Document:

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                                                                   Exhibit 10.46
                              EMPLOYMENT AGREEMENT

     EMPLOYMENT AGREEMENT (this "Agreement"), effective as of April 30, 1999, by
and between El Paso Electric Company, a Texas corporation ("Company"), and Helen
Knopp ("Executive").

                             W I T N E S S E T H:
                             -------------------

     WHEREAS, the Board of Directors of the Company desires to employ Executive
as its Vice President - Customer/Public Affairs; and

     WHEREAS, Executive is willing, on the terms and subject to the conditions
provided in this Agreement, to undertake the management responsibilities
contemplated herein, to furnish services to Company as provided herein, and to
be subject to certain employment restrictions and obligations;

     NOW, THEREFORE, in consideration of the premises and the covenants herein
contained and other good, valuable, and binding consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:

                            Article I.  Employment
                                        ----------

     1.1  Responsibilities and Authority.  Company hereby employs Executive to
          ------------------------------
serve as its Vice President - Customer Relations/Public Affairs for planning or
directing all activities pertaining to Customer Service (i.e., customer
inquiries, meter reading and collections), Public Affairs and Community
Development.  The duties of Executive shall be those duties which can reasonably
be expected to be performed by a person with the title of Vice President -
Customer/Public Affairs.  Executive shall report directly to the Chief Executive
Officer and President of the Company and shall perform such other duties as may
be assigned to her by the Chief Executive Officer and President or the Board of
Directors as are not inconsistent with Executive's position as Vice President -
Customer/Public Affairs.

     1.2  Acceptance of Employment.  Executive accepts employment by Company on
          ------------------------
the terms and conditions herein provided and agrees, subject to the terms of
this Agreement, to devote substantially all of her business time to advance the
business of the Company.  Nothing contained in this Agreement shall be construed
so as to prevent Executive from investing her personal assets in such a manner
and otherwise engaging in business transactions that are not inconsistent with
the interests of the Company and that will not require a substantial portion of
Executive's business time or otherwise interfere with the performance of her
duties hereunder.

     1.3  Employment Term.  Company hereby employs Executive for an employment
          ---------------
term of two years, beginning April 30, 1999 and terminating on April 30, 2001
(the "Employment Term").

     1.4  Termination.  This Agreement may be terminated, subject to the
          -----------
provisions of Article IV below, at the option of either party upon the giving of
at least thirty (30) days written notice to the other party.
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                   Article II.  Compensation and Incentives
                                ---------------------------

     As compensation for her services hereunder, Executive shall be paid the
following:

     2.1  Base Compensation.  Commencing on April 30, 1999, Company shall pay
          -----------------
Executive a base cash salary at the aggregate initial rate of $145,000.00 per
annum.  Thereafter, the base salary amount will be reviewed annually by the
Board of Directors, which may, in its discretion, make appropriate annual merit
increases, provided, however, Executive's base cash salary shall never be less
than $145,000.00 per annum.  The compensation paid to Executive pursuant to this
Section 2.1 is hereinafter referred to as "Base Compensation."    The Base
Compensation shall be paid to Executive in accordance with the Company's
existing payroll policy.

     2.2  Options.  (a) As additional inducement for Executive to enter into
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this Agreement, Company hereby grants to Executive nontransferable Options to
purchase 100,000 shares of Common Stock (the "Options") for an amount per share
equal to the closing price of the Common Stock on the American Stock Exchange on
April 29, 1999.  The Options will be issued under the El Paso Electric Company
1996 Long-Term Incentive Plan and will be evidenced by a separate Stock Option
Agreement (the "Stock Option Agreement") between Executive and the Company which
agreement will provide that the maximum number of Options will be incentive
stock options (the "Qualified Options") and the remainder of the Options will be
non-qualified stock options (the "Non-Qualified Options").

          (b) The Stock Option Agreement will provide that twenty per cent (20%)
of the Qualified Options and twenty per cent (20%) of the Non-Qualified Options
shall vest each year for five (5) successive years beginning on January 2, 2000,
and continuing each and every January 2 thereafter, until all such are fully
vested on January 2, 2004; provided, however, that all such shall vest
immediately in the event of a Triggering Event (as described in Section 5.3
below).  Executive (or her legal representative) may exercise such Options any
time after vesting subject to such reasonable terms and conditions as are
contained in the Stock Option Agreement.  All Options granted and not earlier
exercised shall expire ten years from the date of the grant.

                            Article III.  Benefits
                                          --------

     3.1  Benefits.  In addition to the Base Compensation required to be paid to
          --------
Executive hereunder, Executive shall receive the benefits (the "Benefits")
described on Exhibit 3.1 attached hereto and made a part hereof for all
purposes.

     3.2  Beneficiaries. Executive shall have the absolute right to designate
          -------------
the beneficiary or beneficiaries to receive all payments and employee benefits
described in this Agreement which may be payable or available in the event of
Executive's death.

     3.3  Reimbursement of Expenses.  Executive will be promptly reimbursed by
          -------------------------
Company for all reasonable and necessary expenses incurred by Executive on
behalf of, and in connection with, the business of Company.

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                           Article IV.  Termination
                                        -----------

     4.1  Acceleration of Payments.  In the event of the occurrence of a
          ------------------------
"Triggering Event" (as defined in Section 5.3 below), Company shall pay to
Executive upon the fifth business day after the giving of written demand from
the Executive to Company, a lump sum cash payment equal to the sum of (i) the
greater of (x) the balance of the Base Compensation due to Executive for the
remainder of the Employment Term and (y) the product obtained by multiplying
Executive's then current monthly Base Compensation by six (6) (including in each
case, without limitation, accrued but unused vacation time), plus (ii) earned
but unpaid bonuses, plus (iii) any other payments due to Executive pursuant to
any Benefits.  Executive will forfeit the unvested Options described in Section
2.2 above, and Executive will have not less than 90 days to exercise the vested
Qualified Options and not less than 120 days to exercise the vested Non-
Qualified Options.

