined in the Preamble and includes any lender which
         -----                                                                  
        shall become a party to this Agreement as a signatory to any amendment
        or modification hereof.

     .  "Borrower" is used as defined in the Preamble.
         --------                                     

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

     .  "Commitment" means the agreement of each Bank, severally, to extend its
         ----------                                                            
        Percentage of the Revolving Loan to the Borrower until the Revolving
        Loan Maturity Date.

     .  "Consolidated" or "Consolidating" means:  (a) when used herein with
         ------------      -------------                                   
        reference to financial statements, ratios, assets or liabilities, that
        any calculations have been made by consolidating the assets and
        liabilities of the Borrower and its consolidated Subsidiaries after
        eliminating all intercompany items and making such adjustments as
        required by GAAP; and (b) when used herein with reference to a
        Subsidiary of the Borrower, a Subsidiary whose financial statements have
        been or, in accordance with GAAP, are required to be, presented together
        on a consolidated basis with those of the Borrower.

     .  "Deposit Account" is used as defined in Section 2(a)(iv).
         ---------------                                         

                                       3
<PAGE>
 
     .  "EBITDA" means the net income of the Borrower for any accounting period
         ------                                                                
        plus income tax expense, interest, depreciation, amortization expense,
        and rents and lease expense for such accounting period, all determined
        in accordance with generally accepted accounting principles. For the
        avoidance of doubt, at any time there is an acquisition by the Borrower
        or any Subsidiary, EBITDA shall include the sum of net income of the
        acquired company plus income tax expense, interest, depreciation,
        amortization expense, rents and lease expense of the acquired company
        pro rated in any fiscal year as of the date acquired by the Borrower.

     .  "ERISA" means the Employee Retirement Income Security Act of 1974 and
         -----     
        all of the rules and regulations promulgated pursuant thereto, as
        amended from time to time.

     .  "Event of Default" means any of the events described in Section 8.
         ----------------                                                 

     .  "Federal Funds Rate" means, for any day, the offered Federal Funds rate
         ------------------   
        as published as of such date in the Wall Street Journal (Midwest
                                            -------------------         
        Edition).

     .  "Fiscal Quarter" means a fiscal quarter of the Borrower consisting of
         --------------                                                      
        thirteen (13) consecutive weeks.

     .  "Funded Debt" means, as of any date, the sum of the following (without
         -----------                                                          
        duplication): (a) all interest-bearing indebtedness of the Borrower and
        its Subsidiaries as of such date which would be reflected on a
        consolidated balance sheet of the Borrower and its Subsidiaries prepared
        as of such date in accordance with generally accepted accounting
        principles, and (b) the present value of all obligations in respect of
        capital leases incurred by the Borrower and its Subsidiaries.

     .  "GAAP" means generally accepted accounting principles in the United 
         ----
        States of America in effect from time to time.

     .  "Guaranty Agreement" is used as defined in Section 4(a).
         ------------------                                     

     .  "Hazardous Substance" means any hazardous or toxic substance regulated
         -------------------  
        by any federal, state or local statute or regulation including but not
        limited to the Comprehensive Environmental Response, Compensation and
        Liability Act, the Resource Conservation and Recovery Act and the Toxic
        Substance Control Act, or by any federal, state or local governmental
        agencies having jurisdiction over the control of any such substance
        including but not limited to the United States Environmental Protection
        Agency.

     .  "Letter of Credit" means any Letter of Credit issued under the 
         ----------------  
        provisions of Section 2(b) hereof, and when used in the plural form,
        means all such Letters of Credit.

     .  "LIBOR Advance" means an Advance for which interest is payable at a 
         ------------- 
        LIBOR-based rate.

     .  "LIBOR-based Rate" means that per annum rate of interest which is equal 
         ----------------                                                   
        to the sum 

                                       4
<PAGE>
 
        of the LIBOR Applicable Spread per annum plus the London Interbank
        Offered Rate.

     .  "LIBOR Applicable Spread" means the number of percentage points to be
         -----------------------                                             
        taken into account in calculating the LIBOR-based Rate.

     .  "London Interbank Offered Rate" or "LIBOR" means the per annum rate of
         -----------------------------      -----                             
        interest, as determined by the Reference Bank, at which dollar deposits
        in immediately available funds are offered to the principal banks in the
        London interbank market by other principal banks in that market two (2)
        Banking Days prior to the commencement of a period of either one month,
        three months, or six months for which the Borrower shall have requested
        a quotation of the rate in amounts equal to the amount for which the
        Borrower shall have requested a quotation of the rate. The Reference
        Bank shall notify the Agent of this rate by 9:00 A.M., Indianapolis,
        Indiana time one (1) Banking Day prior to the commencement of the
        relevant LIBOR Interest Period. Each determination of a LIBOR-based Rate
        made by the Agent in accordance with this paragraph shall be conclusive
        except in the case of demonstrative or manifest error.

     .  "LIBOR Interest Period" means, with respect to each LIBOR Advance, the
         ---------------------                                                
        period commencing on the date the LIBOR Advance is disbursed to the
        Borrower and ending one, three, or six months thereafter, as requested
        by the Borrower pursuant to Section 2(a)(iii); provided, however, that a
        LIBOR Interest Period shall not extend beyond the Revolving Loan
        Maturity Date without the consent of the Required Banks.

     .  "Lien" means any mortgage, pledge, assignment, security interest,
         ----                                                            
        encumbrance, lien (statutory or other) or charge or preferential
        arrangement of any kind (including without limitation any agreement to
        provide any of the foregoing), any conditional sale or other title
        retention agreement or any lease in the nature thereof, or any filing or
        agreement to file a financing statement under the Uniform Commercial
        Code or comparable law to evidence or perfect any such lien or security
        interest.

     .  "Loan" means the Revolving Loan.
         ----                           

     .  "Loan Document" means any of this Agreement, the Revolving Notes,  the
         -------------                                                        
        Letters of Credit, any Reimbursement Agreement, the Guaranty Agreements,
        and any other instrument or document which evidences or secures the Loan
        or any Letter of Credit or which expresses an agreement as to terms
        applicable to the Loan or any Letter of Credit, as such documents may be
        amended, modified, restructured or replaced from time to time, and in
        the plural means any two or more of the Loan Documents, as the context
        requires.

     .  "Maturity Date" means the last day of the LIBOR Interest Period with
         -------------                                                      
        respect to a LIBOR Advance and the Termination Date with respect to a
        Prime-Rate Advance.

     .  "Maximum Available Amount" means, with respect to any Letter of Credit,
         ------------------------                                              
        the maximum amount which is available to be drawn under such Letter of
        Credit by the beneficiary thereof at any time.

                                       5
<PAGE>
 
     .  "Note" means any one of the Revolving Notes, and in the plural means
         ----  
        both or all of the Revolving Notes.

     .  "Obligations" means all obligations, Indebtedness and liabilities of the
         -----------                                                            
        Borrower in favor of the Banks, which obligations may be of any type and
        description, direct or indirect, absolute or contingent, due or to
        become due, now existing and hereafter arising, including but not
        limited to: (a) all of such obligations on account of the Loans,
        including any Advances made pursuant to any extension of the Commitments
        beyond the initial Revolving Loan Maturity Date or pursuant to any
        amendment or modification of this Agreement, (b) all of the obligations
        on account of the Letters of Credit, including the obligation of the
        Borrower to immediately reimburse Bank One for all draws made under any
        Letter of Credit, together with the payment of all fees and interest
        thereon, and (c) all other obligations arising under any Loan Document
        as amended from time to time.

     .  "Officer's Certificate" means a certificate in the form included as a
         ---------------------  
        part of Exhibit "A" attached hereto signed by an Authorized Officer of
                ----------
        the Borrower confirming that all of the representations and warranties
        contained in Section 3 of this Agreement are true and correct as of the
        date of such certificate except as specified therein and with the
        further exceptions that: (a) the representation contained in Section
        3(d) shall be construed so as to refer to the latest financial
        statements which have been furnished to the Banks as of the date of any
        Officer's Certificate, (b) the representations contained in Section 3(k)
        will be construed so as to apply not only to the Borrower, but also to
        any Subsidiaries, whether now owned or hereafter acquired, and (c) the
        representation contained in Section 3(l) shall be deemed to be amended
        to reflect the existence of any Subsidiary hereafter formed or acquired
        by the Borrower with the consent of the Required Banks or as permitted
        under Section 6(e). The Certificate shall further confirm that no Event
        of Default or Default shall have occurred and be continuing as of the
        date of the Certificate or shall describe any such Event of Default or
        Default which shall have occurred and be then continuing and the steps
        being taken by the Borrower to correct it.

     .  "Optional Rate" means a LIBOR-based Rate.
         -------------                           

     .  "PBGC" means the Pension Benefit Guaranty Corporation created under
         ----                                                              
        Section 4002(a) of ERISA or any successor thereto.

     .  "Percentage" means, for each Bank, the percentage of the Loan set forth
         ----------                                                            
        after the signature block of each Bank.

     .  "Permitted Liens" means:
         ---------------        

            (a) Liens for taxes not yet due or which are being actively
        contested in good faith by appropriate proceedings (in a manner
        sufficient to prevent enforcement of the matter under contest) as to
        which adequate reserves have been set aside in an amount determined in
        accordance with GAAP;

                                       6
<PAGE>
 
            (b) Other Liens incidental to the conduct of the business of the
        Borrower and its Subsidiaries or the ownership of their respective
        properties and assets which were not incurred in connection with the
        incurring of Indebtedness, and which do not materially detract from the
        value of such property or assets or impair the use thereof in the
        business operation of the Borrower and its Subsidiaries;

            (c) Liens on property or assets of a Subsidiary to secure the
        obligations of such Subsidiary to the Borrower;

            (d) Liens conveyed simultaneously or hereafter by the Borrower to
        the Agent for the benefit of the Banks to secure the Obligations;

            (e)  Purchase-money liens on any equipment hereafter acquired, or
        the assumption of any lien on equipment existing at the time of such
        acquisition, or a lien incurred in connection with any conditional sale
        or other title retention agreement or a finance lease; provided that (A)
        any equipment subject to any of the foregoing is acquired by the
        Borrower or any Subsidiary in the ordinary course of their respective
        businesses, (B) the lien on any such equipment is created
        contemporaneously with such acquisition and attaches only to the
        equipment so acquired and fixed improvements thereon, and (C) the total
        indebtedness secured by all such liens shall not exceed Two Million Five
        Hundred Thousand Dollars ($2,500,000.00) at any time outstanding in the
        aggregate; and

            (d) Liens now existing which are described on the "Schedule of
        Exceptions" attached as Exhibit "C."
                                ----------  

     .  "Person" means an individual, a corporation, a limited liability
         ------
        company, a partnership, an association, a trust, a joint venture or any
        other entity or organization, including a governmental or political
        subdivision or an agent or instrumentality thereof, or other entity of
        any kind.

     .  "Plan" means any employee pension benefit plan maintained or contributed
         ----                                                                   
        to by the Borrower or any of its Subsidiaries or by any trade or
        business (whether or not incorporated) under common control with the
        Borrower or any of its Subsidiaries as defined in Section 4001(b) of
        ERISA or insured by the PBGC under Title IV of ERISA.

     .  "Prepayment Premium" means the excess, if any, as determined by the
         ------------------
        Agent of: (a) the present value at the time of prepayment of the
        interest payments which would have been payable on account of an amount
        prepaid from the date of prepayment until the end of the period during
        which interest would have accrued at an Optional Rate but for prepayment
        over (b) the present value at the time of prepayment of interest
        payments calculated at the rate (the "Reinvestment Rate") which the
                                              -----------------             
        Agent then estimates the Banks would receive upon reinvesting the
        principal amount of the prepayment in an obligation which presents a
        credit risk substantially similar (as determined in accordance with the
        commercial credit rating system then used by the Agent) to that which is
        then presented by the Loan for a period approximately equal to the
        balance of the period during which interest would accrue on the portion
        of the 

                                       7
<PAGE>
 
        Loan prepaid at an Optional Rate, but for prepayment. The discount rate
        used by the Bank in determining such present values shall be the
        Reinvestment Rate.

     .  "Prime Rate" means a variable per annum interest rate equal at all times
         ----------                                                             
        to the rate of interest established and quoted by the Agent as its Prime
        Rate, such rate to change contemporaneously with each change in such
        established and quoted rate, provided that it is understood that the
        Prime Rate shall not necessarily be representative of the rate of
        interest actually charged by the Agent on any loan or class of loans.

     .  "Prime-based Rate" means a variable per annum rate of interest equal to
         ----------------                                                      
        the Prime Rate plus the Prime Rate Applicable Spread.

     .  "Prime Rate Advance" means an Advance for which interest is payable
         ------------------
        based on the Prime Rate.

