Document:

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                                                                     EXHIBIT 4.1

                                   RESTATED
                         CERTIFICATE OF INCORPORATION
                                      OF
                            GENESEE & WYOMING INC.

     (Originally incorporated as Genesee and Wyoming Industries, Inc. on
September 1, 1977)

          1.   Name. The name of the Corporation is Genesee & Wyoming Inc.
               ----

          2.   Registered Agent. The address of its registered office in the
               ----------------
State of Delaware is 1209 Orange Street, Wilmington, New Castle County, Delaware
19801. The registered agent at such address is The Corporation Trust Company.

          3.   Purposes. The nature of the business or purposes to be conducted
               --------
or promoted is:

          To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.

          4.   Capitalization. The aggregate number of shares which the
               --------------
Corporation shall have authority to issue is Fourteen Million Five Hundred
Thousand (14,500,000), consisting of:

               (i)   Twelve Million (12,000,000) shares of Class A Common Stock,
         par value $.01 per share (the "Class A Common");

               (ii)  One Million Five Hundred Thousand (1,500,000) shares of
         Class B Common Stock, par value $.01 per share (the "Class B Common"
         and together with the Class A Common, the "Common Stock"); and

               (iii) One Million (1,000,000) shares of Preferred Stock, par
         value $.01 per share (the "Preferred Stock").

                     A.      Common Stock.

                     The Class A Common and the Class B Common shall be
identical in all respects and shall entitle the holders thereof to the same
rights, privileges and limitations, except as otherwise provided herein. The
relative rights, privileges and limitations of the Class A Common and the Class
B Common are as follows:

          (a)  Voting Rights. The holders of Class A Common and Class B Common
               -------------
shall have the following rights:
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                                                                               2

          (i)     The holders of Class A Common and Class B Common shall be
entitled to vote as separate classes on all matters as to which a class vote is
now, or hereafter may be, required by law.

          (ii)    On all other matters, the holders of Class A Common and Class
B Common shall vote together as a single class, provided that the holders of
Class A Common shall have one vote per share and the holders of Class B Common
shall have ten votes per share.

          (iii)   There shall be no cumulative voting of any shares of either
the Class A Common or the Class B Common.

  (b)      Conversion.
           ----------

           (i)    No Conversion of Class A Common. The Class A Common shall not
                  -------------------------------
be convertible into any class of the securities of the Corporation.

           (ii)   Voluntary Conversion of Class B Common. Each holder of record
                   -------------------------------------
of a share of Class B Common may at any time or from time to time, without cost
to such holder and at such holder's option, convert any whole number or all of
such holder's shares of Class B Common into fully paid and nonassessable shares
of Class A Common at the rate of one share of Class A Common for each share of
Class B Common surrendered for conversion. Any such conversion may be effected
by any holder of Class B Common by surrendering such holder's certificate or
certificates for the shares of Class B Common to be converted, duly endorsed, at
the office of the corporation or the office of any transfer agent for the Class
A Common, together with a written notice to the Corporation at such office that
such holder elects to convert all or a specific number of such shares of Class B
Common. Thereafter, the Corporation shall cause its transfer agent to issue and
deliver to such holder a certificate or certificates for the number of shares of
Class A Common to which such holder shall be entitled as aforesaid. Such
conversion shall be made as of the close of business on the tenth business day
following the date of such surrender, and the person or persons entitled to
receive the shares of Class A Common issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of Class
A Common on such date.

          (iii)   Automatic Conversion of Class B Common Upon Certain Transfers.
                  -------------------------------------------------------------
Upon any transfer, other than an Excluded Transfer (as hereinafter defined), of
a share or shares of Class B Common by the holder of record thereof, such share
or shares of Class B Common shall automatically convert into and become an equal
number of shares of Class A Common. For purposes of this Article 4(b)(iii), the
term "Excluded Transfers" shall mean (a) any transfer to an individual or entity
that is, at the time of such transfer, a holder of record of any shares of Class
B Common or an "Executive Officer" (as hereinafter defined) of the Corporation;
(b) any transfer by gift to a spouse, child or grandchild of a holder of record
of any shares of Class B Common, or to a trust for the benefit thereof; or (c)
any transfer to a spouse, child or grandchild of a holder of record of any
shares of Class B Common, or to a trust for the benefit thereof, which results,
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                                                                               3

          whether by bequest, operation of the laws of intestate succession or
          otherwise, from the death of such holder or record. For purposes of
          this Article 4(b)(iii), the term "Executive Officer" shall mean an
          officer of the Corporation within the meaning of Rule 16a-1
          promulgated under the Securities Exchange Act of 1934, as amended. The
          transferor of the Class B Common shall surrender the certificate or
          certificates representing the transferred shares at the principal
          office of the Corporation at any time during normal business hours,
          together with (a) a written notice stating that such holder has
          transferred the shares, or a stated number of the shares, represented
          by such certificate or certificates and (b) a written statement
          advising as to whether or not the transfer is an Excluded Transfer. In
          the event that, according to such statement, the transfer is an
          Excluded Transfer, the transferor shall also deliver to the
          Corporation proof acceptable to the Corporation and its counsel of the
          nature of the Excluded Transfer. If the transferor does not claim an
          Excluded Transfer, the transfer or shares and automatic conversion of
          shares of Class B Common into shares of Class A Common under this
          Article 4(b)(iii) shall be deemed to have been effected as of the
          close of business on the date on which the transferor surrenders such
          certificate or certificates representing shares of Class B Common and
          delivers such notice, and at such time the rights of the holder of
          record of the converted shares of Class B Common shall cease and the
          person or persons in whose name or names the certificate or
          certificates for shares of Class A Common are to be issued because of
          the conversion shall be deemed to have become the holder or holders of
          record of the Class A Common represented thereby. If the transferor
          claims an Excluded Transfer, the transfer shall be deemed to have been
          effected as of the close of business on the date on which the
          transferor surrenders such certificate or certificates representing
          shares of Class B Common, but only following the determination by the
          Corporation and its counsel that the proof of Excluded Transfer
          submitted by the transferor is acceptable. In the event the transferor
          claims an Excluded Transfer and the Corporation and its counsel
          determine that the submitted proof is not acceptable, the Corporation
          shall so advise the transferor by written notice accompanied by any
          share certificates and stock powers previously tendered by the
          transferor.