     4.2  Continuation of Benefits.  In the event of any termination of this
          ------------------------
Agreement, except voluntary termination by Executive which is not for "Good
Reason" prior to April 30, 2001, for a period of two years from the date of such
termination the Company shall maintain full coverage for Executive and her
surviving spouse, if any, under all group medical and dental plans in which
Executive was entitled to participate immediately prior to the termination,
provided that her continued participation is possible under the general terms
and provisions of such plans.  In the event that Executive's participation in
any such plan or program is barred, Company shall arrange to provide Executive
and such surviving spouse with benefits substantially similar to those which
they are entitled to receive under such plans.  While Executive continues to
participate in any such plan or receive any such benefit, she shall continue to
pay employee premiums at the level of such premiums in force at the time of such
termination.  Executive and Company hereby expressly acknowledge that all
eligibility periods under the Consolidated Omnibus Budget Reconciliation Act of
1985 ("COBRA") shall run from the termination of this Agreement and provision of
benefits by the Company during the two year period following termination shall
not extend the period during which Executive can elect to participate under
COBRA.

     4.3  Termination Upon Death.  In the event of Executive's death, this
          ----------------------
Agreement will terminate upon the first day of the month following Executive's
date of death, and her surviving spouse, if any, shall be entitled to the
benefits described in Section 4.2 above and to all other benefits described in
this Agreement or otherwise available to Executive which may be payable or
available in the event of Executive's death.  Any unvested Options described in
Section 2.2 above shall be forfeited, and Executive's surviving spouse or legal
representative shall have not less than 90 days to exercise the vested Qualified
Options and not less than 120 days to exercise vested Non-Qualified Options.

     4.4  Termination Upon Total Disability.  (a) Company may terminate this
          ---------------------------------
Agreement by reason of Executive's "Total Disability" upon at least 30 days'
written notice to Executive, in which event Company shall pay Executive the
amounts set forth in Section 4.1 above and, subject to the standards and
restrictions governing employee disabilities in general under the Company's
medical plans, Executive shall be entitled to the benefits set forth in Section
4.2 above.  As used herein, "Total Disability" means illness or other physical
or mental disability of Executive which shall continue for a period aggregating
at least six months during any 12-month period, which such illness or disability
shall make it impossible or impracticable for Executive to substantially perform
her duties and responsibilities hereunder with whatever reasonable accommodation
may be required by applicable law.  If a disagreement arises between Executive
and Company as to whether Executive is suffering from "Total Disability," as
defined herein, the

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question of Executive's disability shall be determined by a physician designated
by a majority of the Board of Directors.

          (b) In the event of a termination of this Agreement by Company
pursuant to subparagraph (a) above, Executive will forfeit any right to unvested
Options described in Section 2.2  above, and Executive will be paid those
benefits provided by Company's disability insurance coverage as described on
Exhibit 3.1. Executive shall have not less than 90 days to exercise vested
Qualified Options and not less than 120 days to exercise vested Non-Qualified
Options.

     4.5  Constructive Termination by Company.  As used herein, "constructive
          -----------------------------------
termination" shall mean any one or more of the events constituting "Good Reason"
if not remedied by Company within 15 business days after receipt by Company of
written notice from Executive of such event of constructive termination.
Executive's continued employment with Company shall not constitute consent to,
or a waiver of rights with respect to, any circumstances constituting
constructive termination hereunder.

     4.6  Termination by Company for Cause.  Pursuant to the procedure set forth
          --------------------------------
in the definition of "Cause" in Section 5.1 below, Company shall be entitled to
terminate Executive's employment for Cause, in which event Executive will no
longer be entitled to her Base Compensation, will forfeit the unvested Options
as described in Section 2.2 above, and, if such termination occurs before
October 30, 1999, will forfeit the benefits described in Section 4.2 above.
Notwithstanding the foregoing, if Executive disputes such termination for Cause,
Executive may require the Company to resolve the dispute pursuant to the
procedure set forth in Article VII of this Agreement.  As provided in Section
6.4 below, Executive's Base Compensation, the grant of Options described in
Section 2.2 above, and all Benefits to which Executive would otherwise be
entitled, including but not limited to group medical and dental coverage, shall
continue to be made currently available to Executive pending final resolution of
the dispute.

                            Article V.  Definitions
                                        -----------

     For purposes of this Agreement and in addition to any other defined terms
herein, the following terms shall have the indicated meanings:

     5.1  Cause.  (a) "Cause" shall mean any act of dishonesty, commission of a
          -----
felony, significant activities harmful to the reputation of the Company,
repeated refusal to perform or substantial disregard of duties properly assigned
by the Chief Executive Officer and President or the Board of Directors
(following notice thereof to the Executive), or significant violation of any
statutory or common law duty of loyalty to the Company.

          (b) Notwithstanding the foregoing and subject to the resolution of any
disputes pursuant to Articles IV and VI, the Executive shall in no event be
deemed to have been terminated for Cause unless and until there shall have been
delivered to her a termination notice in the form of a copy of a resolution duly
adopted by the affirmative vote of not less than a majority of the entire
membership of the Board of Directors specifying the reason for such termination
at a meeting of such Board duly called and held.

     5.2  Good Reason.  "Good Reason" shall mean the occurrence of any of the
          -----------
following events without Executive's express written consent:

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          (a) A substantial and adverse change in the Executive's duties,
control, authority, status or position, or the assignment to the Executive of
any duties or responsibilities which are inconsistent with such status or
position, or a reduction in the duties and responsibilities previously exercised
by the Executive, or a loss of title, loss of office, relocation of Executive's
office to a location more than 100 miles from Executive's original office with
Company, loss of significant authority, power or control, or any removal of her
from or any failure to reappoint or reelect her to such positions, except in
connection with the termination of her employment for "Cause" (as defined in
Section 5.1(a)) or "Total Disability" (as defined in Section 4.4), or as a
result of her death;

          (b) A reduction by Company for any reason in Executive's Base
Compensation or in the grants of Options described in section 2.2 above, or a
substantial and adverse change in Executive's Benefits; or

          (c) Any material breach by Company of any provisions of this
Agreement.