     .  "Prime Rate Applicable Spread" means the number of percentage points to
         ----------------------------
        be taken into account in calculating the rate at which interest will
        accrue on the Loan based on the Prime Rate.

     .  "Pro Rata" means a calculation based upon each Bank's Percentage of
         --------                                                          
        amounts payable to or due from such Bank under this Agreement.

     .  "Reference Bank" means Bank One, or any one of the other Banks, as the
         --------------                                                       
        Agent may choose in its sole discretion when determining the
        applicable LIBOR-based Rates.

     .  "Reimbursement Agreement" is used as defined in Section 2(b).
         -----------------------                                     

     .  "Reinvestment Rate" is used as defined in the text of the definition of
         -----------------                                                     
        "Prepayment Premium" in this Section 1.

     .  "Required Banks" means Banks holding in the aggregate at least sixty-six
         --------------                                                         
        and two-thirds percent (66-2/3%) of the unpaid principal balance of
        the Revolving Loan, plus the aggregate Maximum Available Amount of any
        Letters of Credit issued and outstanding under Section 2(b) of this
        Agreement, or if no Advances or Letters of Credit are outstanding,
        Banks having in the aggregate at least sixty-six and two-thirds
        percent (66-2/3%) of the Aggregate Commitment.

     .  "Revolving Loan" is used as defined in Section 2(a)(i).
         --------------                                        

     .  "Revolving Loan Maturity Date" means initially December 31, 2003, or
         ----------------------------
        such other date, as the Borrower may request, to which the Commitments
        may be extended by all of the Banks pursuant to the terms of Section
        2(a)(viii).

     .  "Revolving Notes" is used as defined in Section 2(a)(v).
         ---------------                                        

     .  "Shareholders' Equity" means the remainder of the Borrower's total
         --------------------
        assets minus total liabilities as reflected on the Borrower's
        financial statements and determined on 

                                       8
<PAGE>
 
        a Consolidated basis.

     .  "Subsidiary" as to any Person means any corporation, joint venture or
         ----------                                                          
        other business entity of which shares of stock or other ownership
        interests having ordinary voting power (other than stock or other
        ownership interests having such power only by reason of the happening
        of a contingency) to elect a majority of the board of directors or
        other managers of such corporation or other business entity, are at
        the time owned, or the management of which is otherwise controlled,
        directly or indirectly through one or more intermediaries, or both, by
        such Person.

     .  "Termination Date" means the earlier to occur of (a) the Revolving Loan
         ----------------                                                      
        Maturity Date and (b) the date upon which the Revolving Loan is
        terminated, accelerated or both, pursuant to the terms of Section 8
        hereof.

     .  "Unmatured Event of Default" means any event specified in Section 8,
         --------------------------
        which is not initially an Event of Default, but which would, if
        uncured, become an Event of Default with the giving of notice or the
        passage of time or both.

     Section 2.  THE LOAN.  Subject to all of the terms and conditions of this
Agreement, each Bank severally agrees to make its Percentage of the Revolving
Loan and to participate in the Letters of Credit, and Bank One agrees to issue
the Letters of Credit described in this Section 2 to the Borrower, as follows.

     a. The Revolving Loan.  Each Bank severally agrees to make its Percentage
        ------------------                                                    
        of the Revolving Loan to the Borrower on the following terms and
        subject to the following conditions:

        (i)    The Aggregate Commitment -- Principal Reductions.  From the date
               ------------------------------------------------                
               of this Agreement and until the Revolving Loan Maturity Date,
               each Bank severally agrees to make its Percentage of Advances
               (all such Advances by all such Banks are collectively referred to
               as the "Revolving Loan") under a revolving line of credit from
               time to time to the Borrower of amounts not exceeding the
               aggregate at any time outstanding the sum of Forty Million and
               00/100 Dollars ($40,000,000.00) ( as shall be reduced as
               hereafter provided, the "Aggregate Commitment"), provided that
               all of the conditions of lending stated in Section 7 of this
               Agreement as being applicable to the Revolving Loan have been
               fulfilled at the time of each Advance, and provided further that
               the Aggregate Commitment shall decrease as of the end of each
               fiscal quarter beginning with the fiscal quarter ending on March
               31, 2000, by Two Million Five Hundred Dollars ($2,500,000) (each
               such amount referred to in this subsection as a "Principal
               Reduction"). The Borrower shall pay such amounts as are required
               to reduce the outstanding principal balance of the Revolving Loan
               plus the Maximum Available Amount of all outstanding Letters of
               Credit to an amount not exceeding the Aggregate Commitment less
               the aggregate amount of the scheduled Principal Reduction on the
               effective date of the Principal Reduction. The Revolving Loan is
               a revolving credit facility and, subject to the provisions of
               this Section 2, the Borrower may prepay and borrow as the
               Borrower may elect, provided that: (A) all

                                       9
<PAGE>
 
               Advances must mature no later than the Termination Date and (B)
               the aggregate outstanding principal balance of the Revolving
               Loan, together with the aggregate Maximum Available Amount of all
               outstanding Letters of Credit, may not at any one time exceed the
               Aggregate Commitment then in effect.

        (ii)   Method of Borrowing.  So long as no Event of Default or Unmatured
               -------------------                                              
               Event of Default shall have occurred and be continuing and until
               the Revolving Loan Maturity Date, the Borrower may borrow, repay
               and reborrow under the Revolving Notes on any Banking Day,
               provided that no borrowing may cause the principal balance
               outstanding under the Revolving Loan to exceed the maximum
               principal amount permitted to be outstanding under Section
               2(a)(i) or may result in an Event of Default or an Unmatured
               Event of Default. Each Advance under the Revolving Loan shall be
               conditioned upon receipt by the Agent from the Borrower, at the
               time and in accordance with the terms of this Section 2, of an
               Application for Advance and an Officer's Certificate, provided
               that the Agent may, at its discretion, cause the Banks to make a
               disbursement upon the oral request of the Borrower made by an
               Authorized Officer, or upon a request transmitted to the Agent by
               telephone facsimile ("fax") machine, or by any other form of
               written electronic communication (all such requests for Advances
               being hereafter referred to as "informal requests"). In so doing,
               the Agent may rely on any informal request which shall have been
               received by it in good faith from a person reasonably believed to
               be an Authorized Officer. Each informal request shall be promptly
               confirmed by a duly executed Application and Officer's
               Certificate if the Agent so requires and shall in and of itself
               constitute the representation of the Borrower that no Event of
               Default or Unmatured Event of Default has occurred and is
               continuing or would result from the making of the requested
               Advance and that the making of the requested Advance shall not
               cause the principal balance outstanding under the Revolving Loan
               to exceed the maximum principal amount permitted to be
               outstanding under Section 2(a)(i).

        (iii)  Requests for Advances.  The Borrower shall give the Agent at
               ---------------------                                       
               least three (3) Banking Days' irrevocable notice of each LIBOR
               Advance or renewal thereof to be made hereunder and same-day
               notice of each Prime Rate Advance to be made. Each such request,
               including any informal request, (each a "Request") shall be
               irrevocable, shall be received by the Agent by no later than
               11:30 A.M., Indianapolis, Indiana time, on the date required
               hereunder, and shall specify the date the Advance is to be made
               (which shall be a Banking Day), the type of Advance, the
               requested LIBOR Interest Period, and the amount of the Advance,
               which amount shall not exceed the maximum principal amount
               permitted to be outstanding under Section 2(a)(i). Requests may
               be made as provided in Section 2(a)(ii). If the Borrower fails to
               specify the type of Advance, it shall be deemed to have selected
               a Prime Rate Advance. If Borrower fails to specify the length of
               any LIBOR Advance, it shall be deemed to have selected a LIBOR
               Interest Period of thirty (30) days.

        (iv)   Funding by Banks. The Agent shall promptly notify each Bank upon
               ----------------
               receipt 

                                      10
<PAGE>
 
               of a Request from the Borrower specifying the amount of such
               Advance to be funded by each Bank, the interest rate, the LIBOR
               Interest Period if applicable, and the date of borrowing. Each
               Advance or renewal thereof shall be made by the Banks in
               accordance with each Bank's Percentage of the Advance or renewal
               thereof. Provided that each Bank is given the notice required in
               this subsection (iv), each Bank agrees that it will make the
               funds which it is to advance hereunder available to the Agent, in
               immediately available funds, not later than 1:30 P.M.
               Indianapolis, Indiana time on the date such Advance is to be
               made. The Agent will advance to the Borrower the amount requested
               by the Borrower not later than 2:30 P.M. Indianapolis, Indiana
               time on the date such Advance is to be made, unless the Agent
               shall determine that any condition precedent applicable to the
               Advance set forth in Section 7 of this Agreement shall not be
               fulfilled as of the date of such Advance. All Advances will be
               made to the Borrower by a credit to Borrower's account number
               193119823 at Bank One (the "Deposit Account"). All notices
               (including Requests for Advances) sent by the Borrower to the
               Agent and received by the Agent after 11:30 A.M. Indianapolis,
               Indiana time (or such other time as is specified in any Section
               hereof) on a Banking Day shall be deemed received on the next
               succeeding Banking Day.

        (v)    The Revolving Notes.  The obligation of the Borrower to repay the
               --------------------                                             
               Revolving Loan shall be evidenced by the promissory notes (the
               "Revolving Notes") of the Borrower payable to the order of each
               Bank and in an amount equal to each Bank's Percentage of the
               Aggregate Commitment, which Revolving Notes shall be in the form
               of Exhibits "B-1," and "B-2" attached hereto.  Principal,
                  ---------------     -----                             
               interest and all other sums owing to the Banks under this
               Agreement shall be evidenced by entries in records maintained by
               each Bank.  Each payment on and any other credits with respect to
               principal, interest, and all other sums outstanding under this
               Agreement shall be evidenced by entries in such records.  All
               such entries shall be prima facie proof that such sums are owing
               or that such payments have been made.  The failure to so record
               any such amount or any error in so recording any such amount
               shall not, however, limit or otherwise affect the obligations of
               the Borrower hereunder or under any Note to repay the principal
               amount of the Advances together with all interest accruing
               thereon.

        (vi)   Interest and Principal of the Revolving Loan.
               -------------------------------------------- 

          A.   Each Advance under the Revolving Loan shall bear interest until
               such Advance is paid in full at a rate per annum equal to, at the
               Borrower's option: (1) the Prime-based Rate or (2) a LIBOR-based
               Rate. In the event of the failure of the Borrower to designate an
               interest rate for an Advance, the Borrower shall have been deemed
               to have elected the Prime-based Rate.

          B.   The Borrower shall pay accrued interest on each Advance on the
               first Banking Day of each calendar month and on the Maturity Date
               for such Advance, with the first payment due on the first such
               date after the making of the Advance.
                                      
                                      11
<PAGE>
 
          C.   The Borrower shall pay the principal of each Advance in full on
               its Maturity Date unless the Borrower gives the Agent notice as
               provided in Section 2(a)(iii) that such Advance is to be renewed.
               Renewals of LIBOR Advances are subject to Sections 2(c)(iii),
               2(c)(iv) and 2(c)(v) hereof.  Subject to the provisions of
               Sections 2(a)(iii), and 2(c) hereof, (I) on the Maturity Date of
               any Advance or (II) on any Banking Day for any portion of the
               outstanding principal balance of the Revolving Loan on which
               interest is accruing at the Prime Rate, the Borrower shall have
               the right to elect to have such outstanding Advance or portion of
               the balance converted into a different type of Advance provided
               for under the terms of this Agreement; provided, that if no
               notice is given of the election of the Borrower to convert or
               renew a LIBOR Advance on its respective Maturity Date, the
               Borrower shall be deemed to have elected to convert such Advance
               or portion thereof to a Prime Rate Advance.

          D.   All borrowings and reborrowings and all repayments shall be in
               amounts of not less than $50,000.00, except for repayment of the
               entire principal balance of the Revolving Loan and except for
               special prepayments of principal required under the terms of
               Section 2(a)(ix); provided, however, that each LIBOR Advance
               shall be in an aggregate minimum amount of $1,000,000.00 and
               $100,000.00 increments in excess thereof and there shall be no
               more than 3 LIBOR Advances outstanding at one time.

          E.   After maturity, whether on the Revolving Loan Maturity Date or on
               account of acceleration upon the occurrence of an Event of
               Default, and until paid in full, all Advances shall bear interest
               at a per annum rate equal to two percent (2%) above the Prime-
               based Rate.  The outstanding principal amount of the Revolving
               Loan shall be paid in full on the Revolving Loan Maturity Date,
               together with all accrued and unpaid interest thereon.

        (vii)  Use of Proceeds.  The proceeds of the Revolving Loan shall be
               ---------------                                              
               used by the Borrower only to fund new store development,
               acquisitions, working capital requirements and for general
               corporate purposes of the Borrower and its Consolidated
               Subsidiaries.