                    (iv) Reserves of Class A Common. The Corporation will at all
                         --------------------------
          times reserve and keep available, solely for the purpose of issue upon
          conversion of the outstanding shares of Class B Common, such number of
          shares of Class A Common as shall be issuable upon the conversion of
          all outstanding shares of Class B Common, provided that the foregoing
          shall not be considered to preclude the Corporation from satisfying
          its obligations in respect of the conversion of the outstanding shares
          of Class B Common by delivery of shares of Class A Common which are
          held in the treasury of the Corporation.

               (c) Dividends. Subject to the rights of the Class A Common set
                   ---------
forth in Article 4(d) hereof, the Board of Directors, acting in its sole
discretion, may declare in accordance with law a dividend payable in cash, in
property or in shares of Class A Common on only the Class A Common or on both
the Class A Common and the Class B Common. No dividends may be declared payable
(i) in shares of Class B Common or (ii) only to holders of Class B Common. If a
dividend is to be paid on the Class B Common, a dividend shall also be paid on
the Class A Common such that the market price of the dividend paid on each share
of the
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                                                                               4

Class A Common exceeds the market price of the dividend paid on each share of
Class B Common by ten percent (rounded up, if necessary, to the nearest one-
hundredth of a cent).

     (d)    Rights Upon Liquidation. Holders of Class A Common and Class B
            -----------------------
Common shall have identical rights in the event of liquidation of the
Corporation, and shall be treated as a single class for purposes thereof.

     (e)    Other Terms. Neither the Class A Common Stock nor the Class B Common
            -----------
Stock may be subdivided, consolidated, reclassified or otherwise changed unless
contemporaneously therewith the other class of shares is subdivided,
consolidated, reclassified or otherwise changed in the same proportion and in
the same manner. In any merger, consolidation, reorganization or other business
combination, the consideration to be received per share by holders of either
Class A Common Stock or Class B Common Stock must be identical to that received
by holders of the other class. Holders of Common Stock are not entitled to
preemptive rights, and neither the Class A Common Stock nor the Class B Common
Stock is subject to redemption.

                           B.   Preferred Stock.
                                ---------------

     The Board of Directors is authorized, subject to any limitations prescribed
by law, to provide for the issuance of shares of Preferred Stock in series, and
by filing a certificate pursuant to the applicable law of the State of Delaware
(such certificate being hereinafter referred to as a "Preferred Stock
Designation"), to establish from time to time the number of shares to be
included in each such series, and to fix the designation, powers, preferences,
and rights of the shares of each such series and any qualifications, limitations
or restrictions thereof. The number of authorized shares of Preferred Stock may
be increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of a majority of the voting power of all of
the Common Stock, without a vote of the holders of the Preferred Stock, or of
any series thereof, unless a vote of any such holders is required pursuant to
the terms of any Preferred Stock Designation.

     5.     Perpetual Existence. The Corporation is to have perpetual existence.
            -------------------

     6.     By-laws. In furtherance and not in limitation of the powers
            -------
conferred by statute, the Board of Directors is expressly authorized to make,
alter or repeal the By-laws of the Corporation.

     7.     Stockholders. Meetings of stockholders may be held within or without
            ------------
the State of Delaware, as the By-laws may provide. The books of the Corporation
may be kept (subject to any provision contained in the statutes) outside the
State of Delaware at such place or places as may be designated from time to time
by the Board of Directors or in the By-laws of the Corporation. Elections of
directors need not be by written ballot unless the By-laws of the Corporation
shall so provide.

     8.     Amendment. The Corporation reserves the right to amend, alter,
            ---------
change or repeal any provision contained in this Certificate of Incorporation,
in the manner now or
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                                                                               5

hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.

     9.   Liability to Directors. A member of the Corporation's Board of
          ----------------------
Directors shall not be personally liable to the Corporation or its stockholders
for monetary damages for a breach of fiduciary duty as a director, except for
liability of the director (a) for any breach of the director's duty of loyalty
to the Corporation or its stockholders, (b) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law, (c)
under Section 174 of the Delaware General Corporation Law, relating to the
payment of unlawful dividends or unlawful stock repurchases or redemptions, or
(d) for any transaction from which the director derived an improper personal
benefit. If the Delaware General Corporation Law is hereafter amended to further
eliminate or limit the liability of a director of a corporation, then a director
of the Corporation, in addition to the circumstances set forth herein, shall
have no liability as a director (or such liability shall be limited) to the
fullest extent permitted by the Delaware General Corporation Law as so amended.
No repeal or modification of the foregoing provisions of this Article 9 nor, to
the fullest extent permitted by law, any modification of law, shall adversely
affect any right or protection of a director of the Corporation existing at the
time of such repeal or modification.

     10.  Indemnification.
          ---------------

     (a)  Right to Indemnification. Each person who was or is made a party or is
          ------------------------
threatened to be made party to or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she is or was a
director or officer of the Corporation or is or was serving at the request of
the Corporation as a director, officer, employee or agent of another
corporation, or of a partnership, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan (hereinafter an
"indemnitee"), whether the basis of such proceeding is alleged action in an
official capacity as a director, officer, employee or agent or in any other
capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than such law permitted the Corporation to provide prior to such
amendment), against all expense, liability and loss (including attorneys' fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid in
settlement) reasonably incurred or suffered by the indemnitee in connection
therewith, and such indemnification shall continue as to an indemnitee who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the indemnitee's heirs, executors and administrators; provided,
however, that, except as provided in section (b) of this Article 10 with respect
to proceedings to enforce rights to indemnification, the Corporation shall
indemnify any such indemnitee in connection with a proceeding (or part thereof)
initiated by such indemnitee only if such proceeding (or part thereof) was
authorized by the Board of Directors of the Corporation. The right to
indemnification conferred by this Article 10 shall be a contract right and shall
include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition (hereinafter
an "advancement of expenses"); provided, however, that, if the Delaware General
Corporation Law
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so requires, an advancement of expenses incurred by an indemnitee in his or her
capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such indemnitee, including without limitation
service to an employee benefit plan) shall be made only upon delivery to the
Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of
such indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal (hereinafter a "final adjudication") that such indemnitee is not entitled
to be indemnified for such expenses under this Article 10 or otherwise.