     5.3  Triggering Event.  "Triggering Event" shall mean the termination by
          ----------------
Executive of Executive's employment hereunder after the occurrence of Good
Reason; or the actual or constructive termination of this Agreement by the
Company for any other reason other than:

          (a) Executive's voluntary termination (except a voluntary termination
for "Good Reason" as defined in Section 5.2 above); or

          (b) Termination of employment in the event of Executive's death (under
Section 4.3 above); or in the event of Executive's "Total Disability" under
Section 4.4 above; or

          (c) Termination of employment for "Cause" as defined in Section 5.1
above.

                    Article VI.  Arbitration and Mediation
                                 -------------------------

     6.1  Mediation.  Any dispute arising hereunder between Executive and
          ---------
Company (including any dispute over whether Company has properly terminated
Executive for Cause) which cannot be resolved by them to their mutual
satisfaction within a period of fourteen days, unless mutually extended, shall
first be submitted to mediation in El Paso, Texas, to a mediator selected
pursuant to the rules of the American Arbitration Association ("AAA").  All
costs of mediation incurred by Executive will be paid by the Company.

     6.2  Arbitration.  If such mediation shall not result in an agreed
          -----------
settlement between the parties, the dispute will be promptly submitted to
binding arbitration (conducted in El Paso, Texas, by a panel of three
arbitrators) in accordance with the rules of the AAA then in effect.  The
results of such arbitration shall be binding and conclusive upon the parties
hereto, and judgment on the award may be entered at the instance of either party
in any court of competent jurisdiction.  The dispute resolution procedure set
forth in this Section 6.2 may be initiated by either party upon five business
days prior written notice to the other and after failure to resolve the dispute
after the expiration of the 14 day time period referred to in Section 6.1.

     6.3  Proceedings.  Unless otherwise expressly agreed in writing by the
          -----------
parties to the arbitration proceedings:

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          (a) The arbitration proceedings shall be conducted in accordance with
the Commercial Arbitration Rules of the AAA, as amended from time to time;

          (b) Any procedural issues not determined under the arbitral rules
selected pursuant to item (a) above shall be determined by the law of the place
of arbitration, other than those laws which would refer the matter to another
jurisdiction;

          (c) All costs of the arbitration proceedings incurred by Executive
(including the fees of attorneys and expert witnesses and all other costs) shall
be borne by the Company regardless of the outcome of the proceeding; and

          (d) The decision of the arbitrators shall be reduced to writing; final
and binding without the right of appeal; the sole and exclusive remedy regarding
any claims, counterclaims, issues or accounting presented to the arbitrators;
made and promptly paid in United States dollars free of any deduction or offset;
and any costs or fees incident to enforcing the award shall, to the maximum
extent permitted by law, be charged against the party resisting such
enforcement.

     6.4  Continuation of Payments/Benefits.  Until final resolution of any
          ---------------------------------
dispute between Company and Executive, the Company shall continue to pay to
Executive the Base Compensation under Section 2.1, and the Options shall
continue to vest in Executive pursuant to Section 2.2 above.

     6.5  Acknowledgement of Parties.  Each party acknowledges that she or it
          --------------------------
has voluntarily and knowingly entered into an agreement to arbitration under
this Section by executing this Agreement.

                          Article VII.  Miscellaneous
                                        -------------

     7.1  Notices.  Any notice, demand or request to be given hereunder to
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either party hereto shall be deemed given and effective only if in writing and
either (1) delivered personally to Executive or (in case of a notice to Company)
to the Secretary of the Company, or (2) sent by certified or registered mail,
postage prepaid, to the addresses set forth on the signature page hereof or to
such other address as either party may hereafter specify to the other by notice
similarly served.

     7.2  Governing Law.  This Agreement shall be construed and enforced in
          -------------
accordance with the laws of the State of Texas.

     7.3  Modification.  No modification or waiver of any provision hereof shall
          ------------
be made unless it be in writing and signed by both of the parties hereto.

     7.4  Scope of Agreement.  This Agreement constitutes the whole of the
          ------------------
agreement between the parties on the subject matter, superseding all prior oral
and written conversations, negotiations, understandings, and agreements in
effect as of the date of this Agreement.

     7.5  Indemnification. The Company shall provide Executive with the same
          ---------------
indemnification and insurance protection provided by Company from time to time
to all of its officers and directors, whether pursuant to that Indemnity
Agreement attached hereto as Exhibit 7.5 or otherwise.

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<PAGE>

     7.6  Tax Payments, Withholdings and Reporting.  Executive recognizes that
          ----------------------------------------
the payments and benefits provided under this Agreement may result in taxable
income to her which Company and its affiliates will report to the appropriate
taxing authorities.  Company shall have the right to deduct from any payment
made under this Agreement to Executive, any federal, state, local or foreign
income, employment or other taxes it determines are required by law to be
withheld with respect to such payments or benefits provided thereunder or to
require payment from Executive which she agrees to pay upon demand, for the
purpose of satisfying any such withholding requirement.

     7.7  Separate Counsel.  Executive acknowledges that she has been advised by
          ----------------
Company that before she signs this Agreement she should consult with an
attorney.

     7.8  Successors and Assigns.  The terms and provisions of this Agreement
          ----------------------
shall inure to the benefit of and be binding upon the successors and assigns of
the Company.

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
April 30, 1999.

                                        EL PASO ELECTRIC COMPANY
                                        123 W. Mills St.
                                        El Paso, Texas  79901

                                        By:   /s/ James Haines
                                            ------------------------
                                            Authorized Officer

                                                                COMPANY

                                        Helen Knopp
                                        5756 Box Elder
                                        El Paso, Texas  79932

                                        /s/ Helen Knopp
                                        ----------------------------

                                                                EXECUTIVE

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<PAGE>

                                  EXHIBIT 3.1

                             SCHEDULE OF BENEFITS

                                      FOR

 .  Participation in the El Paso Electric Company Retirement Income Plan, as
   amended from time to time and other qualified plans covering executive
   officers of the Company from time to time.

