<PAGE>   1
                                                       Exhibit 10.37

                            SWISS BANK CORPORATION,
                                New York Branch
                             210 East 50th Street
                           New York, New York  10022


                         Letter of Credit No. S567171


                                          December 18, 1996


Fleet National Bank
777 Main Street
Hartford, Connecticut 06115

Attention: Corporate Trust Department

      Re:   Littlestown Industrial Development Authority Variable
            Rate Demand Industrial Development Revenue Refunding
            Bonds, 1987 Series (Hanover House Industries, Inc.
            MK.Project) (individually a "Bond" and collectively the
            "Bonds")

Ladies and Gentlemen:

            At the request and on the instructions of our customer, Hanover
Direct Pennsylvania, Inc. (formerly known as Hanover House Industries, Inc.)
("Industries"), we, the undersigned bank (the "Bank") hereby establish in your
favor this direct pay Letter of Credit in the amount of $8,560,000 (the "Stated
Amount"). This Letter of Credit is issued to you as successor trustee
("Trustee") under the Indenture of Trust dated as of September 1, 1987
("Indenture"), and is for the benefit of the holders of the Bonds issued by the
Littlestown Industrial Development Authority (the "Issuer") to refinance a
project for Industries. This Letter of Credit No. S567171 is irrevocable during
its term. The Stated Amount may be adjusted from time to time during the term
hereof as more fully set forth below.

            You, as Trustee, are hereby irrevocably authorized to draw hereunder
for account of Industries, upon the terms and conditions hereinafter set forth,
an aggregate amount not exceeding the Stated Amount of which Stated Amount (a)
an amount not exceeding $8,000,000 (the "Principal Portion") may be stated to be
drawn upon with respect to payment of the unpaid principal
<PAGE>   2

amount of the Bonds and (b) an amount not exceeding $560,000 (the "Interest
Portion") may be stated to be drawn upon with respect to payment of up to 210
days' of accrued interest on the Bonds on or prior to their stated maturity date
(the amount of such drawing with respect to accrued interest to be expressly
further limited to an amount computed by you at the actual rate of interest from
time to time applicable to the Bonds during the period for which such drawing is
to be made but not in any event to exceed a rate of twelve percent (12%) per
annum). All of the foregoing shall be effective immediately and shall expire on
February 18, 1998 unless sooner terminated as provided herein or until renewed
or extended as provided herein. All drawings under this Letter of Credit will be
paid with our own funds.

            Funds under this Letter of Credit are available to you upon
presentation by you of (a) if the drawing is under the Principal Portion, your
written certificate signed by your authorized officer, appropriately completed,
in the form of Schedules A, C or E hereto (the "Principal Drawing"; drawings
under Schedule C or E may also be referred to as a "Purchase Drawing"); or (b)
if the drawing is under the Interest Portion, your written certificate signed by
your authorized officer, appropriately completed, in the form of Schedules B, D
or F hereto (each an "Interest Drawing"). Presentation of such certificate(s)
shall be made during our business hours on a Business Day (as hereinafter
defined) at our offices located at Swiss Bank Corporation, 10 East 50th Street,
New York, New York 10022, Attention: Documentary Department, marked "Urgent" and
"For Immediate Delivery", or at any other offices which may be designated by us
by written notice delivered to you. We hereby agree that each certificate
presented in compliance with the terms of this Letter of Credit will be duly
honored by us if presented as specified on or before the expiration date hereof.
If a presentation in respect of payment is made by you hereunder at or prior to
11:30 a.m., New York City time, on a Business Day, and provided that the
documents so presented conform to the terms and conditions hereof, payment shall
be made to you, or to your designee, of the amount specified, by wire transfer
in immediately available funds of the Bank, not later than 3:00 p.m., New York
City time, on the same Business Day. If a presentation in respect of payment is
made by you hereunder after 11:30 a.m., New York City time, on a Business Day,
and provided that the documents so presented conform to the terms and conditions
hereof, payment shall be made to you, or your designee, of the amount specified,
by wire transfer in immediately available funds, not later than 3:00 p.m., New
York City time, on the succeeding Business Day. If requested by you, payment
under this Letter of Credit will be made by deposit of immediately available
funds into a designated account that you maintain with us. As used herein,
"Business Day" shall mean any day other than (i) a Saturday or Sunday, (ii) a
day on which commercial banks located in New York, New York, or the city or
cities in which the corporate trust office of the Trustee is


                                      2
<PAGE>   3

located, are required or authorized by law to close or (iii) a day on which the
New York Stock Exchange is closed.