     (b)  Right of Indemnitee to Bring Suit. If a claim under section (a) of
          ---------------------------------
this Article 10 is not paid in full by the Corporation within sixty days after a
written claim has been received by the Corporation, except in the case of a
claim for an advancement of expenses, in which case the applicable period shall
be twenty days, the indemnitee may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim. If successful in whole or
in part in any such suit, or in a suit brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the indemnitee
shall be entitled to be paid also the expense of prosecuting or defending such
suit. In any suit brought by an indemnitee to enforce a right to indemnification
hereunder (other than a suit brought by an indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that the indemnitee has not met
the applicable standard of conduct set forth in the Delaware General Corporation
Law. In any suit by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the Corporation shall be entitled to
recover such expenses upon a final adjudication that the indemnitee has not met
the applicable standard of conduct set forth in the Delaware General Corporation
Law. Neither the failure of the Corporation (including its Board of Directors,
independent legal counsel, or stockholders) to have made a determination prior
to the commencement of such suit that indemnification of the indemnitee is
proper in the circumstances because the indemnitee has met the applicable
standard of conduct set forth in the Delaware General Corporation Law, nor an
actual determination by the Corporation (including its Board of Directors,
independent legal counsel, or stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense of such a suit. In any suit brought by
the indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to such indemnification or to such advancement of
expenses, under this Article 10 or otherwise, shall be on the Corporation.

     (c)  Non-Exclusive Rights. The rights to indemnification and to the
          --------------------
advancement of expenses conferred by this Article 10 shall not be exclusive of
any other right which any person may have or hereafter acquire under any
statute, the Corporation's Certificate of Incorporation, as amended or
supplemented, By-law, agreement, vote of stockholders or disinterested directors
or otherwise.

     (d)  Insurance. The Corporation may maintain insurance, at its expense, to
          ---------
protect itself and any director, officer, employee or agent of the Corporation,
or another corporation, partnership, joint venture, trust or other enterprise,
against any expense, liability or
<PAGE>

                                                                               7

loss, whether or not the Corporation would have the power to indemnify such
person against such expense, liability or loss under the Delaware General
Corporation Law.

     (e)  Indemnification of Employees and Agents. The Corporation may, to the
          ---------------------------------------
extent authorized from time to time by the Board of Directors, grant rights to
indemnification and to the advancement of expenses to any employee or agent of
the Corporation to the fullest extent of the provisions of this Article 10 with
respect to the indemnification and advancement of expenses of directors and
officers of the Corporation.

     11.  Super-Majority Voting Requirement.
          ---------------------------------

     (a)  Without the affirmative vote of sixty-six and two-thirds percent (66
2/3%) of the voting power of all of the Common Stock of the Corporation entitled
to vote thereon (voting together as one class), the Corporation shall not:

          (i)    consolidate with or merge into or with any other Person (as
   hereinafter defined) unless the Corporation is the survivor of such
   consolidation or merger and no Change of Control (as hereinafter defined) has
   occurred thereby; or

          (ii)   sell, lease, exchange, transfer (by liquidation or otherwise),
   or otherwise dispose of all or substantially all of its properties and assets
   (or the properties and assets of all of its Subsidiaries (as hereinafter
   defined), taken as a whole) to any Person or Persons, whether in a single
   transaction or a series of related transactions; or

          (iii)  amend or otherwise modify or repeal this Article 11.

     (b)  For the purposes of this Article 11, the following terms shall have
the following meanings:

          (i)    "Affiliate" of a Person is any other Person that directly, or
   indirectly through one or more intermediaries, controls or is controlled by,
   or is under common control with, such Person.

          (ii)   "Change of Control" shall be deemed to have occurred if and
   when any Person or Persons shall become the beneficial owner or owners,
   directly or indirectly, of shares of the Class A Common and/or the Class B
   Common which represent 50 percent or more of the votes represented by all
   outstanding shares of Class A Common and Class B Common.

          (iii)  "Control" (including the terms "controlled by" and "under
   common control with") means the possession, direct or indirect, of the power
   to direct or cause the direction of the management and policies of a Person,
   whether through the ownership of voting securities, by contract or otherwise.

          (iv)   "Person" means and includes any individual, partnership,
   corporation, trust, unincorporated organization or other entity, and any
   government or
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                                                                               8

          governmental authority, agency or political subdivision thereof. The
          term "Persons" shall include a Person and all Affiliates of such
          Person. The term "Person" and "Persons" shall also include any person
          or group of persons within the meaning of the Securities Exchange Act
          of 1934, as amended.

                         (v) "Subsidiaries" means, with respect to the
          Corporation, all corporations, partnerships, joint ventures, trusts
          and other entities of which the Corporation, directly or indirectly,
          owns an amount of voting securities, or possesses other ownership
          interests, having the power, direct or indirect, to elect a majority
          of the Board of Directors or other governing body thereof.

                12.  Relevant Considerations. In discharging the duties of their
                     -----------------------
respective positions, the Board of Directors, committees of the Board of
Directors and individual Directors may, in considering the best interests of the
Corporation, consider the effects of any action upon employees, general agents,
and other customers and creditors of the Corporation and its subsidiaries,
communities in which offices or other establishments of the Corporation are
located, the economy of the state and nation, and the long-term as well as the
short-term interests of the Corporation and its stockholders, including the
possibility that these interests may be best served by the continued
independence of the Corporation, and all other pertinent factors.