 .  All other insurance coverages, including without limitations, any disability,
   life and accident coverage, extended to non-bargaining employees from time to
   time.

 .  Annual physical coverage as previously structured for senior management of
   the Company.

 .  Waiver of waiting periods for health insurance coverage for Executive and
   Executive's family.

 .  Annual paid vacation of four (4) weeks per year or such greater vacation
   benefits as may be provided generally to executive officers of the company.

 .  Personal use of cellular phone and related service.

 .  Car allowance of $250 per month.

 .  All other benefits to which executive officers of the company are entitled
   from time to time.

EL PASO ELECTRIC COMPANY

By:  /s/ James Haines                            /s/ Helen Knopp
    -------------------------               -------------------------
    Authorized Officer
                      COMPANY                               EXECUTIVE<PAGE>

                                                                    EXHIBIT 10.1

                                 FIFTH AMENDMENT

                                       TO

                    AMENDED AND RESTATED FINANCING AGREEMENT

                  Fifth Amendment, dated as of March 21, 2000 to the Amended and
Restated Financing Agreement, dated as of June 18, 1998, as amended through the
date hereof (the "Financing Agreement"), by and among McNaughton Apparel Group
Inc., a Delaware corporation, formerly known as Norton McNaughton, Inc. (the
"Company"), Norton McNaughton of Squire, Inc., a New York corporation
("Squire"), Miss Erika, Inc., a Delaware corporation ("Miss Erika"), Jeri-Jo
Knitwear, Inc., a Delaware corporation formerly known as JJ Acquisition Corp.
("Jeri-Jo" and together with Squire and Miss Erika, each a "Borrower" and
collectively, the "Borrowers"), the lenders party thereto (each a "Lender" and
collectively the "Lenders"), Banc of America Commercial Corporation, as
successor by merger to NationsBanc Commercial Corporation, as collateral agent
for the Lenders (in such capacity, the "Collateral Agent"), The CIT
Group/Commercial Services, Inc., as administrative agent for the Lenders (in
such capacity, the "Administrative Agent") and Fleet Bank NA, as documentation
agent for the Lenders (in such capacity, the "Documentation Agent" and together
with the Collateral Agent and the Administrative Agent, each an "Agent" and
collectively, the "Agents").

                  The Company, the Borrowers, the Lenders and the Agents desire
to amend certain terms and conditions in the Financing Agreement as hereafter
set forth. Accordingly, the Company, the Borrowers, the Agents and the Lenders
hereby agree as follows:

                  1. Definitions. All capitalized terms used herein and not
otherwise defined herein are used herein as defined in the Financing Agreement.

                  2. New Definition. The following definition of the new term
"Jeri-Jo Earn Out L/C" is hereby added to Section 1.01 of the Financing
Agreement to read as follows:

                  "'Jeri-Jo Earn Out L/C' means the Letter of Credit in the
            stated amount of $30,000,000 issued by the L/C Issuer in connection
            with the Jeri-Jo Earn Out Payment."

                  3. L/C Subfacility. The definition of the term "L/C
Subfacility" in Section 1.01 of the Financing Agreement is hereby amended in its
entirety to read as follows:

                  "'L/C Subfacility' means that portion of the Total Commitment
            equal to (i) prior to the time that the Jeri-Jo Earn Out L/C is no
            longer outstanding, whether as a result of a drawing and/or a
            cancellation of such Letter of Credit, $160,000,000 and (ii) on and
            after the time that the Jeri-Jo Earn Out L/C is no longer
            outstanding, whether as a result of a drawing and/or a cancellation
            such
<PAGE>
            Letter of Credit, $130,000,000, or, in each case, such other amount
            as shall be agreed to in writing by the Agents, the Lenders and the
            Borrowers."

                  4. Overadvance Amount. The definition of the term "Overadvance
Amount" in Section 1.01 of the Financing Agreement is hereby amended in its
entirety to read as follows:

                  "'Overadvance Amount' means (i) for the Borrowers on a
            combined basis, for each Fiscal Month, the amount (A) at anytime
            during such Fiscal Month (other than the last day of such Fiscal
            Month) and (B) on the last day of such Fiscal Month, in each case as
            set forth on Schedule 1.01E attached hereto, corresponding to each
            such Fiscal Month, which amounts shall be allocated among the
            Borrowers by the Administrative Agent pursuant to the terms of
            Section 2.01(b) hereof and (ii) for each Borrower on an individual
            basis, the portion of the relevant amount set forth in clause (i)
            above allocated by the Administrative Agent to such Borrower
            pursuant to Section 2.01(b) hereof as such amounts may be reduced as
            provided in Section 2.07(g) hereof."

                  5. Pricing Grid. The definition of the term "Pricing Grid" in
Section 1.01 of the Financing Agreement is hereby amended in its entirety to
read as follows:

                  "'Pricing Grid' means the pricing grid attached hereto as
            Exhibit 1.01D-1".

                  6. Revolving Credit Loans. Section 2.01(b) of the Financing
Agreement is hereby amended by deleting clause (i)(C) thereof and substituting
in lieu thereof the following:

                  "(c) for each Fiscal Month, the maximum amount of Revolving
            Credit Loans corresponding to each such Fiscal Month as set forth on
            Schedule 1.01E attached hereto."

                  7. Settlement Period. The first sentence of Section 2.05(b)(i)
of the Financing Agreement is hereby amended in its entirety to read as follows:

                  "With respect to each Eurodollar Loan, on the first and the
            last day of each Interest Period and, with respect to all periods
            for which the Administrative Agent, on behalf of the Lenders, has
            funded Loans pursuant to subsection 2.05(a), on the first Business
            Day after the last day of each week, or such shorter period as the
            Administrative Agent may from time to time select (any such period
            being herein called a "Settlement Period"), the Administrative Agent
            shall notify each Lender of the average daily unpaid principal
            amount of the Loans outstanding during such Settlement Period."