        (viii) Extensions of Revolving Loan Maturity Date.  The Banks may, upon
               ------------------------------------------                      
               the request of the Borrower, but at the sole discretion of and
               with the consent of all of the Banks, extend the Revolving Loan
               Maturity Date from time to time to such date or dates as the
               Banks may elect by notice in writing to the Borrower, and upon
               any such extension and upon execution and delivery by the
               Borrower of Revolving Notes reflecting the extended maturity
               date, the date to which the Commitments are then extended will
               become the "Revolving Loan Maturity Date" for purposes of this
               Agreement.

         (ix)  Facility Fee.  In addition to interest on the Revolving Loan, the
               ------------                                                     
               Borrower shall pay to the Agent for the Banks a facility fee for
               each partial or full calendar quarter during which the Aggregate
               Commitment is outstanding equal to the Applicable Facility
               Percentage per annum of the average daily 

                                      12
<PAGE>
 
               excess of the Aggregate Commitment over the outstanding principal
               balance of the Revolving Loan. Facility fees for each calendar
               quarter shall be due and payable within ten (10) days following
               the Agent's submission of a statement of the amount due. Such
               fees may be debited by the Agent when due to any demand deposit
               account of the Borrower carried with the Agent without further
               authority.

        (x)    Agent's Fee.  The Borrower shall pay to the Agent an Agent's Fee
               -----------                                                     
               in accordance with the agreement between the Agent and the
               Borrower.  The Agent may debit the Deposit Account or any other
               demand deposit account of the Borrower on the date such fee is
               due in payment of such fee, without further authority and, in any
               event shall be paid by the Borrower within ten (10) days
               following the date due.


        (xi)   Commitment Fee. The Borrower shall pay the Agent for the
               --------------                                          
               benefit the Banks a fee in the amount of $200,000.00 either
               previous to or contemporaneously with the execution of this
               Agreement as fees for the Commitments of the Banks to make the
               Loan.

     b. Sublimit for Letters of Credit. Prior to the Revolving Loan Maturity
        ------------------------------
        Date and at any time that the Borrower is entitled to an Advance under
        the Revolving Loan, Bank One shall issue, upon the application of the
        Borrower, for the account of the Borrower, a standby letter of credit
        (each a "Letter of Credit"), provided, that (i) the issuance of any
        Letter of Credit with a maturity date beyond the Revolving Loan Maturity
        Date shall be entirely at the discretion of Bank One, (ii) the form of
        the requested Letter of Credit shall be satisfactory to Bank One in the
        reasonable exercise of Bank One's discretion, (iii) the Borrower shall
        have executed an Application and Reimbursement Agreement for each Letter
        of Credit in the form attached hereto as Exhibit "D" (each a
                                                 -----------
        "Reimbursement Agreement"), and (iv) the aggregate Maximum Available
        Amount of all Letters of Credit outstanding at any one time shall not
        exceed $2,500,000.00. The Borrower shall pay Bank One a commission for
        each Standby Letter of Credit issued calculated at the Applicable
        Commission per annum of the Maximum Available Amount of all outstanding
        Letters of Credit. In addition, the Borrower shall pay Bank One's
        standard transaction fees, as published from time to time, with respect
        to any transactions (draws, amendments, etc.) occurring on account of
        any Letter of Credit. Commissions shall be payable when the related
        Letters of Credit are issued, and transaction fees shall be payable upon
        completion of the transaction as to which they are charged. All such
        commissions and fees may be debited by Bank One to the Deposit Account
        without further authority, and in any event, shall be paid by the
        Borrower within ten (10) days following billing. All commissions and
        transaction fees provided by this Section 2(b) shall be payable solely
        to Bank One and shall not be divided or shared with the other Banks.

     c. Other Provisions Applicable to the Obligations.  The following
        ----------------------------------------------                
        additional provisions are applicable to the Obligations:

        (i) Calculation of Interest and Fees. Interest on each Loan and fees 
            --------------------------------
            and commissions 

                                      13
<PAGE>
 
               payable hereunder which are calculated on a per annum basis shall
               be calculated on the basis of a year of 360 days and actual days
               elapsed.

        (ii)   Taxes and Increased Costs.
               ------------------------- 

               A. All payments and reimbursements required to be made hereunder
                  shall be made free and clear of, and without deduction of any
                  and all taxes, fees or other charges of any nature whatsoever
                  imposed by any taxing authority, except such taxes as are
                  imposed on or measured by a Bank's net income by the
                  jurisdiction or any political subdivision thereof in which
                  such Bank's principal office or actual lending branch is
                  located. The Borrower shall reimburse or compensate such Bank,
                  upon demand by such Bank, for all costs incurred, losses
                  suffered or payments made in connection with the Advances or
                  any part thereof which costs, losses or payments are a result
                  of any present or future reserve, special deposit or similar
                  requirement against assets of, liabilities of, deposits with
                  or for the account of or loans by such Bank, imposed on such
                  Bank or the offshore interbank market by any regulatory
                  authority, central bank or other authority, whether or not
                  having the force of law. If any Bank makes a claim for
                  compensation hereunder, it shall provide to the Borrower a
                  certificate setting forth the computation upon which such
                  claim is based and such certificate shall be conclusive except
                  in the case of manifest error. If Borrower is prohibited by
                  operation of law from (I) making payments without deduction as
                  provided in this Section, or (II) paying, causing to be paid,
                  or reimbursing any Bank for the cost of, any and all taxes,
                  duties, fees or other charges as provided in this Section,
                  then payments due to any such Bank under this Agreement (and
                  any Note required hereunder) shall be increased to such amount
                  which, after provision for such taxes, duties, fees or other
                  charges, is necessary to yield and remit to such Bank payments
                  at the applicable rate specified in Section 2(a)(vi). The
                  Borrower shall provide evidence that all applicable taxes
                  imposed on the transaction contemplated by this Agreement
                  shall have been paid to the appropriate taxing authorities by
                  delivery to Agent of the official tax receipts or notarized
                  copies of such receipts within thirty (30) days after payment
                  of any such tax.
               
               B. Each Bank that is not incorporated under the laws of the
                  United States or a State thereof agrees that, prior to the
                  first date on which any payment is due to it hereunder, it
                  will deliver to the Borrower (I) two duly completed copies of
                  Internal Revenue Service ("IRS") Form 1001 or 4224, as the
                  case may be, certifying that such Bank is entitled to receive
                  payments under this Agreement without deduction or withholding
                  of any U.S. federal income taxes, and (II) an IRS Form W-8 or
                  W-9, as the case may be, to establish an exemption from U.S.
                  backup withholding tax. Each Bank required to deliver to the
                  Borrower such IRS forms shall also deliver to the Borrower two
                  new copies of such applicable forms on or before the date that
                  any such forms expire or become obsolete, certifying that it
                  can receive payments hereunder without deduction or
                  withholding of any such taxes. If a Bank fails to provide all
                  of the duly completed IRS forms exempting the payments made
                  hereunder by the Borrower to such Bank from withholding or
                  deduction for U.S. federal income taxes or U.S. backup
                  withholding taxes, the Borrower shall withhold the appropriate
                  amount of tax from the payment otherwise due and the
                  provisions of Section 2(c)(ii)(A) shall not apply.

                                      

                                       14
<PAGE>
 
        (iii)  Availability, Yield.  With respect to the LIBOR Advances,
               -------------------                                      
               notwithstanding anything to the contrary contained herein, if at
               any time any Bank in its discretion determines that there is a
               reasonable probability that United States dollar deposits in the
               amount of any requested LIBOR Advance and for a period equal to
               the LIBOR Interest Period for such Advance will not be available
               in the offshore interbank market, or there is a reasonable
               probability that the rate of interest at which such deposits will
               be available will not accurately reflect the cost to such Bank of
               maintaining such LIBOR Advance during such LIBOR Interest Period,
               such Bank shall promptly give notice thereof to Agent who shall
               notify the Borrower and, unless the Borrower elects to withdraw
               its Request for borrowing on the date it receives such notice
               from such Bank, Borrower shall be deemed to have requested a
               Prime Rate Advance in lieu of such LIBOR Advance.

        (iv)   Rate Not Ascertainable.  Anything herein to the contrary
               ----------------------                                  
               notwithstanding, if at any time the Agent shall determine (which
               determination shall be binding and conclusive on all parties
               hereto) that by reason of circumstances affecting the offshore
               interbank market, adequate and reasonable means do not exist for
               ascertaining the applicable LIBOR, then so long as such
               circumstances shall continue (A) the Agent shall promptly give
               notice of such determination to each Bank and the Borrower, (B)
               no Bank shall be under any obligation to make or continue, or
               convert into, LIBOR Advances, (C) any request of the Borrower for
               LIBOR Advances (whether by continuation or conversion or
               otherwise) shall be deemed a request for Prime Rate Advances, and
               (D) the Borrower shall, in the case of each outstanding LIBOR
               Advance, on the Maturity Date of such Advance, either cause such
               Advance to be converted into a Prime Rate Advance or pay or
               prepay such Advance in full (together with accrued interest
               thereon).

        (v)    Illegality.  Notwithstanding anything to the contrary contained
               ----------                                                     
               herein, if at any time any Bank determines that any change in
               applicable law or regulation or any interpretation thereof makes
               it unlawful for such Bank to make or continue any LIBOR Advance,
               or to comply with its obligations hereunder in respect of LIBOR
               Advances, such Bank shall give notice of the same to Agent and
               Borrower, at which time the obligation of such Bank to lend on
               the basis of LIBOR shall terminate.  If after consultation with
               Borrower, such Bank determines that the effect of such change
               cannot reasonably be mitigated, the Borrower shall, upon request
               of such Bank and subject to Section 2(c)(vi), immediately prepay
               in full the outstanding LIBOR Advances, together with all
               interest accrued thereon to the date of payment, and shall pay
               all other sums due such Bank in connection with such LIBOR
               Advances, provided, however, that Borrower may then elect to
               borrow the sums being prepaid at the Prime Rate.

        (vi)   Prepayments.  If any payment or prepayment of any LIBOR Advance
               -----------                                                    
               is made on a day which is not the Maturity Date for such Advance,
               the Borrower shall pay to each Bank upon its request (within ten
               (10) days thereof) such amount or amounts as will compensate such
               Bank for the amount by which the rate of 

                                       15
<PAGE>
 
               interest on such Advance immediately prior to such repayment
               exceeds the rate of return to such Bank on relending or
               reinvesting until the original Maturity Date of such Advance the
               funds received in connection with payment or prepayment. If any
               Bank makes a claim for compensation hereunder, it shall provide
               to the Borrower a certificate setting forth the computation upon
               which such claim is based and such certificate shall be
               conclusive except in the case of manifest error.

        (vii)  Method of Payment; Mistakes.
               --------------------------- 

            A. Each payment of principal, interest and other sums due under this
               Agreement shall be made to the Agent without set-off or
               counterclaim in immediately available funds on the Banking Day
               when due not later than 12:30 P.M. Indianapolis, Indiana time.
               All sums received after such time shall be deemed received on the
               next Banking Day, and interest thereon shall be payable at the
               then-applicable rate during such extension. Any payment due on a
               day that is not a Banking Day shall be made on the next Banking
               Day, and interest thereon shall be payable at the then-applicable
               rate during such extension.

            B. Payment of all sums under this Agreement shall be made by the
               Borrower to the Agent for the account of the Bank or Banks, as
               the context requires, and the Agent shall promptly distribute to
               each Bank its Percentage share of such payments in like funds as
               received. Borrower agrees that Agent may debit the Deposit
               Account for payments due under this Agreement and the Agent may
               credit the Deposit Account with the amount of any Advance.

            C. Unless the Agent shall have been notified in writing by any Bank
               prior to the date of an Advance that such Bank will not make
               available to the Agent on such date such Bank's Percentage share
               of such Advance, the Agent may (but shall not be required to)
               assume that such Bank has made such amount available to the Agent
               on such date and, in reliance thereon, may make available to
               Borrower a corresponding amount on behalf of such Bank. If such
               Bank subsequently makes its Percentage share of an Advance
               available to the Agent, such Bank shall pay to the Agent on
               demand an amount equal to the product of (I) the Federal Funds
               Rate from and including the date of the Advance to but excluding
               the date such Bank's Percentage share of the Advance was made
               available to the Agent (the "Out-of-Funds Period"), multiplied by
               (II) an amount equal to such Bank's Percentage share of the
               Advance, multiplied by (III) a fraction, the numerator of which
               is the number of days in the Out-of-Funds Period and the
               denominator of which is 360. A certificate of the Agent submitted
               to any Bank with respect to any amounts owing under this
               subsection (C) shall be conclusive in the absence of manifest
               error. If such amount is not in fact made available to the Agent
               by such Bank within three (3) Banking Days after the date of an
               Advance, the Agent shall be entitled to recover such amount, with
               interest thereon at the rate per annum then applicable to such
               Advance on demand from the Borrower.