                13.  Classified Board of Directors. The Board of Directors shall
                     -----------------------------
be and are divided into three classes, designated Class I, Class II and Class
III, as nearly equal in number as possible, and the term of office of Directors
of one class shall expire at each annual meeting of stockholders, and in all
cases as to each Director, until his successor shall be elected and qualified or
until his earlier resignation, removal from office, death or incapacity.
Additional directorships resulting from an increase in number of Directors shall
be apportioned among the classes as equally as possible. At each annual meeting
of stockholders, the number of Directors equal to the number of Directors of the
class whose term expires at the time of such meeting (or if less, the number of
Directors properly nominated and qualified for election) shall be elected to
hold office until the third succeeding annual meeting of stockholders after
their election.

                This Restated Certificate of Incorporation shall be effective on
the date of filing by the Secretary of State of the State of Delaware.

                IN WITNESS WHEREOF, this Restated Certificate of Incorporation
which restates and integrates and further amends the provisions of the Restated
Certificate of Incorporation of this Corporation, and which has been duly
adopted in accordance with Sections 242 and 245 of the Delaware General
Corporation Law, has been executed by its duly authorized officer this 14th day
of November 2000.

                                   /s/  Mortimer B. Fuller, III
                                   -------------------------------------
                                   Mortimer B. Fuller, III
                                   Chairman of the Board, President and Chief
                                   Executive Officer<PAGE>

                                                                    Exhibit 10.1

     THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
     AMENDED.  IT MAY NOT BE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
     REGISTRATION STATEMENT UNDER SUCH ACT OR AN OPINION OF COUNSEL TO THE MAKER
     THAT SUCH REGISTRATION IS NOT REQUIRED.

                          SUBORDINATED PROMISSORY NOTE

                                                            New York, New York
As of December 1, 2000

          Section 1.  General.  FOR VALUE RECEIVED, McNAUGHTON APPAREL GROUP
                      -------
INC., a Delaware corporation (the "Maker"), hereby promises to pay to the order
of LEONARD SCHNEIDER (the "Payee"), at c/o Bruce A. Madnick, Friedman Alpren &
Green, LLP, 1700 Broadway, New York, New York 10019 (except that the Payee may
require that payments shall be made to the Payee at such other address as the
Payee shall from time to time designate in writing to the Maker), the principal
sum of TWENTY THREE MILLION SIX HUNDRED THOUSAND DOLLARS ($23,600,000), plus
interest thereon, in lawful money of the United States of America, which,
subject to the terms and conditions hereof, shall be payable to the Payee on the
payment dates and in the amounts set forth herein.

          Section 2.  Definitions.
                      -----------

          "Agreement of Purchase and Sale" shall mean the Agreement of Purchase
and Sale dated as of April 15, 1998, as amended, by and among JJ Acquisition
Corp. (now known as Jeri-Jo Knitwear, Inc.), Norton McNaughton, Inc. (now known
as McNaughton Apparel Group Inc.), Jeri-Jo Knitwear Inc. (now known as JJK II
Inc.), Jamie Scott, Inc. and the stockholders of Jamie Scott, Inc. (now known as
JJK III Inc.).

          "August Subordinated Promissory Notes" shall mean the Subordinated
Promissory Notes of the Maker dated August 29, 2000 issued to the Payee and the
Other Payees in the original aggregate principal amount of $10,000,000.

          "Bankruptcy Code" shall mean the Federal Bankruptcy Code, 11 U.S.C.
(S) 101 et seq.
        -- ---

          "Business Day" shall mean any day excluding Saturday, Sunday and any
day which shall be in The City of New York a legal holiday or a day on which
banking institutions are authorized by law or other governmental actions to
close.

          "Common Stock" shall mean common stock, $.01 par value, of the Maker.
<PAGE>

          "December Subordinated Promissory Notes" shall mean this Note and the
other Subordinated Promissory Notes of the Maker dated the date hereof issued to
the Other Payees.

          "Financing Agreement" shall mean the Second Amended and Restated
Financing Agreement dated as of November 29, 2000, among the Maker, Norton
McNaughton of Squire, Inc., Miss Erika, Inc., Jeri-Jo Knitwear, Inc., Banc of
America Commercial Corporation, The CIT Group/Commercial Services, Inc., Fleet
Capital Corporation and the other lenders from time to time party thereto,
(together with all other Loan Documents, as defined in such Second Amended and
Restated Financing Agreement), as any of such has been heretofore amended and as
any of such may be further supplemented, amended, modified, restated, renewed,
replaced, refinanced, substituted, extended or refunded, from time to time.

          "Indenture" shall mean the Indenture dated as of June 18, 1998, among
the Maker, Norton McNaughton of Squire, Inc., Norty's, Inc., Miss Erika, Inc.,
Jeri-Jo Knitwear, Inc. and United States Trust Company of New York, as
heretofore supplemented and as may be further supplemented, amended, modified,
restated, renewed, replaced, refinanced, substituted, extended or refunded, from
time to time.

          "Interest Rate" shall mean a rate equal to the interest rate payable
from time to time in respect of non-overadvance, non-term loan revolving credit
borrowings under Section 2.06(a) of the Financing Agreement.  The Interest Rate
shall change as of when the above interest rate changes, and shall be computed
on the same basis as the computation of the above interest rate.

          "Maker" shall have the meaning provided in Section 1.

          "Market Price Factor" shall mean the lower of (i) $13.00 (as such
number shall be adjusted for stock splits, stock dividends and similar events)
and (ii) the Market Value (determined on the basis of a 20-business day average)
of a share of Common Stock on the date of the occurrence of an Event of Default
(as defined in Section 9 hereof).