                  8. Prepayment of Loans. The first sentence of Section 2.07(c)
of the Financing Agreement is hereby amended in its entirety to read as follows:

                           "If at any time (i) the Borrowing Base of the
                  Borrowers calculated on a combined basis is less than the sum
                  of the outstanding principal on all Loans

                                      -2-
<PAGE>

                  outstanding plus the outstanding amount of all Letter of
                  Credit Obligations, (ii) the Borrowing Base of Squire on an
                  individual basis is less than the sum of the outstanding
                  principal on all A Revolving Credit Loans plus the outstanding
                  amount of all A Letter of Credit Obligations, (iii) the
                  Borrowing Base of Miss Erika on an individual basis is less
                  than the sum of the outstanding principal on all B Revolving
                  Credit Loans plus the outstanding amount of all B Letter of
                  Credit Obligations, or (iv) the Borrowing Base of Jeri-Jo on
                  an individual basis is less than the sum of the outstanding
                  principal on all C Revolving Credit Loans plus the outstanding
                  amount of all C Letter of Credit Obligations, Squire, Miss
                  Erika or Jeri-Jo, as appropriate, will (A) immediately give
                  notice of such occurrence to the Administrative Agent and (B)
                  prepay the appropriate Loans in an amount which will reduce
                  the sum of the outstanding principal on all such Loans, the A
                  Revolving Credit Loans, the B Revolving Credit Loans, or the C
                  Revolving Credit Loans, as the case may be, to an amount less
                  than or equal to the then current Borrowing Base of the
                  Borrowers on a combined basis or the Borrowing Base of Squire,
                  Miss Erika or Jeri-Jo, on an individual basis, as the case may
                  be, less the outstanding amount of all Letter of Credit
                  Obligations, the outstanding amount of all A Letter of Credit
                  Obligations, the outstanding amount of all B Letter of Credit
                  Obligations, or the outstanding amount of all C Letter of
                  Credit Obligations, as the case may be."

                  9. Letters of Credit. The third sentence of Section 3.01(b) of
the Financing Agreement is hereby amended in its entirety to read as follows:

                        "Not more than $45 million (or $15 million on and after
                  the time that the Jeri-Jo Earn Out L/C is no longer
                  outstanding, whether as a result of a drawing and/or a
                  cancellation of such Letter of Credit) of such Letter of
                  Credit Obligations shall be Letter of Credit Obligations with
                  respect to standby Letters of Credit and not more than $130
                  million of such Letter of Credit Obligations shall be Letter
                  of Credit Obligations with respect to documentary Letters of
                  Credit (including $45 million of such Letters of Credit
                  available to Jeri-Jo under its Borrowing Base, subject to all
                  of the terms of this Agreement)."

                  10. Norty's Inc. Section 7.02(d)(i) of the Financing Agreement
is hereby amended in its entirety to read as follows:

                           "(i) Merge or consolidate with any Person, or permit
                  any of their Subsidiaries to merge or consolidate with, any
                  Person; provided, however, that (A) Norty's Inc. may merge
                  into Squire as long as Squire is the surviving entity in such
                  merger and (B) any Loan Party (other than the Borrowers)
                  including any Subsidiary of a Loan Party formed or acquired
                  after the Effective Date, may be merged into a Guarantor
                  (other than the Borrowers) or another such Subsidiary, or may
                  consolidate with another such Subsidiary, so long as (x) the
                  Company gives the Administrative Agent at least 60 days' prior
                  written notice of such merger or

                                      -3-
<PAGE>

                  consolidation and (y) no Default or Event of Default shall
                  have occurred and be continuing either before or after giving
                  effect to such transactions."

                  11. Capital Expenditures. Section 7.02(h) of the Financing
Agreement is hereby amended in its entirety to read as follows:

                        "(h) Capital Expenditures. Make or be committed to make,
                  or permit any of its Subsidiaries to make or be committed to
                  make, any expenditure (by purchase or Capitalized Lease) for
                  fixed or capital assets other than expenditures (including
                  obligations under Capitalized Leases) which would not cause
                  the aggregate amount of all such expenditures to exceed
                  $8,000,000 for the Fiscal Year ending November 4, 2000, and
                  $5,000,000 for each Fiscal Year thereafter."

                  12. Share Repurchase. Section 7.02(i) of the Financing
Agreement is hereby amended to delete the amount "$1,000,000" in clause (iii)
thereof and substitute in lieu thereof "$5,000,000."

                  13. Financial Covenants. Section 7.02(p) of the Financing
Agreement is hereby amended in its entirety to read as follows:

                        "(i) Net Worth. Permit Consolidated Net Worth of the
                  Company and its Consolidated Subsidiaries at the end of each
                  Fiscal Quarter to be less than the amount set forth below
                  opposite each such Fiscal Quarter end:

                        Fiscal Quarter End   Minimum Net Worth
                        ------------------   -----------------

                         February 5, 2000       $ 47,000,000

                         May 6, 2000            $ 55,000,000

                         August 5, 2000         $ 57,000,000

                         November 4, 2000       $130,000,000

                  provided that, upon receipt of the financial projections
                  required to be delivered to the Lenders pursuant to Section
                  7.01(a)(vi) hereof for each Fiscal Year, the Company and the
                  Agents shall negotiate in good faith to determine the
                  Consolidated Net Worth for the Company and its Consolidated
                  Subsidiaries as of the end of each Fiscal Quarter covered by
                  such financial projections and, in the event that the Company
                  and the Required Lenders are unable to agree upon the amounts
                  of such Consolidated Net Worth on or before the date that is
                  30 days after the date that the Lenders have received such
                  financial projections, the Consolidated Net Worth at the end
                  of each Fiscal Quarter of the Fiscal Year covered by such
                  financial projections shall not be less than the amount set
                  forth for the last Fiscal Quarter end set forth above.