            D. Unless the Agent shall have been notified in writing by the
               Borrower prior to any date on which a payment is due hereunder or
               under the Notes that the

                               16
<PAGE>
 
               Borrower will not make the required payment on such date, the
               Agent may (but shall not be required to) assume that the Borrower
               will make such payments to the Agent and, in reliance upon such
               assumption, may make available to each Bank the amount due to it
               on such date. If such amount is not in fact paid to the Agent by
               the Borrower within one (1) Banking Day after such payment is
               due, the Agent shall be entitled to recover from each Bank the
               amount paid to it by the Agent, together with interest thereon in
               the amount equal to the product of: (I) the daily average Federal
               Funds Rate from and including the payment date to but excluding
               the date the payment was made available to the Agent (the 
               "Out-of-Funds Period"), multiplied by (II) an amount equal to
               such Bank's Percentage share of the total amount paid by the
               Agent, multiplied by (III) a fraction, the numerator of which is
               the number of days in the Out-of-Funds Period and the denominator
               of which is 365. A certificate of the Agent submitted to any Bank
               with respect to any amounts owing under this subsection (D) shall
               be conclusive in the absence of manifest error.

          E.   Neither the Agent nor any Bank which continues to make its
               Percentage share of Advances available to the Borrower shall have
               any liability to the Borrower for the actions of a Bank which
               does not make its Percentage share of Advances available, and the
               Borrower's sole remedy for damages for the refusal of a Bank to
               lend its Percentage share of Advances, if any, shall be for
               actual damages from such non-performing Bank only.

        (viii) Capital Reimbursement.
               --------------------- 

          A.   If either (I) the introduction or implementation of, or any
               change in, or in the interpretation of, any law, rule or
               regulation, or (II) the introduction or implementation of or
               compliance with any request, directive or guideline from any
               central bank or other governmental authority (whether or not
               having the force of law) affects or would affect the amount of
               capital required or expected to be maintained by any Bank or any
               corporation controlling any Bank, then, upon demand by such Bank,
               the Borrower will pay to the Agent for benefit of such Bank, from
               time to time as specified by such Bank, such additional amount or
               amounts which such Bank shall determine to be appropriate to
               compensate such Bank or any corporation controlling such Bank in
               light of such circumstances, to the extent that such Bank
               reasonably determines that the amount of any such capital would
               be increased or the rate of return on any such capital would be
               reduced by, or in whole or in part based on the existence of, the
               face amount of such Bank's Percentage share of the Revolving Loan
               or such Bank's Commitment under this Agreement.

          B.   Any amount otherwise payable by the Borrower to a Bank under the
               foregoing subsection (A) (hereinafter referred to as the "Capital
               Cost") shall be increased by the remainder of (I) that portion of
               the Capital Cost determined by such Bank to be allocable to the
               amount of any interest or participation transferred by such Bank
               in such Bank's Advance or Percentage of the Loan under this
               Agreement, minus (II) the sum of the amount of the Capital Cost
               which such Bank has agreed or is otherwise obligated to pay to
               the holder of

                                      17
<PAGE>
 
                    such interest or participation as determined by such Bank,
                    plus the amount such Bank shall determines to be appropriate
                    to compensate such Bank or any corporation controlling such
                    Bank to the extent that such Bank reasonably determines that
                    the capital required or expected to be maintained by such
                    Bank, or by any corporation controlling such Bank, will be
                    increased, in whole or in part, based upon the existence of
                    such interest or participation so transferred.
               
               C.   Notwithstanding the foregoing, any amount payable with
                    respect to the taxes, duties, fees or other charges under
                    Section 2(c)(ii) or the Capital Cost as determined under
                    subsections (A) and (B) above shall be payable by the
                    Borrower to the relevant Bank (the "Reimbursed Bank") within
                    forty-five (45) days after demand therefor, which demand
                    shall be accompanied by the calculation in reasonable detail
                    of the taxes, duties, fees or other charges determined under
                    Section 2(c)(ii) or the Capital Cost, with a copy to the
                    Agent. Additionally, the Borrower may, in its sole option,
                    obtain a new lender to replace the participation of the
                    Reimbursed Bank in this Agreement. Upon replacing the
                    Reimbursed Bank with a new lender, the Borrower shall pay
                    the Reimbursed Bank the outstanding principal amount of the
                    Reimbursed Bank's Advances, together with accrued interest
                    thereon, together with the taxes, duties, fees or other
                    charges under Section 2(c)(ii) or the Capital Cost demanded
                    by the Reimbursed Bank. Thereafter, the Reimbursed Bank
                    shall no longer be a party to this Agreement, and the
                    Borrower shall have no further obligation hereunder with
                    respect to the Reimbursed Bank.

     Section 3.  REPRESENTATIONS AND WARRANTIES.  To induce the Banks to make
the Revolving Loan, to induce Bank One to issue the Letters of Credit, and to
induce the Banks and the Agent to enter into this Agreement, the Borrower
represents and warrants that:

     a.   Organization of the Borrower and the Subsidiaries.  The Borrower is a
          -------------------------------------------------                    
          corporation organized, existing and in good standing under the laws of
          the State of Delaware and each Subsidiary is a corporation organized,
          existing and in good standing under the laws of the State of its
          respective incorporation.  Each is qualified to do business in every
          jurisdiction in which:  (i) the nature of the business conducted or
          the character or location of properties owned or leased, or the
          residences or activities of employees make such qualification
          necessary, and (ii) failure so to qualify might impair its title to
          material properties or its right to enforce material contracts or
          result in exposure of liability for material penalties in such
          jurisdiction.  No jurisdiction in which the Borrower or a Subsidiary
          is not qualified to do business has asserted that such corporation is
          required to be qualified therein.  The principal office of the
          Borrower is located at 1645 Broadway, Boulder, Colorado 80302.  The
          principal offices of each Subsidiary is located the address listed in
          Exhibit "E" attached to this Agreement.  Neither the  Borrower nor any
          -----------                                                           
          Subsidiary conducts any material operations or keeps any material
          amounts of property at any other location, except as disclosed on the
          "Schedule of Exceptions" attached as Exhibit "C."  Neither the
                                               -----------              
          Borrower nor any Subsidiary has done business under any name other
          than its present corporate name at any time during the six years
          preceding the date of this Agreement except as disclosed on the
          "Schedule of Exceptions" attached as Exhibit "C."
                                               ------------

                                      18
<PAGE>
 
     b.   Authorization; No Conflict.  The execution and delivery of this
          --------------------------                                     
          Agreement, the borrowings hereunder, the execution and delivery of all
          of the other Loan Documents and the performance by the Borrower of its
          obligations under this Agreement and all of the other Loan Documents
          are within its corporate powers, have been duly authorized by all
          necessary corporate action, have received all required governmental or
          regulatory agency approvals and do not and will not contravene or
          conflict with any provision of law or of its Articles or Certificate
          of Incorporation or Bylaws or of any agreements which are binding upon
          the Borrower or any of its properties which contravention or conflict
          would have a material adverse effect on the financial condition or
          business operations of the Borrower.  The execution and delivery of
          the Guaranty Agreement of each Subsidiary and the execution and
          delivery of any of the other Loan Documents to which it is a party and
          the performance by each Subsidiary of its obligations under its
          Guaranty Agreement and any of the other Loan Documents to which it is
          a party are within its corporate powers, have been duly authorized by
          all necessary corporate action, have received all required
          governmental or regulatory agency approvals and do not and will not
          contravene or conflict with any provision of law or of their
          respective Articles or Certificates of Incorporation or Bylaws or of
          any agreements which are binding upon any Subsidiary or any of its
          properties which contravention or conflict would have a material
          adverse effect on the financial condition or business operations of
          such Subsidiary.

     c.   Validity and Binding Nature.  This Agreement and all of the other Loan
          ---------------------------                                           
          Documents are the legal, valid and binding obligations of the Borrower
          enforceable against the Borrower, in accordance with their respective
          terms, except to the extent that enforcement thereof may be limited by
          bankruptcy, insolvency, reorganization, moratorium and other laws
          enacted for the relief of debtors generally and other similar laws
          affecting the enforcement of creditors' rights generally or by
          equitable principles which may affect the availability of specific
          performance and other equitable remedies.  The Guaranty Agreement of
          each Subsidiary and any of the other Loan Documents to which it is a
          party are the legal, valid and binding obligations of such Subsidiary,
          enforceable against it in accordance with their respective terms,
          except to the extent that enforcement thereof may be limited by
          bankruptcy, insolvency, reorganization, moratorium and other laws
          enacted for the relief of debtors generally and other similar laws
          affecting the enforcement of creditors' rights generally or by
          equitable principles which may affect the availability of specific
          performance and other equitable remedies.

     d.   Financial Statements.  The Borrower has delivered to the Bank its
          --------------------                                             
          unaudited quarterly financial statements as of September 30, 1996.
          Such statements have been prepared in accordance with GAAP
          consistently applied except, as to the interim statements, for the
          absence of a statement of cash flows, footnotes and adjustments
          normally made at year end which are not material in amount.  Such
          statements present fairly the consolidated financial positions of the
          Borrower and any Subsidiaries as of the date thereof and the
          consolidated results of their operations for the period covered and
          since the date of such statements there has been no material adverse
          change in the consolidated financial position of the Borrower and its
          Subsidiaries or in the results of the consolidated operations of the
          Borrower and its Subsidiaries.


                                      19
<PAGE>
 
     e.   Litigation and Contingent Liabilities.  Except as disclosed on the
          -------------------------------------                             
          "Schedule of Exceptions" attached as Exhibit "C", no litigation,
                                               -----------                
          arbitration proceedings or governmental proceedings are pending or to
          the knowledge of an officer of the Borrower threatened against the
          Borrower or any Subsidiary which would, if adversely determined,
          materially and adversely affect the financial position or continued
          operations of the Borrower or any Subsidiary.  Neither the Borrower
          nor any Subsidiary has any material contingent liabilities which are
          not provided for or disclosed in the financial statements referred to
          in Section 3(d) or on the "Schedule of Exceptions" attached as Exhibit
                                                                         -------
          "C."
          ----

     f.   Liens.  None of the assets of the Borrower or any Subsidiary are
          -----                                                           
          subject to any mortgage, pledge, title retention lien, or other lien,
          encumbrance or security interest except for liens and security
          interests described in the exceptions enumerated in Section 6(b), and
          those liens existing as of the date hereof as disclosed on the
          "Schedule of Exceptions" attached as Exhibit "C".
                                               ----------- 

     g.   Employee Benefit Plans.  Each Plan maintained by the Borrower and each
          ----------------------                                                
          Subsidiary is in material compliance with ERISA, the Code and all
          applicable rules and regulations adopted by regulatory authorities
          pursuant thereto, and each of the Borrower and its Subsidiaries has
          filed all reports and returns required to be filed by ERISA.  No Plan
          maintained by the Borrower or any Subsidiary and no trust created
          under any such Plan has incurred any "accumulated funding deficiency"
          as defined in Section 412 (c)(1) of ERISA, and the present value of
          all benefits vested under each Plan did not exceed, as of the last
          annual valuation date, the value of the assets of the respective
          Plans.  Neither the Borrower nor any Subsidiary has any knowledge that
          any "reportable event" as defined in ERISA has occurred with respect
          to any Plan maintained by the Borrower or such Subsidiary.

     h.   Payment of Taxes.  The Borrower and each Subsidiary have filed all
          ----------------                                                  
          federal, state and local tax returns and tax related reports which
          each is required to file by any statute or regulation and all taxes
          and any tax related interest payments and penalties that are due and
          payable have been paid except for such as are being contested in good
          faith by appropriate proceedings, and with respect to which the
          Borrower or such Subsidiary shall, to the extent required by GAAP,
          have set aside on its books adequate reserves.  Adequate provision has
          been made for the payment when due of all tax liabilities of the
          Borrower and each Subsidiary which have been incurred, but are not as
          yet due and payable.

     i.   Investment Company Act.  Neither the Borrower nor any Subsidiary is an
          -----------------------                                               
          "investment Company" or a Company "controlled" by an "investment
          Company" within the meaning of the Investment Company Act of 1940, as
          amended.

     j.   Regulation U.  Neither the Borrower nor any Subsidiary is engaged
          ------------                                                     
          principally, or as one of its important activities, in the business of
          extending credit for the purpose of purchasing or carrying margin
          stock within the meaning of Regulation U of the Board of Governors of
          the Federal Reserve System.  Not more than twenty-five percent (25%)
          of the consolidated assets of the Borrower and its Subsidiaries
          consists of 