          "Market Value" shall mean, for any day, the last sales price for the
Common Stock on the principal securities exchange on which the Common Stock is
listed or admitted to trading, or, if not so listed or admitted to trading on
any securities exchange, the last sales price for the Common Stock on the Nasdaq
National Market, in each such case, averaged over a period of 20 consecutive
Business Days prior to the day as of which Market Value is being determined.

          "New Financing" shall mean the debt financing contemplated by the
Financing Agreement, as such may be supplemented, amended, modified, restated,
renewed, replaced, refinanced, substituted, extended, or refunded, from time to
time.

          "New Financing Advance" shall mean the principal portion of the New
Financing which are term loans to the Maker and/or its subsidiaries and/or which
are advances to the Maker and/or its subsidiaries in excess of 85% of the
eligible accounts receivable and 60% of the eligible inventory of the Maker and
its subsidiaries.
<PAGE>

          "Other Payees" shall mean the other payees of subordinated promissory
notes of the Maker dated the date hereof and aggregating (together with this
Note) $59,000,000.

          "Payee" shall have the meaning provided in Section 1.

          "Person" shall mean any individual, partnership, joint venture, firm,
corporation, limited liability company, association, trust or other enterprise
or any government or political subdivision or any agency, department or
instrumentality thereof.

          "Proceeding" shall have the meaning provided in Section 5.2.

          "Pro Rata Excess Proceeds" shall mean (x) the amount of cash proceeds
received by the Maker from the consummation of any underwritten public offering
of a Common Stock effected after the date hereof which are in excess of (i) all
underwriting commissions and discounts and all other costs and expenses of such
offering and (ii) all New Financing Advances, multiplied by (y) 40%.

          "Senior Debt" shall have the meaning provided in Section 5.8.

          "Senior Debt Agent" shall mean the Administrative Agent, as defined
under the Financing Agreement, and following the repayment in full of all
Obligations owing under, and as defined in, the Financing Agreement, any agent
or any trustee, in any case, for the holders of Senior Debt.

          "Senior Debt Documents" shall mean and include each of the documents,
instruments and other agreements, including the Financing Agreement and the
Indenture, evidencing, governing or securing, or otherwise relating to the
incurrence by the Maker and/or its subsidiaries of, the Senior Debt, as in
effect on the date hereof, and as the same may be entered into, supplemented,
amended, modified, restated, renewed, replaced, refinanced, substituted,
extended or refunded from time to time.

          "Senior Notice Office" shall mean the office of the Senior Debt Agent
at The CIT Group/Commercial Services, Inc., 1211 Avenue of the Americas, New
York, NY 10036, Attn: Charles Carbone, Vice President; with copies to Banc of
America Commercial Corporation 1372 Broadway, New York, NY  10018, Attn: Fred
Hoffmann, Vice President and United States Trust Company of New York, 114 West
47 Street, 25th Floor, New York, NY 10036-1532, Attn: Corporate Trust
Administration.

          "Subordinated Debt" shall mean:

     (a)  all principal of and interest on this Note, including post-petition
interest (whether or not such post-petition interest is allowed as a claim under
the Bankruptcy Code);

     (b)  all other amounts (including all costs and expenses) payable under the
Subordinated Debt Document; and
<PAGE>

     (c)  any and all supplements, amendments, modifications, restatements,
renewals, replacements, refinancings, substitutions, extensions or refundings of
any of the amounts referred to in clauses (a) and (b) above.

          "Subordinated Debt Document" shall mean this Note, as supplemented,
amended, modified, restated, renewed, replaced, refinanced, substituted,
extended or refunded from time to time.

          "Subordinated Notice Office" shall mean the office of the Payee at c/o
Bruce A. Madnick, Friedman Alpren & Green, LLP, 1700 Broadway, New York, New
York 10019, or such other office as the Payee may designate to the Maker and to
the Senior Note Office in writing from time to time.

          "Written" or "in writing" shall mean any form of written communication
or a communication by means of telex, facsimile transmission, telegraph or
cable.

          Section 3.  Principal.  Subject to Section 7 hereof, until all
                      ---------
principal outstanding hereunder shall have been paid in full, the Maker shall
make quarterly payments of principal to the Payee on the first Business Day of
each fiscal quarter of the Maker commencing after the date hereof in the
principal amount of $1,000,000, or such lesser amount as may be at the time
outstanding hereunder; provided, that, all principal amounts outstanding
hereunder shall be due and payable in full on November 30, 2003.

          Section 4.  Interest. The Maker shall pay interest on the unpaid
                      --------
principal amount hereof from the date hereof until payment of the principal
amount hereof has been made in full, at the Interest Rate, payable monthly in
arrears commencing on January 2, 2001, and ending with the final payment of the
principal due hereunder.

          Section 5.  Subordination.
                      -------------

          5.1  Subordinated Debt Subordinate to Senior Debt.  The Maker
               --------------------------------------------
covenants and agrees, and, by the acceptance hereof,  the Payee covenants and
agrees, that, to the extent and in the manner hereinafter set forth in this
Section 5, the Subordinated Debt is hereby expressly made subordinate and
subject in right of payment to the prior indefeasible payment in full in cash of
all Senior Debt.  The provisions of this Section 5 shall be reinstated if at any
time any payment of any of the Senior Debt is rescinded or must otherwise be
returned by any holder of Senior Debt or any agent of such holder.  The lenders
and the agents under the Financing Agreement, the trustee under the Indenture
and any other holders of Senior Debt are third-party beneficiaries of the
provisions of this Note and are entitled to rely hereon and enforce the
provisions hereof.