                                    (ii) Leverage Ratio. Permit the ratio of
                  Consolidated Total Liabilities to Consolidated Net Worth of
                  the Company and its Consolidated

                                      -4-
<PAGE>

                  Subsidiaries as of the end of each Fiscal Quarter to be
                  greater than the amount set forth below opposite each such
                  Fiscal Quarter end:

                                                        Maximum
                        Fiscal Quarter End           Leverage Ratio
                        ------------------           --------------

                        February 5, 2000                3.53 to 1

                        May 6, 2000                     3.45 to 1

                        August 5, 2000                  5.48 to 1

                        November 4, 2000                1.91 to 1

                  provided that, upon receipt of the financial projections
                  required to be delivered to the Lenders pursuant to Section
                  7.01(a)(vi) hereof for each Fiscal Year, the Company and the
                  Agents shall negotiate in good faith to determine the ratio of
                  Consolidated Total Liabilities to Consolidated Net Worth of
                  the Company and its Consolidated Subsidiaries as of the end of
                  each Fiscal Quarter covered by such financial projections and,
                  in the event that the Company and the Required Lenders are
                  unable to agree upon such ratio on or before the date that is
                  30 days after the date that the Lenders have received such
                  projections, such ratio as of the end of each Fiscal Quarter
                  of the Fiscal Year covered by such financial projections shall
                  not be greater than the ratio set forth for the last Fiscal
                  Quarter end set forth above.

                                    (iii) Working Capital. Permit Working
                  Capital at the end of each Fiscal Quarter to be less than the
                  amount set forth below opposite each such Fiscal Quarter:

                                                          Minimum
                        Fiscal Quarter End            Working Capital
                        ------------------            ---------------

                        February 5, 2000                 $89,000,000

                        May 6, 2000                      $93,000,000

                        August 5, 2000                   $29,000,000

                        November 4, 2000                 $37,000,000

                  provided that, upon receipt of the financial projections
                  required to be delivered to the Lenders pursuant to Section
                  7.01(a)(vi) hereof for each Fiscal Year, the Company and the
                  Agents shall negotiate in good faith to determine the minimum
                  Working Capital as of the end of each Fiscal Quarter covered
                  by such financial projections and, in the event that the
                  Company and the Required Lenders are unable to agree upon the
                  amounts of such Working Capital on or before the date that is
                  30 days after the date that the Lenders have received such
                  projections, the Working Capital at the end of each Fiscal
                  Quarter of the Fiscal Year covered by

                                      -5-
<PAGE>

                  such financial projections shall not be less than the amount
                  set forth for the last Fiscal Quarter end set forth above.

                                    (iv) Fixed Charge Coverage Ratio. Permit the
                  ratio of Consolidated EBITDA of the Company and its
                  Consolidated Subsidiaries to Consolidated Fixed Charges of the
                  Company and its Consolidated Subsidiaries for each Fiscal
                  Quarter to be less than the amount set forth below opposite
                  each such Fiscal Quarter:

                                                       Minimum Fixed
                        Fiscal Quarter End         Charge Coverage Ratio
                        ------------------         ---------------------

                        February 5, 2000                 .87 to 1

                        May 6, 2000                     1.30 to 1

                        August 5, 2000                   .90 to 1

                        November 4, 2000                1.91 to 1

                  provided that, upon receipt of the financial projections
                  required to be delivered to the Lenders pursuant to Section
                  7.01(a)(vi) hereof for each Fiscal Year, the Company and the
                  Agents shall negotiate in good faith to determine the ratio of
                  Consolidated EBITDA of the Company and its Consolidated
                  Subsidiaries to Consolidated Fixed Charges of the Company and
                  its Consolidated Subsidiaries as of the end of each Fiscal
                  Quarter covered by such financial projections and, in the
                  event that the Company and the Required Lenders are unable to
                  agree upon the amounts of such ratio on or before the date
                  that is 30 days after the date that the Lenders have received
                  such projections, such ratio for each Fiscal Quarter of the
                  Fiscal Year covered by such financial projections shall not be
                  less than the ratio set forth for the last Fiscal Quarter end
                  set forth above.

                                    (v) Cash Flow Ratio. Permit the ratio of
                  Consolidated EBIT of the Company and its Consolidated
                  Subsidiaries to Consolidated Net Interest Expense of the
                  Company and its Consolidated Subsidiaries at the end of each
                  Fiscal Quarter be less than the amount set forth below
                  opposite each such Fiscal Quarter:

                                                              Minimum
                        Fiscal Quarter End              Cash Flow Ratio
                        ------------------              ---------------

                        February 5, 2000                     1.56 to 1

                        May 6, 2000                          3.76 to 1

                        August 5, 2000                       1.93 to 1

                        November 4, 2000                     2.73 to 1

                                      -6-
<PAGE>

                  provided that, upon receipt of the financial projections
                  required to be delivered to the Lenders pursuant to Section
                  7.01(a)(vi) hereof for each Fiscal Year, the Company and the
                  Agents shall negotiate in good faith to determine the ratio of
                  Consolidated EBIT of the Company and its Consolidated
                  Subsidiaries to Consolidated Net Interest Expense of the
                  Company and its Consolidated Subsidiaries as of the end of
                  each Fiscal Quarter covered by such financial projections and,
                  in the event that the Company and the Required Lenders are
                  unable to agree upon such ratio on or before the date that is
                  30 days after the date that the Lenders have received such
                  projections, such ratio at the end of each Fiscal Quarter of
                  the Fiscal Year covered by such financial projections shall
                  not be less than the ratio set forth for the last Fiscal
                  Quarter set forth above."

                  14. Schedules. Schedule 1.01D to the Financing Agreement is
hereby amended in its entirety to read as set forth as Annex I to this
Amendment. New Schedule 1.01E is hereby added to the Financing Agreement to read
as set forth as Annex II to this Amendment.