                                      20
<PAGE>
 
          margin stock, within the contemplation of Regulation U, as amended.

     k.   Hazardous Substances.  Except as disclosed on the "Schedule of
          --------------------                                          
          Exceptions" attached as Exhibit "C", to the best knowledge of the
                                  -----------                              
          Borrower after due inquiry and investigation, (i) there are no
          underground storage tanks of any kind on any premises owned or
          occupied by or under lease to the Borrower or any Subsidiary; (ii)
          there are no tanks, drums or other containers of any kind on premises
          owned or occupied by or under lease to the Borrower or any Subsidiary;
          (iii) no premises owned or occupied by or under lease to the Borrower
          or any Subsidiary have ever been used, and as of the date of this
          Agreement, no such premises are being used for any activities
          involving the use, treatment, transportation, generation, storage or
          disposal of any Hazardous Substances in reportable quantities; and
          (iv) no Hazardous Substances in reportable quantities have been
          released on any such premises nor is there any threat of release of
          any Hazardous Substances in reportable quantities on any such
          premises.

     l.   Subsidiaries.  The only Subsidiary of the Borrower as of the date of
          ------------                                                        
          this Agreement is Alfalfa's Canada, Inc., a corporation established
          under the laws of British Columbia, Canada.

     m.   Merger--Compliance With Laws.  The consummation and closing of the
          ----------------------------                                      
          merger of Wild Oats Markets, Inc., a Delaware corporation, with and
          into W. O. Holdings, Inc. (formerly Alfalfa's, Inc., a Colorado
          corporation with the resulting entity renamed Wild Oats Markets, Inc.
          (the "Merger") have been conducted in compliance with all applicable
          laws, including federal laws and the laws of the states of Delaware
          and Colorado, respectively, and all necessary approvals, consents,
          exemptions and other action, notice to or filing with any governmental
          authority by the Borrower or any other party in connection with
          execution, delivery and performance of the documents required as an
          incident to the Merger and the Loan Documents has been obtained and
          taken.

     n.   Securities Act of 1933.  The Merger has been consummated in compliance
          ----------------------                                                
          with the Securities Act of 1933.

     Section 4.  COLLATERAL FOR THE OBLIGATIONS.  The Obligations will be
secured and supported as provided in this Section:

     a.   Guaranty Agreements.  The Obligations will be supported by the
          -------------------                                           
          unconditional guaranty of prompt payment of each of the Subsidiaries,
          each of which guaranty shall be evidenced by a Guaranty Agreement
          (collectively, the "Guaranty Agreements") in the form of Exhibit "F."
                                                                   ------------

     Section 5.  AFFIRMATIVE COVENANTS OF THE BORROWER.  Until all Obligations
terminate or are paid and satisfied in full, and so long as the Aggregate
Commitment, or any Letter of Credit is outstanding, the Borrower agrees that it
will strictly observe the following covenants:

     a.   Corporate Existence.  The Borrower shall preserve, and shall cause
          -------------------                                               
          each Subsidiary to preserve, its corporate existence.

                                      21
<PAGE>
 
     b.   Reports, Certificates and Other Information.  The Borrower shall
          -------------------------------------------                     
          furnish to each Bank copies of the following financial statements,
          certificates and other information:

        (i)    Annual Statements.  As soon as available and in any event within
               -----------------                                               
               one hundred twenty (120) days after the close of each fiscal
               year, consolidated financial statements of the Borrower and its
               Subsidiaries for such fiscal year prepared and presented in
               accordance with GAAP, in each case setting forth in comparative
               form corresponding figures for the preceding fiscal year,
               together with the audit report, unqualified as to scope, of
               independent certified public accountants, approved by the Banks
               which approval shall not be unreasonably withheld.  The Borrower
               shall provide supplementary consolidating financial statements of
               the Borrower and its Subsidiaries for such fiscal year consisting
               at a minimum of:

          A.   the balance sheet as of the end of the year;

          B.   a statement of income for the fiscal year; and

          C.   the operating performance of each store/kitchen/bakery,

          all in reasonable detail, in each case setting forth in comparative
          form corresponding figures for the same period in the preceding fiscal
          year and for the current year's budget, and accompanied by the written
          representation of the chief financial officer of the Borrower that
          such financial statements have been prepared in accordance with GAAP,
          consistently applied, (except for changes in which the independent
          accountants of the Borrower concur) and present fairly the
          consolidated financial position of the Borrower and its Subsidiaries
          and the results of the business operations of the Borrower and its
          Subsidiaries as of the dates of such statements and for the fiscal
          year then ended.

        (ii)   Interim Statements.  As soon as available and in any event within
               ------------------                                               
               thirty (30) days after the end of each month which is not a
               quarter-end and as soon as possible and in any event within
               forty-five (45) days after the end of each month constituting a
               quarter-end, a copy of the consolidated interim financial
               statements of the Borrower and its Subsidiaries consisting at a
               minimum of:

          A.   the balance sheet as of the end of the month;

          B.   a statement of income for the month and for the partial or full
               fiscal year ended as of the end of the month; and

          C.   if requested by the Agent, the operating performance of each
               store/kitchen/bakery,

          all in reasonable detail, in each case setting forth in comparative
          form corresponding figures for the same period in the preceding fiscal
          year and for the current year's budget, and accompanied by the written
          representation of the chief 

                                       22
<PAGE>
 
          financial officer of the Borrower that such financial statements have
          been prepared in accordance with GAAP (except that they need not
          include footnotes and need not reflect adjustments normally made at
          year end, if such adjustments are not material in amount),
          consistently applied, (except for changes in which the independent
          accountants of the Borrower concur) and present fairly the
          consolidated financial position of the Borrower and its Subsidiaries
          and the results of the business operations of the Borrower and its
          Subsidiaries as of the dates of such statements and for the fiscal
          periods then ended. Notwithstanding the foregoing, in the event that
          the Borrower has no outstanding and unpaid principal, interest, or
          fees of the Loan, or outstanding Letters of Credit, and no event of
          Default or Unmatured Event of Default exists, during the entire period
          of a fiscal quarter, the Borrower shall be required to submit the
          above described financial statements no more often than within forty-
          five (45) days after each fiscal quarter, and such fiscal quarter and
          such statements shall be prepared as of the end of each such fiscal
          quarter rather than on a monthly basis.

        (iii)  Certificates.  Contemporaneously with the furnishing of each set
               ------------                                                    
               of financial statements provided for in Sections 5(b)(i) and
               5.b(ii), an Officer's Certificate.

        (iv)   Management Letter.  As soon as available and in any event within
               -----------------                                               
               sixty (60) days after receipt, a copy of any management letter
               from the Borrower's independent certified public accountants,
               together with a copy of any response by the Borrower to such
               letter.

        (v)    Annual Budget.  As soon as available and in any event within
               -------------                                               
               sixty (60) days after the close of each fiscal year, a summary of
               the Budget (including, without limitation, projected capital
               expenditures, balance sheets, statements of income and of cash
               flows on a monthly basis) for the following fiscal year.

        (vi)   Orders.  Prompt notice of any material adverse orders in any
               ------                                                      
               material proceedings to which the Borrower or any Subsidiary is a
               party, issued by any court, regulatory agency, or other such
               tribunal, federal or state, and if any Bank should so request, a
               copy of any such order.

        (vii)  Notice of Default or Litigation.  Immediately upon learning of
               -------------------------------                               
               the occurrence of an Event of Default or Default, or the
               institution of or any adverse determination in any litigation,
               arbitration proceeding or governmental proceeding which is
               material to the Borrower or any Subsidiary, or the occurrence of
               any event which could have a material adverse effect upon the
               Borrower or any Subsidiary, written notice thereof describing the
               same and the steps being taken by the Borrower or any Subsidiary
               with respect thereto.

        (viii) Compliance Certificates.  Within thirty (30) days following each
               -----------------------                                         
               month end, a certificate of the Chief Financial Officer or other
               appropriate officer of the Borrower demonstrating compliance with
               the applicable financial covenants stated in Section 5(g) and
               compliance with the covenant limiting new store openings of the
               Borrower stated in Section 6(k).  Such certificate shall relate
               the covenants to the month-end figures and shall otherwise be in
               such form 

                                       23
<PAGE>
 
               and provide such detail as may be reasonably satisfactory to the
               Bank.

        (ix)   Registration Statements and Reports.  Promptly upon filing with
               -----------------------------------                            
               the Securities and Exchange Commission or any state securities
               regulatory authority, copies of all registration statements and
               all periodic and special reports required or permitted to be
               filed under federal or state securities laws and regulations.

        (x)    Other Information.  From time to time such other information
               -----------------                                           
               concerning the Borrower or any Subsidiary as any Bank may
               reasonably request.

     c.   Books, Records and Inspections.  The Borrower shall maintain and shall
          ------------------------------                                        
          cause each Subsidiary to maintain complete and accurate books and
          records, and the Borrower or such Subsidiary shall permit access
          thereto upon reasonable notice and during normal business hours, by
          the Agent or its agent for purposes of inspection, copying and audit.
          The Borrower shall permit and shall cause each Subsidiary to permit
          the Agent or its agent to inspect its properties and operations at all
          reasonable times upon reasonable notice and during normal business
          hours.

     d.   Insurance. The Borrower shall maintain and shall cause each Subsidiary
          ---------                                                             
          to maintain such insurance as may be required by law and such other
          insurance, to such extent and against such hazards and liabilities, as
          is customarily maintained by companies similarly situated.  The
          Borrower shall name, and shall cause each Subsidiary to name, the
          Agent as additional loss payee on any such insurance policy under a
          standard lender's loss payable clause and shall provide a copy of any
          such policy to the Agent.

     e.   Taxes and Liabilities.  The Borrower shall pay and shall cause each
          ---------------------                                              
          Subsidiary to pay when due all taxes, license fees, assessments and
          other liabilities except such as are being contested in good faith and
          by appropriate proceedings and for which appropriate reserves have
          been established.

     f.   Compliance with Legal and Regulatory Requirements.  The Borrower shall
          -------------------------------------------------                     
          maintain and shall cause each Subsidiary to maintain material
          compliance with the applicable provisions of all federal, state and
          local statutes, ordinances and regulations and any court orders or
          orders of regulatory authorities issued thereunder.

     g.   Financial Covenants.  The Borrower shall observe, on a consolidated
          -------------------                                                
          basis, the following financial covenants:

        (i)    Shareholders' Equity.  The Borrower shall maintain at all times a
               --------------------                                             
               minimum Shareholders' Equity at a level not less than the sum of
               (A)the greater of (I) $76,000,000, or (II) the level reported on
               the Borrower's audited financial statements for the fiscal year
               ending December 28, l996, plus (B) fifty percent (50%) of net
               income for the quarter for which Shareholders' Equity is
               determined, exclusive of losses.

        (ii)   Ratio of Total Funded Debt to Shareholders' Equity.  The Borrower
               --------------------------------------------------               
               shall maintain at all times the ratio of Total Funded Debt to
               Shareholders' Equity at 

                                       24
<PAGE>
 
               a level not greater than .65 to 1.0.

        (iii)  Interest Coverage.  For the first fiscal quarter ending in 1997,
               -----------------                                               
               and for each period of two, three and four consecutive fiscal
               quarters ending thereafter until the first fiscal quarter ending
               in 1998, and for each period of four consecutive fiscal quarters
               ending thereafter, the Borrower shall maintain an interest
               coverage ratio of not less than 3.0 to 1.0.  For purposes of this
               covenant, the phrase "interest coverage ratio" means the sum of
               net income plus, without duplication and to the extent deducted
               in determining such net income, (A) interest expense and (B)
               income tax expense; divided by interest expense.