          5.2  Payment Over of Proceeds Upon Dissolution.  In the event of (i)
               -----------------------------------------
any insolvency or bankruptcy case or proceeding, or any receivership,
liquidation, reorganization or other similar case or proceeding in connection
therewith relative to the Maker, any of its subsidiaries, or to any of their
assets, (ii) any liquidation, dissolution or other winding up of the Maker or
any of its subsidiaries, whether voluntary or involuntary and whether or not
involving insolvency or bankruptcy, or (iii) any assignment for the benefit of
creditors or any other
<PAGE>

marshalling of assets and liabilities of the Maker or any of its subsidiaries
(any of the foregoing events in clauses (i), (ii) or (iii), a "Proceeding"),
then and in any such event:

          (a)  The holders of Senior Debt shall be entitled to receive
indefeasible payment in full in cash of all amounts due or to become due on or
in respect of all Senior Debt, before the Payee is entitled to receive any
payment on account of the Subordinated Debt; and

          (b)  Any payment or distribution of assets of the Maker or any of its
subsidiaries of any kind or character whether in cash, property or securities,
by set-off or otherwise, to which the Payee would be entitled but for the
provisions of this Note (other than in any event any payment or distribution in
the form of equity securities (including Common Stock) or subordinated
securities of the Maker or any successor obligor with respect to Senior Debt
provided for by a plan of reorganization or readjustment that, in the case of
any such subordinated securities are, subordinated in right of payment to all
Senior Debt that may at the time be outstanding to the same extent as, or to a
greater extent than, the Subordinated Debt is subordinate to the Senior Debt as
provided in this Note), shall be paid by the liquidating trustee or agent or
other Person making such payment or distribution, whether a trustee in
bankruptcy, a receiver or liquidating trustee or otherwise, directly to the
Senior Debt Agent, to be applied ratably according to the aggregate amounts
remaining unpaid on account of the principal of and interest and premium (if
any) on the Senior Debt, to the extent necessary to make indefeasible payment in
full in cash of all Senior Debt remaining unpaid, after giving effect to any
concurrent payment or distribution to the holders of such Senior Debt.

          (c)  In the event that, notwithstanding the foregoing provisions of
this Section 5.2, the Payee shall have received any such payment or distribution
of assets of the Maker or any of its subsidiaries of any kind or character,
whether in cash, property or securities  (but excluding any payment of the
character described in the parenthetical clause in the foregoing clause (b)),
before all Senior Debt is indefeasibly paid in full in cash, then and in such
event such payment or distribution shall be held in trust for the holders of the
Senior Debt and immediately paid over or delivered to the trustee in bankruptcy,
receiver, liquidating trustee, custodian, assignee, agent or other Person making
payment or distribution of assets of the Maker or any of its subsidiaries for
application to the payment of all Senior Debt remaining unpaid, to the extent
necessary to indefeasibly pay all Senior Debt in full in cash, after giving
effect to any concurrent payment or distribution to or for the holders of Senior
Debt.

          (d)  If the Payee shall have failed to file claims or proofs of claim
with respect to the Subordinated Debt in any Proceeding earlier than 30 days
prior to the deadline for any such filing, the Payee hereby appoints and
empowers the Senior Debt Agent (i) to file such claims or proofs of claim and/or
(ii) if the Payee shall fail to vote any such claim at least five Business Days
prior to the expiration of the time to vote such claim, to vote such claim;
provided that the Senior Debt Agent shall have no obligation to file and/or vote
any such claim.  Absent any such failure to file or vote, the Payee shall have
and continue to have full and absolute discretion over the filing and voting of
such claims in any manner and in substance as the Payee may determine in its
sole discretion.  If the Senior Debt Agent votes any such claim in accordance
with the provisions of this subsection, the Payee shall not be entitled to
modify, revoke or withdraw such vote.  The Payee shall execute and deliver, at
the expense of the holders
<PAGE>

of the Senior Debt, such agreements, instruments and documents as the Senior
Debt Agent may reasonably request to carry out the provisions of this
subsection.

          5.3  No Payment.  (a)  No payment of cash or other property shall be
               ----------
made by the Maker, or accepted, retained or demanded by the Payee, on account of
the Subordinated Debt unless and until the Senior Debt shall have been
indefeasibly paid in full in cash, except that (i) the Maker may pay and the
Payee may accept and retain cash payments of principal pursuant to Sections 3
and 6 hereof and of interest pursuant to Section 4 hereof, provided that no such
principal or interest payments shall be made by the Maker, or accepted, retained
or demanded by the Payee, after the occurrence and during the continuance of an
event of default under any of the Senior Debt Documents or which would result
from the making of any such payment (the Maker hereby agrees that,
notwithstanding such event of default, interest on the Note shall continue to
accrue), and (ii) the Maker may issue shares of Common Stock and the Payee may
accept and retain such shares of Common Stock pursuant to and in accordance with
the terms of Section 9(a)(i) hereof.

          (b)  In the event that, notwithstanding the foregoing, the Payee shall
have received any payment of cash or other property prohibited by the foregoing
provisions of this Section 5.3, then and in such event such payment shall be
held in trust for the holders of the Senior Debt and immediately paid over and
delivered forthwith to the Senior Debt Agent for application to the Senior Debt
remaining unpaid.

          (c)  The provisions of this Section 5.3 shall not apply to any payment
with respect to which Section 5.2 hereof would be applicable.

          5.4  Provisions Solely to Define Relative Rights.  The provisions of
               -------------------------------------------
this Section 5 are and are intended solely for the purpose of defining the
relative rights of the holder of the Subordinated Debt on the one hand and the
holders of Senior Debt on the other hand.  Without in any way limiting the
generality of the foregoing statement, nothing contained in this Note is
intended to or shall impair, as between the Payee and the Maker, the obligations
of the Maker, which are unconditional and absolute, to pay to the Payee all
obligations and liabilities under this Note as and when the same shall become
due and payable in accordance with their respective terms, or is intended to or
shall affect the relative rights of the Payee and any creditors of the Maker
(other than the holders of the Senior Debt in accordance with the subordination
provisions of this Note).