                  15. Conditions to Effectiveness. This Amendment shall be
effective as of the date hereof provided that the following conditions have been
satisfied in full (the "Amendment Effective Date").

                        (a) The representations and warranties contained in this
Amendment and in Article VI of the Financing Agreement shall be true and correct
in all material respects on and as of the Amendment Effective Date and the date
hereof as though made on and as of each of such dates (except where such
representations and warranties relate to an earlier date in which case such
representations and warranties shall be true and correct as of such earlier
date); no Event of Default or Default shall have occurred and be continuing on
the Amendment Effective Date or on the date hereof, or result from this
Amendment becoming effective in accordance with its terms.

                        (b) The Agents shall have received counterparts of this
Amendment which bear the signatures of the Company, the Borrowers and each of
the Lenders.

                        (c) The Administrative Agent shall have received in
immediately available funds, for the ratable benefit of the Lenders in
accordance with their Pro Rata Shares, a non-refundable amendment fee equal to
$250,000.

                        (d) All legal matters incident to this Amendment shall
be satisfactory to the Agents and their counsel.

                  16. Representations and Warranties. Each of the Company and
the Borrowers represents and warrants to the Lenders as follows:

                        (a) The Company and each Borrower (i) is duly organized,
validly existing and in good standing under the laws of the state of its
organization and (ii) has all requisite power, authority and legal right to
execute, deliver and perform this Amendment, all

                                      -7-
<PAGE>

other documents executed by it in connection with this Amendment, and to perform
the Financing Agreement, as amended hereby.

                        (b) The execution, delivery and performance by each of
the Company and the Borrowers of this Amendment and all other documents executed
by each of them in connection with this Amendment and the performance by the
Company and the Borrowers of the Financing Agreement as amended hereby (i) have
been duly authorized by all necessary action, (ii) do not and will not violate
or create a default under the Company's or any Borrower's organizational
documents, any applicable law or any contractual restriction binding on or
otherwise affecting the Company or any Borrower or any of the Company's or such
Borrower's properties, and (iii) except as provided in the Loan Documents, do
not and will not result in or require the creation of any Lien upon or with
respect to the Company's or any Borrower's property.

                        (c) No authorization or approval or other action by, and
no notice to or filing with, any Governmental Authority or other regulatory body
is required in connection with the due execution, delivery and performance by
the Company or any of the Borrowers of this Amendment and all other documents
executed by it in connection with this Amendment and the performance by the
Company and the Borrowers of the Financing Agreement as amended hereby.

                        (d) This Amendment and the Financing Agreement, as
amended hereby, and all other documents executed in connection with this
Amendment constitute the legal, valid and binding obligations of the Company and
the Borrowers party thereto, enforceable against such Persons in accordance with
their terms except to the extent the enforceability thereof may be limited by
any applicable bankruptcy, insolvency, reorganization, moratorium or similar
laws from time to time in effect affecting generally the enforcement of
creditors' rights and remedies and by general principles of equity.

                        (e) The representations and warranties contained in
Article VI of the Financing Agreement are true and correct on and as of the
Amendment Effective Date and as of the date hereof as though made on and as of
the Amendment Effective Date and the date hereof (except to the extent such
representations and warranties expressly relate to an earlier date), and no
Event of Default or Default has occurred and is continuing on and as of the
Amendment Effective Date or on the date hereof after giving effect to this
Amendment.

                        (f) Immediately prior to the merger by Norty's Inc. into
Squire, Norty's Inc. conducts no business and does not have any assets or
liabilities except for a net operating loss.

                  17. Continued Effectiveness of Financing Agreement. Each of
the Company and the Borrowers hereby (i) confirms and agrees that each Loan
Document to which it is a party is, and shall continue to be, in full force and
effect and is hereby ratified and confirmed in all respects except that on and
after the Amendment Effective Date of this Amendment all references in any such
Loan Document to "the Financing Agreement", "thereto", "thereof", "thereunder"
or words of like import referring to the Financing Agreement shall mean the

                                      -8-
<PAGE>

Financing Agreement as amended by this Amendment, and (ii) confirms and agrees
that to the extent that any such Loan Document purports to assign or pledge to
the Collateral Agent, or to grant to the Collateral Agent a Lien on any
collateral as security for the Obligations of the Company and the Borrowers from
time to time existing in respect of the Financing Agreement and the Loan
Documents, such pledge, assignment and/or grant of a Lien is hereby ratified and
confirmed in all respects.

                  18.      Miscellaneous.

                        (a) This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which shall be deemed to be an original, but all of which taken together shall
constitute one and the same agreement.

                        (b) Section and paragraph headings herein are included
for convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.

                        (c) This Amendment shall be governed by, and construed
in accordance with, the laws of the State of New York.

                        (d) The Borrowers will pay on demand all reasonable
out-of-pocket costs and expenses of the Agents in connection with the
preparation, execution and delivery of this Amendment, including, without
limitation, the reasonable fees, disbursements and other charges of Schulte Roth
& Zabel LLP, counsel to the Agents.

                                      -9-
<PAGE>

                  IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their respective officers thereunto duly authorized
as of the day and year first above written.

                                        MCNAUGHTON APPAREL GROUP INC.

                                        By:
                                           -------------------------------------
                                        Title:
                                              ----------------------------------

                                        NORTON MCNAUGHTON OF SQUIRE, INC.

                                        By:
                                           -------------------------------------
                                        Title:
                                              ----------------------------------

                                        MISS ERIKA, INC.

                                        By:
                                           -------------------------------------
                                        Title:
                                              ----------------------------------

                                        JERI-JO KNITWEAR, INC.