        (iv)   Fixed Charge Coverage.  For each period of four consecutive
               ---------------------                                      
               fiscal quarters beginning with the first fiscal quarter ending in
               2000, and for each period of four consecutive fiscal quarters
               thereafter, the Borrower shall maintain a fixed charge coverage
               ratio of not less than 1.15 to 1.0.  For purposes of this
               covenant, the phrase "fixed charge coverage ratio" means EBITDA
               divided by the sum of (A) dividends paid, (B) required Principal
               Reductions made under the Revolving Loan, (C) income taxes paid,
               (D) interest expense, (E) expenditures for fixed assets, (F)
               rents and (G) and the sum of all capital lease payments.

     h.   Primary Banking Relationship.  The Borrower shall maintain its primary
          ----------------------------                                          
          concentration and, where practical, its deposit accounts with Bank One
          or, at the Borrower's option, with an affiliate of Bank One.

     i.   Employee Benefit Plans.  The Borrower shall maintain and shall cause
          ----------------------                                              
          each Subsidiary to maintain any Plan in material compliance with
          ERISA, the Code, and all rules and regulations of regulatory
          authorities pursuant thereto and shall file and shall cause each
          Subsidiary to file all reports required to be filed pursuant to ERISA,
          the Code, and such rules and regulations.

     j.   Hazardous Substances.  If the Borrower or any Subsidiary should
          --------------------                                           
          commence the use, treatment, transportation, generation, storage or
          disposal of any Hazardous Substance in reportable quantities in its
          operations in addition to those noted in Exhibit "C," the Borrower or
                                                   ------------                
          such Subsidiary shall immediately notify the Agent of the commencement
          of such activity with respect to each such Hazardous Substance.  The
          Borrower shall cause and shall cause each Subsidiary to cause any
          Hazardous Substances which are now or may hereafter be used or
          generated in the operations of the Borrower or such Subsidiary to be
          accounted for and disposed of in compliance with all applicable
          federal, state and local laws and regulations.  The Borrower shall
          notify and shall cause each Subsidiary to notify the Agent immediately
          upon obtaining knowledge that:

        (i)    any premises which, at any time, have been owned, occupied by or
               under lease to the Borrower or any Subsidiary are the subject of
               an environmental investigation by any federal, state or local
               governmental agency having jurisdiction over the regulation of
               any Hazardous Substances, the purpose of 

                                       25
<PAGE>
 
               which investigation is to quantify the levels of Hazardous
               Substances located on such premises, or

        (ii)   the Borrower or any Subsidiary has been named or is threatened to
               be named as a party responsible for the possible contamination of
               any real property or ground water with Hazardous Substances,
               including, but not limited to the contamination of past and
               present waste disposal sites.

          If the Borrower or any Subsidiary is notified of any event described
          at items (i) or (ii) above, upon the request of the Banks the Borrower
          immediately shall engage or cause such Subsidiary to engage a firm or
          firms of engineers or environmental consultants appropriately
          qualified to determine as quickly as practical the extent of
          contamination and the potential financial liability of the Borrower or
          such Subsidiary with respect thereto, and the Banks shall be provided
          with a copy of any report prepared by such firm or by any governmental
          agency as to such matters as soon as any such report becomes available
          to the Borrower or such Subsidiary. The selection of any engineers or
          environmental consultants engaged pursuant to the requirements of this
          Section shall be subject to the approval of the Agent, which approval
          shall not be unreasonably withheld.

     Section 6.  NEGATIVE COVENANTS OF THE BORROWER.  Until all Obligations
terminate or are paid and satisfied in full, and so long as the Aggregate
Commitment, or any Letter of Credit, is outstanding, the Borrower agrees that it
shall strictly observe the following covenants, unless at any time the Required
Banks shall otherwise expressly consent in writing:

     a.   Restricted Payments.  The Borrower shall not purchase or redeem any
          -------------------                                                
          shares of the capital stock of the Borrower or declare or pay any
          dividends thereon except for dividends payable entirely in capital
          stock, share repurchases and redemptions and dividends paid in any
          fiscal year not exceeding in the aggregate fifty percent (50%) of the
          Borrower's net income for such fiscal year.

     b.   Liens.  The Borrower shall not create or permit to exist, nor allow
          -----                                                              
          any Subsidiary to create or permit to exist, any Lien with respect to
          any property or assets now owned or hereafter acquired except
          Permitted Liens, nor enter into any agreement with any Person (other
          than the Banks pursuant to this Agreement) which restricts the right
          of the Borrower or any of its Subsidiaries to create, assume or permit
          to exist any Lien on any of their respective assets.

     c.   Guaranties.  The Borrower shall not be and shall not allow any
          ----------                                                    
          Subsidiary to be a guarantor or surety of, or otherwise be responsible
          in any manner with respect to any undertaking of any other person or
          entity, whether by guaranty agreement or by agreement to purchase any
          obligations, stock, assets, goods or services, or to supply or advance
          any funds, assets, goods or services, or otherwise except for:

        (i)    guaranties in favor of the Banks and the Agent on behalf of the
               Banks;

        (ii)   guaranties by endorsement of instrument for deposits or
               collection in the ordinary course of its business;

                                       26
<PAGE>
 
        (iii)  the specific items listed in the "Schedule of Exceptions"
               attached as Exhibit "C."
                           ------------

     d.   Loans or Advances.  The Borrower shall not make or permit and shall
          -----------------                                                  
          not allow any Subsidiary to make or permit to exist any loans or
          advances to any other person or entity, except for:

        (i)    extensions of credit or credit accommodations to customers or
               vendors made by the Borrower or such Subsidiary in the ordinary
               course of its business as now conducted;

        (ii)   reasonable salary advances to non-executive employees, and other
               advances to agents and employees for anticipated expenses to be
               incurred on behalf of the Borrower or such Subsidiary in the
               course of discharging their assigned duties;

        (iii)  the specific items listed in the "Schedule of Exceptions"
               attached as Exhibit "C."
                           ------------

     e.   Mergers, Consolidations, Sales, Acquisitions or Formation of
          ------------------------------------------------------------
          Subsidiaries.  The Borrower shall not be and shall not allow any
          ------------                                                    
          Subsidiary to be a party to any consolidation or to any merger unless
          in the case of merger the Borrower or such Subsidiary is the surviving
          entity.  The Borrower shall not, and shall not allow any Subsidiary
          to, sell, transfer, convey or lease all or any material part of its
          assets, except in the ordinary course of business, or sell or assign
          with or without recourse any receivables.  The Borrower shall not
          cause, and shall not allow any Subsidiary to cause, to be created or
          otherwise acquire any Subsidiaries unless contemporaneously with such
          acquisition the acquired or newly created Subsidiary executes and
          delivers to the Agent for the benefit of the Banks a Guaranty
          Agreement.

     f.   Margin Stock.  The Borrower shall not use or cause or permit, and
          ------------                                                     
          shall not allow any Subsidiary to use or cause or permit, the proceeds
          of the Loans to be used, either directly or indirectly, for the
          purpose, whether immediate, incidental or ultimate, of purchasing or
          carrying any margin stock within the meaning of Regulation U of the
          Board of Governors of the Federal Reserve System, as amended from time
          to time.

     g.   Other Agreements.  The Borrower shall not enter and shall not allow
          ----------------                                                   
          any Subsidiary to enter into any agreement containing any provision
          which would be violated or breached in material respect by the
          performance of its obligations under this Agreement or under any Loan
          Document.

     h.   Judgments.  The Borrower shall not permit and shall not allow any
          ---------                                                        
          Subsidiary to permit any uninsured judgment or monetary penalty
          rendered against it in any judicial or administrative proceeding to
          remain unsatisfied for a period in excess of forty-five (45) days
          unless such judgment or penalty is being contested in good faith by
          appropriate proceedings and execution upon such judgment has been
          stayed, and unless an appropriate reserve has been established with
          respect thereto.

                                       27
<PAGE>
 
     i.   Principal Office.  The Borrower shall not change and shall not allow
          ----------------                                                    
          any Subsidiary to change the location of its principal office unless
          it gives not less than ten (10) days prior written notice of such
          change to the Agent.

     j.   Hazardous Substances.  The Borrower shall not allow or permit to
          --------------------                                            
          continue the release or threatened release of any Hazardous Substance
          on any premises owned or occupied by or under lease to the Borrower or
          any Subsidiary.

     k.   Transactions With Affiliates.  The Borrower shall not, and shall not
          ----------------------------                                        
          allow any Subsidiary to, enter into or be a party to any transaction
          or arrangement, including, without limitation, the purchase, sale,
          exchange or use of any property or asset, or any interest therein,
          whether real, personal or mixed, or tangible or intangible, or the
          rendering of any service, with any Affiliate except transactions in
          the ordinary course of, and pursuant to the reasonable requirements
          of, the Borrower's or a Subsidiary's business and upon fair and
          reasonable terms no less favorable to the Borrower and each Subsidiary
          than would obtain in a comparable arm's-length transaction with a
          Person who is not an Affiliate and, in the case of any inter-company
          debt, on terms not more favorable than the terms offered by the Bank
          under this Agreement.

     Section 7.  CONDITIONS OF LENDING.  The obligation of the Banks to make
Advances, and for Bank One to issue the Letters of Credit, is subject to
fulfillment of each of the following conditions precedent:

     a.   No Default.  No Event of Default, or Default, shall have occurred and
          ----------                                                           
          be continuing, and the representations and warranties of the Borrower
          contained in Section 3 shall be true and correct as of the date of
          this Agreement and as of the date of each Advance and issuance of each
          Letter of Credit, except that after the date of this Agreement:  (i)
          the representations contained in Section 3(d) will be construed so as
          to refer to the latest financial statements furnished to the Agent by
          the Borrower pursuant to the requirements of this Agreement, (ii) the
          representation contained in Section 3(1) will be construed so as to
          except any Subsidiary which may hereafter be formed or acquired by the
          Borrower with the consent of the Required Banks and except as
          permitted under Section 6(e), and (iii) all other representations will
          be construed to have been amended to conform with any changes of which
          the Banks shall previously have been given notice in writing by the
          Borrower and to which the Required Banks have consented.

     b.   Documents to be Furnished at Closing.  The Agent shall have received
          ------------------------------------                                
          contemporaneously with the execution of this Agreement, the following,
          each duly executed, dated the date of this Agreement, in form and
          substance satisfactory to the Agent and in sufficient numbers for each
          Bank:

        (i)    The Notes.

        (ii)   The Guaranty Agreement of Alfalfa's Canada, Inc.

        (iii)  A certified copy of a Resolution of the Board of Directors of the
               Borrower 

                                       28
<PAGE>
 
               authorizing the execution, delivery and performance,
               respectively, of this Agreement and the other Loan Documents
               provided for in this Agreement to which the Borrower is a party.

        (iv)   A certificate of the Secretary of the Borrower certifying the
               names of the officer or officers authorized to sign this
               Agreement and the other Loan Documents provided for in this
               Agreement to which the Borrower is a party, together with a
               sample of the true signature of each such officer.

        (v)    A copy of the filed-marked Articles of Incorporation of the
               Borrower and a copy of the By-Laws of the Borrower, certified as
               complete and correct by the Secretary of the Borrower.

        (vi)   A certified copy of a Resolution of the Board of Directors of
               each of the Guarantors authorizing the execution, delivery and
               performance of its respective Guaranty Agreement and any other
               Loan Document provided for in this Agreement to which such
               Guarantor is a party.

        (vii)  A certificate of the Secretary of each of the Guarantors
               certifying the names of the officer or officers authorized to
               sign its respective Guaranty Agreement and any other Loan
               Document provided for in this Agreement to which such Guarantor
               is a party together with a sample of the true signature of each
               such officer.

        (viii) A currently dated certificate of good standing of the Borrower
               and each Guarantor issued by the Secretary of State of
               Incorporation of each such corporation.

        (ix)   The opinion of counsel for the Borrower and the Subsidiaries
               addressed to the Banks to the effect that the representations
               stated in Sections 3(a), 3(b), 3(c), 3(e), 3(f) and 3(i) are
               correct.  Such opinion shall be in such form as may be reasonably
               acceptable to the Agent.

        (x)    Certificates evidencing the existence of all insurance required
               under the terms of this Agreement or any other Loan Documents.

        (xi)   Payment to the Agent for the account of the Banks of a closing
               fee in an amount equal to one-half of one percent (1/2%) of the
               respective Bank's Commitment.

        (xii)  Such other documents as the Bank may reasonably require.

     c.   Documents to be Furnished at Time of Each Advance.  The Agent shall
          -------------------------------------------------                  
          have received the following prior to making any Advance, each duly
          executed and currently dated, unless waived at the Agent's discretion
          as provided in Section 2(a)(ii):

        (i)    An Application for Advance.

                                       29
<PAGE>
 
          (ii)   An Officer's Certificate.

          (iii)  Such other documents as the Agent may reasonably require.