          5.5  No Waiver of Subordination Provisions.  No right of any present
               -------------------------------------
or future holder of any Senior Debt to enforce subordination as herein provided
shall at any time in any way be prejudiced or impaired by any act or failure to
act on the part of the Maker or any of its subsidiaries or by any act or failure
to act by such holder under the Senior Debt Documents or hereunder, or by any
non-compliance by the Maker or any of its subsidiaries with the terms,
provisions and covenants of this Note, regardless of any knowledge thereof any
such holder may have or be otherwise charged with.  Without in any way limiting
the generality of the foregoing sentence, the holders of Senior Debt may, at any
time and from time to time, without the consent of or notice to the Payee,
without incurring responsibility to the Payee and without impairing or releasing
the subordination provided in this Note or the obligations hereunder of the
Payee to the
<PAGE>

holders of Senior Debt, do any one or more of the following: (a) supplement,
amend, modify, restate, replace, refinance, substitute, extend or refund the
Financing Agreement, the Indenture or any other agreement or instrument
evidencing or governing any Senior Debt, or change the manner, place or terms of
payment or extend the time of payment of, or renew or alter, any Senior Debt or
any agreement or instrument evidencing or governing the same or any agreement
under which any Senior Debt is outstanding; (b) foreclose on, sell, exchange,
release or otherwise deal with any property pledged, mortgaged or otherwise
securing any Senior Debt; (c) release any Person liable in any manner for the
collection of any Senior Debt; and (d) exercise or refrain from exercising any
rights against the Maker and any other Person.

          5.6  Reliance on Judicial Order or Certificate of Liquidating Agent.
               --------------------------------------------------------------
Upon any payment or distribution of assets of the Maker or any of its
subsidiaries, referred to in this Section 5, the Payee and the Senior Debt Agent
shall be entitled to rely upon any order or decree entered by any court of
competent jurisdiction in which such insolvency, bankruptcy, receivership,
liquidation, reorganization, dissolution, winding up or similar case or
proceeding is pending, or a certificate of the trustee in bankruptcy, receiver,
liquidating trustee, custodian, assignee for the benefit of creditors, agent or
other Person making such payment or distribution, delivered to the Payee for the
purpose of ascertaining the Persons entitled to participate in such payment or
distribution, the holders of Senior Debt and other indebtedness of the Maker or
any of its subsidiaries the amount thereof or payable thereon, the amount or
amounts paid or distributed thereon and all other facts pertinent thereto or to
this Section 5.

          5.7  Restriction on Rights and Remedies.  Notwithstanding anything
               ----------------------------------
contained herein to the contrary, or in any Senior Debt Document, but without
limiting the Payee's sole and exclusive rights and remedies under Section 9(a)
hereof, the Payee shall not at any time (i) accelerate any portion of the
Subordinated Debt, (ii) initiate or join in any judicial proceeding (including a
Proceeding) or judicial or other action (whether or not in a judicial forum) to
collect any portion of the Subordinated Debt or (iii) otherwise initiate or join
in any judicial proceeding or judicial or other action in respect of the
Subordinated Debt against the Maker or any of its subsidiaries.

          5.8  Definition of Senior Debt.  "Senior Debt" shall mean:
               -------------------------

          (a)  all principal of and interest (including interest at the
applicable post-default interest rate) and premium (if any) on the Obligations
(as defined in the Financing Agreement), including post-petition interest
(whether or not such post-petition interest is allowed as a claim under the
Bankruptcy Code);

          (b)  all principal of and interest (including interest at the
applicable post-default interest rate) and premium (if any) on any loan or other
indebtedness under any New Financing, including post-petition interest (whether
or not such post-petition interest is allowed as a claim under the Bankruptcy
Code);

          (c)  all principal of and interest (including interest at the
applicable post-default interest rate) and premium (if any) on the Securities
(as defined in the Indenture),
<PAGE>

including post-petition interest (whether or not such post-petition interest is
allowed as a claim under the Bankruptcy Code);

          (d)  all other amounts (including all costs, expenses, indemnities,
commitment and other fees) payable under the Financing Agreement, the Factoring
Agreements (as defined in the Financing Agreement), the Indenture or the
agreements and instruments evidencing or governing any New Financing, or
otherwise payable to any of the holders of the Senior Debt under any of the
Senior Debt Documents; and

          (e)  any and all supplements, amendments, modifications, restatements,
renewals, replacements, refinancings, substitutions, extensions or refundings of
any of the amounts referred to in clauses (a), (b), (c) and (d) above.

The Senior Debt shall be considered outstanding whenever any commitment to
extend credit is outstanding under the Financing Agreement or under other
agreement or instrument evidencing or governing Senior Debt.

          5.9  Notices.  By its acceptance of the benefits of this Note, the
               -------
Payee and the holders of the Senior Debt and the Senior Debt Agent agree that
(a) all notices or communications to be given by the Payee under this Agreement
to the holders of Senior Debt or the Senior Debt Agent shall be given at the
Senior Notice Office and (b) all notices or communications to be given by the
holders of the Senior Debt or the Senior Debt Agent under this Agreement to the
Payee shall be given at the Subordinated Notice Office.

          5.10  Amendments.  This Section 5 may not be amended, changed, waived,
                ----------
discharged or terminated unless such amendment, change, waiver, discharge or
termination is in writing signed by the requisite Lenders under the Financing
Agreement and by the trustee under the Indenture, and no such amendment, change,
waiver, discharge or termination of this Section 5 shall require the consent of
the Maker.

          Section 6.  Prepayment.  (a) The Maker may at any time and from time
                      ----------
to time prepay the whole or any part of the unpaid principal amount of this
Note, without penalty or premium, but with interest accrued to the date fixed
for prepayment.  Any prepayment of this Note in part under this subsection (a)
shall be applied first to the amount of accrued and unpaid interest through the
date of such prepayment and second to principal payable hereunder on a pro rata
basis in the order of maturity.  It is understood and agreed by the Maker and,
by the acceptance hereof, the Payee that, notwithstanding Section 6(b) of the
August Subordinated Promissory Notes and notwithstanding the Agreement of
Purchase and Sale, no prepayment shall be made or required to be made on any of
the August Subordinated Promissory Notes with Pro Rata Excess Proceeds unless
and until the December Subordinated Promissory Notes shall have been paid in
full with Pro Rata Excess Proceeds.