                                        By:
                                           -------------------------------------
                                        Title:
                                              ----------------------------------

                                        AGENTS AND LENDERS

                                        THE CIT GROUP/COMMERCIAL SERVICES,
                                         INC., as Administrative Agent

                                        By:
                                           -------------------------------------
                                        Title:
                                              ----------------------------------

                                        BANC OF AMERICA COMMERCIAL
                                         CORPORATION, as Collateral Agent

                                        By:
                                           -------------------------------------
                                        Title:
                                              ----------------------------------
<PAGE>

                                        FLEET BANK NA, as Documentation Agent

                                        By:
                                           -------------------------------------
                                        Title:
                                              ----------------------------------

                                        FLEET BUSINESS CREDIT CORPORATION

                                        By:
                                           -------------------------------------
                                        Title:
                                              ----------------------------------

                                        ISRAEL DISCOUNT BANK OF NEW YORK

                                        By:
                                           -------------------------------------
                                        Title:
                                              ----------------------------------

                                        SUNROCK CAPITAL CORP.

                                        By:
                                           -------------------------------------
                                        Title:
                                              ----------------------------------

                                        PNC BANK, NATIONAL ASSOCIATION

                                        By:
                                           -------------------------------------
                                        Title:
                                              ----------------------------------

                                        HELLER FINANCIAL, INC.

                                        By:
                                           -------------------------------------
                                        Title:
                                              ----------------------------------
<PAGE>

ACKNOWLEDGED AND AGREED:

NORTY'S INC.

By:
   -----------------------------
Title:

MCNAUGHTON APPAREL HOLDINGS INC.

By:
   -----------------------------
Title:
<PAGE>

                                                                         ANNEX I

                                                 SCHEDULE 1.01D-1

                                                   Pricing Grid

<TABLE>
<CAPTION>
-------------------- ------------------- ------------------- ------------------- -------------------  --------------------
                      If the ratio        If the ratio        If the ratio        If the ratio         If the ratio
                      of Consolidated     Consolidated of     Consolidated        of Consolidated      of Consolidated
                      Funded Debt         Funded Debt         Funded Debt         Funded Debt          Funded Debt to
                      to EBITDA is        to EBITDA is        to EBITDA is        to EBITDA is         EBITDA is
                      greater than        greater than        greater than or     greater than          less than 2.75
                      or equal to 4.50    or equal to 4.00    equal to 3.25       2.75 and less
                                          and less than 4.50  and less than 4.00  than 3.25
-------------------- ------------------- ------------------- ------------------- ------------------- --------------------

<S>                  <C>                 <C>                 <C>                 <C>                 <C>
Applicable Base      (-, minus)          (-, minus)          (-, minus)          (-, minus)          (-, minus)
Rate Margin          25 basis points     50 basis points     75 basis points     100 basis points    125 basis points
-------------------- ------------------- ------------------- ------------------- ------------------- --------------------

Applicable           275 basis points    250 basis points    225 basis points    200 basis points    175 basis points
Eurodollar Rate
Margin
-------------------- ------------------- ------------------- ------------------- ------------------- --------------------

Applicable L/C             1.00%               .875%                .75%               .625%                .50%
Percentage
-------------------- ------------------- ------------------- ------------------- ------------------- --------------------
</TABLE>

Commencing on the Pricing Grid Effective Date, changes in the Applicable Base
Rate Margin, the Applicable Eurodollar Rate Margin or the Applicable L/C
Percentage resulting from changes in the ratio of Consolidated Funded Debt to
EBITDA shall become effective on the first day of the month following the date
of delivery to the Agents of the financial statements pursuant to Sections
7.01(a)(i) of this Agreement and shall remain in effect until the next change to
be effected pursuant to this paragraph. If any financial statements referred to
above are not delivered within the time period specified in Sections 7.01(a)(i),
then, until such financial statements are delivered, the ratio of Consolidated
Funded Debt to EBITDA as at the end of the Fiscal Quarter that would have been
covered thereby shall for the purposes hereof be deemed to be = or > 4.50. Each
determination of the ratio of Consolidated Funded Debt to EBITDA pursuant to
this paragraph shall be made with respect to the period of four consecutive
Fiscal Quarters ending at the end of the period covered by the relevant
financial statements.
<PAGE>

                                                                        ANNEX II

                                 SCHEDULE 1.01E

              Maximum Revolving Credit Loans and Overadvance Amount

<TABLE>
<CAPTION>
                                                                       Overadvance                 Overadvance
                                              Maximum                   Amount on              Amount During Fiscal
                                             Revolving                 Last Day of                Month (Other
                                           Credit Loans                Fiscal Month               than Last Day)
                                           --------------              ------------              ---------------
<S>                                         <C>                         <C>                       <C>
March 2000                                  $  60,000,000                  -0-                       $ 5,000,000

April 2000                                  $  60,000,000                  -0-                       $ 5,000,000

May 2000                                    $  60,000,000                $ 5,000,000                 $ 5,000,000

June 2000                                   $  60,000,000                $ 5,000,000                 $10,000,000

July 2000                                   $  60,000,000                $ 5,000,000                 $10,000,000

August 2000                                 $  80,000,000                $25,000,000                 $25,000,000

September 2000                              $  80,000,000                $25,000,000                 $30,000,000

October 2000                                $  80,000,000                $20,000,000                 $25,000,000

November 2000                               $  75,000,000                $15,000,000                 $20,000,000

December 2000                               $  75,000,000                $20,000,000                 $25,000,000

January 2001                                $  75,000,000                $20,000,000                 $25,000,000

February 2001                               $  90,000,000                $15,000,000                 $25,000,000

March 2001                                  $ 100,000,000                $15,000,000                 $25,000,000

April 2001                                  $ 100,000,000                $15,000,000                 $20,000,000

May 2001                                    $  90,000,000                   -0-                      $15,000,000

June 2001                                   $  70,000,000                   -0-                      $ 5,000,000
</TABLE>

Any extension of the Termination Anniversary Date to a date after June 18, 2001
will be conditioned upon the Lenders and the Borrowers agreeing upon the Maximum
Revolving Credit Loans and Overadvance Amounts for periods subsequent to such
date.

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