     Section 8.  EVENTS OF DEFAULT.  Each of the following shall constitute an
                 -----------------                                            
Event of Default under this Agreement unless waived by the Required Banks:

     a.   Nonpayment.  The Borrower shall fail to pay any installment of
          ----------                                                    
          principal or interest or any other sum payable to the Banks or the
          Agent under this Agreement on or prior to the date when due.

     b.   Nonpayment of Other Indebtedness for Borrowed Money.  The Borrower or
          ---------------------------------------------------                  
          any Guarantor shall fail to pay when due, whether by acceleration or
          otherwise, any other indebtedness of $2,000,000 or more determined on
          an individual basis for borrowed money or shall default in the
          performance or observance of any obligation or condition with respect
          to any such other Indebtedness if the effect of such default is to
          accelerate the maturity of such other Indebtedness or to permit the
          holder or holders thereof, or any trustee or agent for such holders,
          to cause such Indebtedness to become due and payable prior to its
          scheduled maturity, unless the Borrower or such Guarantor is
          contesting such payment or the existence of such default in good faith
          and by appropriate proceedings and that appropriate reserves have been
          established with respect thereto.

     c.   Other Material Obligations.  Subject to the expiration of any
          --------------------------                                   
          applicable grace period, default by the Borrower in the payment when
          due, or in the performance or observance of any obligation of, or
          condition agreed to by the Borrower with respect to any purchase or
          lease of goods, securities or services except only to the extent that
          the existence of any such default is being contested in good faith and
          by appropriate proceedings and that appropriate reserves have been
          established with respect thereto.

     d.   Bankruptcy, Insolvency, etc.  The Borrower or any Guarantor admitting
          ----------------------------                                         
          in writing its inability to pay its debts as they mature or an
          administrative or judicial order of dissolution or determination of
          insolvency being entered against the Borrower or any Guarantor; or the
          Borrower or any Guarantor applying for, consenting to, or acquiescing
          in the appointment of a trustee or receiver for the Borrower or any
          Guarantor or any property thereof, or the Borrower or any Guarantor
          making a general assignment for the benefit of creditors; or, in the
          absence of such application, consent or acquiescence, a trustee or
          receiver being appointed for the Borrower or for a substantial part of
          its property and not being discharged within sixty (60) days; or any
          bankruptcy, reorganization, debt arrangement, or other proceeding
          under any bankruptcy or insolvency law, or any dissolution or
          liquidation proceeding being instituted by or against the Borrower or
          any Guarantor, and, if involuntary, being consented to or acquiesced
          in by the Borrower or such Guarantor or remaining for sixty (60) days
          undismissed.

     e.   Warranties and Representations.  Any warranty or representation made
          ------------------------------                                      
          by the Borrower in this Agreement proving to have been false or
          misleading in any material respect when made, or any schedule,
          certificate, financial statement, report, notice,

                                       30
<PAGE>
 
          or other writing furnished by the Borrower to the Banks or the Agent
          proving to have been false or misleading in any material respect when
          made or delivered.

     f.   Violations of Negative and Financial Covenants.  Failure by the
          ----------------------------------------------                 
          Borrower or any Subsidiary to comply with or perform any covenant
          stated in Section 5.g or Section 6 of this Agreement.

     g.   Guaranty Agreements.  Any Guaranty Agreement shall at any time after
          -------------------                                                 
          the execution and delivery thereof, and for any reason, cease to be in
          full force and effect; or the validity or enforceability thereof shall
          be contested by any Guarantor, or any Guarantor shall default in its
          obligations or deny that it has any further liability or obligation
          under its respective Guaranty Agreement.

     h.   Noncompliance With Other Provisions of this Agreement.  Failure of the
          -----------------------------------------------------                 
          Borrower to comply with or perform any covenant or other provision of
          this Agreement or any other Loan Documents or to perform any other
          Obligation of the Borrower to the Banks (which failure does not
          constitute an Event of Default under any of the preceding provisions
          of this Section 8) and continuance of such failure for thirty (30)
          days after notice thereof to the Borrower from the Agent or the Banks.

     Section 9.  EFFECT OF EVENT OF DEFAULT.

     a.   Acceleration and Termination of the Commitment.  If any Event of
          ----------------------------------------------                  
          Default described in Section 8(d) shall occur, the maturity of the
          Loans shall immediately be accelerated and the Notes and the Loan
          evidenced thereby, and all other Indebtedness and any other payment
          Obligations of the Borrower to the Banks shall become immediately due
          and payable, and the Aggregate Commitment shall immediately terminate,
          all without notice of any kind.  When any other Event of Default has
          occurred and is continuing, at the election of the Required Banks, the
          payment of the Loan shall be accelerated and the Notes and all other
          payment Obligations of the Borrower to the Banks shall be declared due
          and payable, whereupon maturity of the Loan shall be accelerated and
          the Notes and the Loan evidenced thereby, and all other payment
          Obligations of the Borrower to the Banks shall become immediately due
          and payable and the Aggregate Commitment shall immediately terminate,
          all without notice of any kind.  The Agent or such other holder shall
          promptly advise the Borrower of any such declaration, but failure to
          do so shall not impair the effect of such declaration.

     b.   Remedies Not Exclusive.  The remedies of the Banks specified in this
          ----------------------                                              
          Agreement or in any other Loan Document shall not be exclusive, and
          the Banks may avail themselves of any other remedies provided by law
          as well as any equitable remedies available to the Banks including
          without limitation any remedies available under any Reimbursement
          Agreement.

     Section 10.  RELATION OF BANKS.

     a.   Appointment and Authorization.  Each Bank hereby appoints the Agent to
          -----------------------------                                         
          act as its agent in connection with the administration of this
          Agreement and for such purpose irrevocably authorizes the Agent to
          take such action and to exercise such rights,

                                       31
<PAGE>
 
          powers and discretion as are specifically delegated to the Agent in
          this Agreement, together with all rights, powers and discretion as are
          reasonably incidental thereto. The Borrower and each Bank agree that
          all notices, requests, demands and communication by the Banks to the
          Borrower or by the Borrower to the Banks with respect to this
          Agreement and the matters contemplated hereby, shall be made only
          through the Agent as set forth herein. The Agent may perform any of
          its functions and duties under this Agreement by or through agents or
          its directors, officers or employees. In performing its functions and
          duties under this Agreement as Agent, the Agent shall perform its
          duties as designated hereunder, but the Agent shall not be deemed to
          have a fiduciary relationship in respect of, or other responsibility
          to, any Bank or to have assumed any relationship of agency or trust
          with or for the Borrower, the Guarantors, or any Subsidiary of the
          Borrower.

     b.   Pro Rata Sharing and Application of Payments.  All payments of
          --------------------------------------------                  
          principal and interest shall be first applied to payment of all
          outstanding principal and accrued interest under the Revolving Loan.
          All payments of principal and interest on the Revolving Loan and the
          fees payable pursuant to Sections 2(a)(ix) and 2(a)(xi) shall be
          divided among the Banks on the basis of their respective Percentages.
          The fees payable to the Agent pursuant to Section 2(a)(x) shall not be
          divided among the Banks.  All amounts to be disbursed pursuant to
          Section 10(c) shall be advanced Pro Rata by the Banks.

     c.   Sharing of Setoff.  Any Bank which shall receive payment of or on
          -----------------                                                
          account of all or part of its share of the Revolving Loan, through the
          exercise of any right of setoff, counterclaim, banker's lien, secured
          claim under any bankruptcy statute or otherwise in a greater portion
          than the proportion amount of principal, interest and fees due it
          under this Agreement shall purchase immediately prior to such payment
          participations in the portions of the Revolving Loan, as applicable,
          held by the other Banks so that all recoveries of principal, interest
          and fees shall be shared by the Banks in accordance with their
          Percentage interests; except that this provision shall not apply to
          any setoff for payment of standard fees for maintaining deposit
          accounts.  If all or any portion of any such excess payment is
          thereafter recovered from such Bank, such purchase shall be rescinded
          and the purchase price restored to the extent of such recovery, but
          without interest (except to the extent such Bank is required to pay
          interest).  All sums received by a Bank through the exercise of any
          right of setoff, counterclaim, banker's lien, secured claim under any
          bankruptcy statute or otherwise shall be deemed to be first applied to
          such Bank's portion of the Indebtedness under this Agreement until
          payment thereof in full, and any balance remaining thereafter shall be
          deemed to apply to any other Indebtedness of the Borrower to such
          Bank.

     d.   Approvals.  Except as provided in this subsection (d), upon any
          ---------                                                      
          occasion requiring or permitting an approval, consent, election or
          other action on the part of the Banks, action shall be taken by the
          Agent for, on behalf of, and for the benefit of, all Banks upon the
          direction of the Required Banks, and any such action shall be binding
          on all Banks.  However, unless all Banks agree in writing, no
          amendment, modification, consent or waiver shall be effective which:

          (i)    increases the amount of the Revolving Loan or changes the
                 Percentage of the

                                       32
<PAGE>
 
                 Banks,
                       
          (ii)   reduces the amount of interest, principal or fees owing
                 hereunder or under the Notes,
                 
          (iii)  extends the fixed date on which any sum is due hereunder or
                 under the Notes (including but not limited to payments required
                 as a result of a change or reduction in the amount of the
                 Aggregate Commitment) or extends the Revolving Loan Maturity
                 Date,
                 
          (iv)   waives an Event of Default arising from a failure to pay 
                 principal of or interest on an Advance,                  
                                                                          
          (v)    changes the provisions of this Subsection (d),           

          (vi)   waives any material condition specified in Section 7, 
                                                                       
          (vii)  amends the definition of Required Banks,              
                                                                       
          (viii) affects the rights, duties or obligations of the Agent,
                                                                         
          (ix)   amends the provisions of Section 8,                     
                                                                         
          (x)    amends the provisions of Sections 5(g), or              
                                                                         
          (xi)   releases any collateral for the Obligations.            

     e.   Exculpation.  The Agent shall not be liable or answerable to the Banks
          -----------                                                           
          for anything whatsoever in connection with this Agreement or any
          instrument or agreement required hereunder, including responsibility
          with respect to the execution, construction or enforcement of this
          Agreement or any such instrument or agreement, except for its willful
          misconduct or gross negligence, and the Agent shall have no duties or
          obligations other than as provided herein and therein.  The Agent
          shall be entitled to rely on any opinion of counsel (including counsel
          for the Borrower) in relation to this Agreement and any instrument or
          agreement required hereunder, and upon statements and communications
          received from the Borrower, or from any other Person, believed by it
          to be authentic, and shall not be liable for any action taken or
          omitted in good faith on such reliance.

     f.   Indemnification.  Each Bank agrees to indemnify the Agent to the
          ---------------                                                 
          extent not reimbursed by the Borrower, ratably according to its
          Percentage, from and against any and all liabilities, obligations,
          losses, damages, penalties, actions, judgments, suits, costs, expenses
          or disbursements of any kind or nature whatsoever which may be imposed
          on, incurred by or asserted against the Agent in any way relating to
          or arising out of this Agreement or any instrument or agreement
          required hereunder or any action taken or omitted by the Agent in such
          role under this Agreement or any such instrument or agreement;
          provided that no Bank shall be liable for any portion of such
          liabilities, obligations, losses, damages, penalties, actions,
          judgments, suits, costs, expenses or disbursements of any kind or
          nature whatsoever resulting from the 

                                       33
<PAGE>
 
          Agent's willful misconduct or gross negligence.

     g.   The Agent as Bank.  The Agent shall have the same rights and powers
          -----------------                                                  
          hereunder as any other Bank and may exercise the same as though it
          were not the Agent; and the term "Banks" shall include the Agent in
          its individual capacity.  The Agent and its subsidiaries and
          affiliates may accept deposits from, lend money to, engage in any kind
          of banking, trust or other business with, the Borrower or any of its
          Subsidiaries or Affiliates as if it were not the Agent.

     h.   Notice of Transfer.  The Agent and the Borrower may deem and treat a
          ------------------                                                  
          Bank which is a party to this Agreement as the owner of such Bank's
          Note for all purposes hereof unless and until a written notice of the
          assignment or transfer thereof (if any is permitted) executed by such
          Bank shall have been received by the Agent and the Borrower.

     i.   Credit Decision.  Each Bank represents that it has made and agrees
          ---------------                                                   
          that it shall continue to make its own independent investigation of
          the financial condition and affairs of the Borrower and its own
          appraisal of the creditworthiness of the Borrower in connection with
          the making and the continuance of the Advances.  The Agent has no duty
          or responsibility, either initially or on a continuing basis, to
          provide any Bank with any credit or other information (other than
          obtained pursuant to this Agreement) with respect thereto, whether
          coming into its possession before the date hereof or at any time
          thereafter, unless furnished to the Agent by the Borrower for delivery
          to the Banks, or obtained pursuant to this Agreement.  The Agent shall
          promptly provide the Banks with copies of all notices required by the
          Agreement to be provided to the Agent by the Borrower or provided to
          the Borrower by the Agent.

     j.   Number of Documents.  All certificates, financial statements,
          -------------------                                          
          documents, notices, reports, requests and statements furnished to the
          Agent by the Borrower or any other party under this Agreement and the
          other Loan Documents shall be furnished in sufficient counterparts so
          that the Agent may furnish one to each of the Banks.

     k.   Resignation of the Agent.  The Agent may resign at any time by giving
          ------------------------                                             
          written notice to the Banks and the Borrower.  Upon any such
          resignation, the Required Banks with the prior written consent of the
          Borrower, which consent of the Borrower shall not be necessary if an
          Event of Default has occurred and is continuing at such time, which
          shall not be unreasonably withheld, shall have the right to appoint a
          successor from among the Banks.  If no successor shall have accepted
          such appointment within forty-five (45) days after the retiring
          Agent's giving of notice of resignation, the retiring Agent may, on
          behalf of the Banks, appoint a successor thereto with the prior
          written consent of the Borrower, which consent shall not be necessary
          if an Event of Default has occurred and is continuing at such time,
          which shall not be unreasonably withheld, and such successor Agent
          shall be a bank or trust company organized under the laws of the
          United States or any state thereof having a combined capital and
          surplus (or owned by a holding company having a combined capital and
          surplus) of at least $2,000,000,000.00.  Upon the acceptance by such
          successor of its appointment hereunder, such successor shall succeed
          to and become vested with all the rights and obligations of the
          retiring Agent, and the retiring Agent shall be discharged from its

                                       34
<PAGE>
 
          obligations under this Agreement except with respect to any liability
          with respect to a breach of any obligation hereunder prior to such
          resignation.  The provisions of this Article shall inure to the
          benefit of the retiring Agent as to any actions taken or omitted to be
          taken by it while it held such position under this Agreement.