          (b)  On the date on which the Maker consummates an underwritten public
of Common Stock for cash, the Maker shall apply any Pro Rata Excess Proceeds to
the prepayment of this Note, with any such prepayment first being applied to the
amount of accrued and unpaid
<PAGE>

interest through the date of prepayment and second to principal payable
hereunder in the reverse order of maturity.

          Section 7.  Payment Delays.  Notwithstanding anything to the contrary
                      --------------
contained herein, until such time as any and all New Financing Advances are
repaid in full, the quarterly payments of principal due pursuant to Section 3
hereof may be postponed, at the option of the Maker (without notice to the
Payee); after which time such quarterly payments shall be due and payable by the
Maker on the first Business Day of each fiscal quarter occurring immediately
following the repayment of such New Financing Advances and otherwise in
accordance with Section 3 hereof.

          Section 8.  Affirmative Covenants.  So long as any principal or
                      ---------------------
interest on this Note shall remain unpaid, Maker shall:

          (a)  Compliance with Laws. Comply, and cause its subsidiaries to
               ---------------------
comply, with all applicable material laws, rules, regulations and orders, such
compliance to include, without limitation, paying before the same become
delinquent all taxes, assessments and governmental charges or levies imposed
upon it or upon its income or profits or upon any of its properties, except to
the extent contested in good faith by proper proceedings and with respect to
which adequate reserves have been set aside for the payment thereof.

          (b)  Preservation of Existence. Maintain and preserve, and cause each
               -------------------------
of its material subsidiaries to maintain and preserve, its existence, rights,
and privileges, and become or remain duly qualified and in good standing in each
jurisdiction in which the character of the properties owned or leased by them or
in which the transaction of their business makes such qualification necessary,
except where the failure to preserve its rights and privileges and to qualify
and be in good standing would not have a material adverse effect on the business
of the Maker and its subsidiaries taken as a whole.

          (c)  Keeping of Records and Books of Account. Keep, and cause its
               ---------------------------------------
subsidiaries to keep, adequate records and books of account, with entries made
in accordance with generally accepted accounting principles in the United States
of America as in effect from time to time.

          (d)  Maintenance of Insurance. Maintain for itself and its
               ------------------------
subsidiaries, with responsible and reputable insurance companies or
associations, insurance with respect to their properties and business, in such
amounts and covering such risks as is carried generally in accordance with sound
business practices by companies in similar businesses similarly situated.

          Section 9.  Events of Default and Remedies.  (a) Upon the occurrence
                      ------------------------------
and during the continuance of an Event of Default (as defined below), the Payee
shall have the right (together with an Elected Remedy (as defined below), as the
Payee's sole and exclusive remedy), upon written notice to the Maker, to declare
(a "Declaration") the entire amount under this Note due and owing and, following
such declaration, the Payee may (together with a Declaration, as the Payee's
sole and exclusive remedy), at its written election given to the Maker within 15
Business Days after the occurrence of such Event of Default, either (an "Elected
Remedy") (i)
<PAGE>

cause the Maker to issue a fraction of a share of Common Stock to the Payee for
each dollar in outstanding principal amount in default equal to one (1) divided
by the Market Price Factor and, in such case, this Note shall be deemed paid in
full or (ii) elect to have this Note remain outstanding and, subject to the
terms and conditions hereof, including without limitation Section 5 hereof, due
and payable, and, in such case, no shares of Common Stock shall be issued by the
Maker to the Payee; provided that the failure by the Payee to deliver such
written election to the Maker in a timely manner shall terminate the right of
the Payee to make such election and the Maker shall have the right to make such
election on behalf of the Payee.

          (b)  For purposes of Section 9(a) above, the occurrence and
continuance of each of the following shall constitute an "Event of Default"
under this Note:  (a) failure by the Maker to pay the principal of or interest
on this Note within five (5) Business Days' after the due date therefor, (b) any
Proceeding shall be instituted against the Maker and either such Proceeding
shall remain undismissed or unstayed for a period of 60 days or any of the
actions sought in such Proceeding shall occur, (c) the Maker shall voluntarily
institute any Proceeding, (d) acceleration of any of the Senior Debt, (e) in a
single or series of related transactions, the sale of all or substantially all
of the assets of the Maker or the sale by the holders thereof (whether by merger
or otherwise) of a majority of the voting capital stock of the Maker (determined
on a fully diluted basis) and (f) the occurrence and continuance of an event of
default under any of the subordinated promissory notes of the Maker dated the
date hereof to the Other Payees.  The Maker hereby agrees to notify the Payee of
the occurrence of an Event of Default.

          Section 10.  Governing Law.  This Note shall be governed by and
                       -------------
construed in accordance with the laws of the State of New York, without regard
to conflict of laws principles.

          Section 11.  Severability and Facsimile.  If any term of provision of
                       --------------------------
this Note shall be held invalid, illegal or unenforceable, the validity of all
other terms and provisions hereof shall in no way be affected thereby.  This
Note may be executed by the Payee by facsimile and by the Maker and the Payee in
counterparts.

                         *       *       *
<PAGE>

          IN WITNESS WHEREOF, this Note has been executed by the Maker hereof by
an officer duly authorized so to do.

                          McNAUGHTON APPAREL GROUP INC.

                          By:  /s/ Amanda J. Bokman
                               -----------------------------
                               Name: Amanda J. Bokman
                               Title: Vice President and Chief Financial
                                      Officer

Acknowledged and agreed to foregoing,
including Section 5 hereof:

/s/ Leonard Schneider
--------------------------
Leonard Schneider

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