     Section 11.  MISCELLANEOUS.

     a.   Notices.  Any communications between the parties hereto or notices or
          -------                                                              
          requests provided herein to be given may be given by mailing the same,
          first class postage prepaid, by overnight delivery, by courier or
          messenger service, or by telex or electronic transmission, to each
          party at its address set forth on the signature pages hereto (with a
          copy to each address indicated for notices), or to such other address
          as any party may in writing hereafter indicate to the Borrower and the
          Agent, and which the Agent shall forward to the other Banks upon
          receipt thereof by the Agent.  Notices shall be effective on the date
          received by electronic transmission and telex, three (3) Banking Days
          after the date sent by U.S. mail, and on the date of receipt if sent
          by overnight delivery or by courier or messenger service.

     b.   Successors and Assigns.  This Agreement shall bind and inure to the
          ----------------------                                             
          benefit of the parties hereto and their respective permitted
          successors and assigns; provided, however, that Borrower shall not
          assign this Agreement or any of its rights hereunder without the prior
          written consent of each Bank.

     c.   Banks' Obligations Several.  The obligations of each Bank under this
          --------------------------                                          
          Agreement are several.  Neither the Agent nor any Bank shall be liable
          for the failure of any other Bank to perform its obligations under
          this Agreement.  The failure of any Bank to make all or any part of
          the proceeds of any Advance available to the Agent for the benefit of
          Borrower pursuant to this Agreement shall not relieve any other Bank
          from the performance of its obligations under this Agreement.

     d.   Participations and Assignments.  No Bank may participate, sell,
          ------------------------------                                 
          transfer or assign all or any portion of its rights and obligations
          under this Agreement without the prior written consent of the
          Borrower, which consent shall not be unreasonably withheld (provided
          that the consent of the Borrower shall not be required if an Event of
          Default has occurred and is continuing), and without prior notice to
          the Agent, except that any Bank may sell a participation interest in
          its Advances to any subsidiary of the holding companies of the Banks
          so long as the Bank continues to be the sole financial institution
          sending billing or other notices to the Borrower and entitled to
          receipt of notices hereunder from the Borrower or calling upon the
          Borrower to discuss this Agreement, the Commitments or any Advance.
          Bank may provide such a Person purchasing a participation (a
          "Participant") with credit information received by such Bank from the
          Borrower or from Agent or which is otherwise publicly available.  The
          Borrower agrees that any Participant permitted or consented to under
          this Section 11(d) shall at any time during the pendency of an Event
          of Default have the right to set off obligations owed to such
          Participant and not paid when due against any accounts or other assets
          of the Borrower held by, on deposit with or in the possession of such
          Participant.

                                       35
<PAGE>
 
     e.   Delays and Waivers.  No delay or omission by the Agent or the Banks to
          ------------------                                                    
          exercise any right under this Agreement shall impair any such right,
          nor shall it be construed to be a waiver thereof.  No waiver of any
          single breach or default under this Agreement shall be deemed a waiver
          of any other breach or default.  Any waiver, modification, amendment,
          consent or approval relating to this Agreement or the Notes must be in
          writing to be effective and must be signed by or on behalf of the
          Required Banks or all the Banks as the case may be, as provided in
          Section 10(d).

     f.   Costs and Expenses.  The Borrower agrees to pay on demand to the Agent
          ------------------                                                    
          and to each Bank all costs and expenses incurred subsequent to the
          execution and delivery of this Agreement by the Agent and each Bank
          including, without limitation, reasonable attorneys' and consultants'
          fees (i) in connection with the enforcement of this Agreement or any
          instrument or agreement required hereunder or in connection with any
          proposed refinancing or restructuring of the credit provided in this
          Agreement in the nature of a "work-out" and (ii) for all filing fees,
          stamp, registration and other duties and imposts to which this
          Agreement and any instrument or agreement required hereunder may be
          subject.  The Borrower agrees to pay or to reimburse the Agent upon
          demand for its reasonable attorneys' fees and other expenses incurred
          in connection with the preparation, drafting and negotiation of any
          amendments, consents, or waivers hereto.  The Borrower shall indemnify
          the Agent and each Bank against any and all liabilities and penalties
          resulting from any delay in payment, or failure to pay, and such
          duties and imposts upon written notice from the Agent that such
          amounts have been assessed.

     g.   Entire Agreement.  This Agreement and any agreement, document or
          ----------------                                                
          instrument attached hereto or referred to herein integrate all of the
          terms and conditions mentioned herein or incidental hereto, and
          supersede all oral negotiations and prior writings in respect to the
          subject matter hereof.  In the event of any conflict between the
          terms, conditions and provisions of this Agreement and any such
          agreement, document or instrument, the terms, conditions and
          provisions of this Agreement shall prevail.

     h.   Governing Law.  This Agreement and all other Loan Documents executed
          -------------                                                       
          in connection herewith shall be governed by and construed in
          accordance with the laws of the State of Indiana without reference to
          conflicts of laws and principles thereunder.  The Borrower for itself
          and for each Subsidiary consents to jurisdiction of any state or
          federal court located within Marion County, Indiana, and waives
          personal service of any and all process upon the Borrower.  All
          service of process may be made by messenger, by certified mail, return
          receipt requested, or by registered mail directed to the Borrower at
          the address stated on the signature pages hereof.  The Borrower, for
          itself and its Subsidiaries, waives any objection which the Borrower
          or any Subsidiary may have to any proceeding commenced in a federal or
          state court located within Marion County, Indiana, based upon improper
          venue or forum non conveniens.
                   -------------------- 

     i.   Section Headings.  Section headings are for reference only, and shall
          ----------------                                                     
          not affect the interpretation or meanings of any provision of this
          Agreement.

                                       36
<PAGE>
 
     j.   Severability.  The illegality or unenforceability of any provision of
          ------------                                                         
          this Agreement or any instrument or agreement required hereunder shall
          not in any way affect or impair the legality or enforceability of the
          remaining provisions of this Agreement or any instrument or agreement
          required hereunder.

     k.   Indemnity.  The Borrower hereby agrees to indemnify, protect and hold
          ---------                                                            
          harmless the Agent, the Banks and their respective officers directors,
          agents, employees, attorneys and shareholders from and against all
          costs and all actions, claims (whether made or threatened), suits,
          liabilities, damages and losses incurred by or imposed on the Agent,
          the Banks or any such officer, director, agent, employee, attorney or
          shareholder in connection with or as a result of the execution,
          delivery and performance by the Borrower of this Agreement and the use
          of proceeds hereunder, provided, however, that such indemnity shall
          not apply to any action by the Borrower against the Banks or any of
          them; and provided, further, that the foregoing provision shall not be
          deemed to limit the provisions of Section 10(f) hereof.
          Notwithstanding anything to the contrary in this subsection (k), the
          Borrower shall not be obligated to indemnify any such Person for any
          losses, claims, damages, liabilities and expenses incurred by such
          Person which have finally been determined to have resulted from gross
          negligence or willful misconduct on the part of such Person.  Without
          limiting the generality of the foregoing, such indemnity shall extend
          to any and all costs and expenses whatsoever incurred by the Banks,
          their officers, directors, agents, employees, attorneys and
          shareholders (including, without limitation, the reasonable cost of
          counsel, whether staff or otherwise and whether allocated or out-of-
          pocket) in connection with investigating, preparing for or defending
          against or providing evidence, producing documents or taking any
          action with respect to any such action, claim (whether made or
          threatened and whether or not such Bank or other  indemnified person
          is a party to such action or claim), suit, liability, damage or loss,
          whether or not resulting in any liability.  Each Bank may select its
          own legal counsel in connection with any matters indemnified
          hereunder.  This indemnity shall survive the execution, delivery and
          consummation of the transactions contemplated by this Agreement.  The
          Borrower's obligation under this indemnity is absolute and
          unconditional, enforceable against it whether or not any Advances are
          ever made hereunder or any conditions of lending are ever met and
          without regard to any act, omission, breach, knowledge, or event by,
          attributable to, or in any manner involving any of the Banks.  Payment
          by Borrower in respect to a claim made by the Agent or any Bank
          pursuant to this Section shall be made within fifteen (15) days after
          demand therefor.  If and to the extent that the foregoing undertaking
          may be unenforceable for any reason, Borrower hereby agrees to make
          the maximum contribution to the payment and satisfaction of each of
          the foregoing amounts which is permissible under applicable law.

     l.   Waiver of Jury Trial.  Each of the Borrower, Agent, and the Banks
          --------------------                                             
          hereby (i) irrevocably waives, to the maximum extent not prohibited by
          law, any right it may have to a trial by jury in respect of any
          litigation directly or indirectly at any time arising out of, under or
          in connection with the Loan Documents or any transaction contemplated
          thereby or associated therewith, before or after maturity; (ii)
          irrevocably waives, to the maximum extent not prohibited by law, any
          right it may have to claim or recover in any such litigation any
          special, exemplary, punitive or

                                       37
<PAGE>
 
          consequential damages, or damages other than, or in addition to,
          actual damages; (iii) certifies that none of the Agent or the Banks,
          nor any representative, Agent or counsel for the Agent or the Banks
          has represented, expressly or otherwise, or implied, that it would
          not, in the event of litigation, seek to enforce the foregoing
          waivers; and (iv) acknowledges that it has been induced to enter into
          this Agreement, the other Loan Documents and the transactions
          contemplated hereby and thereby by, among other things, the mutual
          waivers and certifications contained in this section.

     m.   Counterparts.  This Agreement may be executed in as many counterparts
          ------------                                                         
          as may be deemed necessary or convenient, and by the different parties
          hereto on separate counterparts, each of which, when so executed,
          shall be deemed an original, but all such counterparts shall
          constitute but one and the same agreement.

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement by
their duly authorized officers as of the date and year first above written.

                                WILD OATS MARKETS, INC.



                                By: ____________________________________

                                    ____________________________________
                                                (Printed Name and Title)

                                Address:    1645 Broadway
                                            Boulder, Colorado 80302
                                Attn:       ___________________________
                                Telephone:  ___________________________
                                Fax:        ___________________________



                                BANK ONE, INDIANAPOLIS, NA, 
                                Individually and as Agent 
          

                                                                             
                                By: /s/ Anthony P. Schlichte                 
                                    ------------------------------------     
                                    Anthony P. Schlichte, Vice President and 
                                    Senior Relationship Manager              

                                PERCENTAGE:   62.5%
                                COMMITMENT:   $25,000,000

                                Address:  111 Monument Circle, Suite 1911
                                          P. O. Box 7700
                                          Indianapolis, Indiana 46277-0119
                                          Attn: Manager, U.S. Corporate

                                       38
<PAGE>
 
                                          Financial Services
                                          Telephone:  (317) 321-3037
                                          Fax:  (317) 321-8830


                                WELLS FARGO BANK

                                                                        
                                By: /s/ Tracey A. Hunson                
                                    ----------------------------------- 
                                     Tracey A. Hunson Vice President    
                                    ----------------------------------- 
                                    (Printed Name and Title)            

                                PERCENTAGE:   37.5%

                                COMMITMENT:   $15,000,000

                                Address:  _____________________________
                                          _____________________________
                                          _____________________________
                                Telephone:_____________________________
                                Fax:      _____________________________



                                Wire Transfer Instructions:

                                Key No.   _____________________________
                                          _____________________________
                                          _____________________________
                                Re:       Wild Oats


                                With a copy to:

                                WELLS FARGO BANK

                                Address:  _____________________________
                                          _____________________________
                                          _____________________________
                                Attn:     _____________________________
                                Telephone:_____________________________
                                Fax:      _____________________________

                                       39