            Drawings in respect of payments hereunder honored by us shall not,
in the aggregate, exceed the Stated Amount, as the Stated Amount may have been
reinstated by us. Each drawing honored by the Bank hereunder shall pro tanto
reduce the amount available under this Letter of Credit, subject to
reinstatement as provided herein. Effective on the seventh Business Day
following the honoring of an Interest Drawing, the Letter of Credit will be
reinstated to the full amount of the Interest Portion (or such lesser amount as
shall have been specified by you in the certificate most recently presented by
you hereunder in the form of Schedule H hereto). The foregoing notwithstanding,
the Interest Portion of this Letter of Credit shall not be reinstated if you
have received notice from us in writing prior to the seventh Business Day
following the day on which such drawing was honored that the Interest Portion
will not be so reinstated because (a) we have not been reimbursed by Industries,
Hanover Direct, Inc. (the "Company") or an Affiliate (as that term is defined in
the Indenture, as such term is defined in Schedule G hereto) of either of them
for such drawing, or a previous or subsequent Interest Drawing, or (b) an event
of default under the Reimbursement Agreement between the Company and us dated as
of December 18, 1996 (the "Reimbursement Agreement") shall have occurred and be
continuing. With respect to a Principal Drawing made by presentation of a
certificate in the form of Schedule C or Schedule E hereto, the Letter of Credit
will be reinstated to the full amount of the Principal Portion (or such lesser
amount as shall have been specified by you in the certificate most recently
presented by you hereunder in the form of Schedule H hereto) effective upon
reimbursement to us in full of all amounts paid by us pursuant to Principal
Drawings and provided no event of default has occurred and is continuing under
the Reimbursement Agreement.

            Only you as Trustee may make a drawing under this Letter of Credit.
Upon the payment to you or to your designee of the amount specified in the
certificate(s) presented hereunder, we shall be fully discharged of our
obligation under this Letter of Credit with respect to such certificate(s) and
we shall not thereafter be obligated to make any further payments under this
Letter of Credit in respect of such certificate(s) to you or any other person
who may have made to you or makes to you a demand for payment of principal of,
the purchase price of, or interest on, any Bond.

            By paying to you an amount demanded in such certificate(s) we make
no representation as to the correctness of such amount.

            This Letter of Credit applies only to the payment of principal of
the Bonds when due, purchase price of Bonds when due and interest accruing on
the Bonds on or prior to the due date(s)


                                      3
<PAGE>   4

of the Bonds (in whole or in part) when due, and does not apply to any interest
that may accrue after any such due date.

            This Letter of Credit is effective and commences coverage as of
December 18, 1996.

            Upon our receipt of the original of this Letter of Credit together
with a certificate signed by your duly authorized officer, appropriately
completed, in the form of Schedule H hereto and approved by Industries, the
Stated Amount, Principal Portion and Interest Portion shall be immediately and
automatically reduced to the amounts set forth in such certificate and we shall,
at our election, either appropriately amend this Letter of Credit or issue a
replacement letter of credit to evidence such reduction.

            Upon the earliest of (i) February 18, 1998, (ii) when all available
amounts hereunder have been drawn, (iii) 15 days after the effective date of a
Term Interest Rate Period (as defined in the Indenture) having a duration
extending beyond February 18, 1998, (iv) 15 days after the effective date of a
Term Interest Rate Period during which the Bonds may be redeemed at a premium
redemption price, (v) when no Bonds are outstanding, or (vi) 15 days after our
receipt of a certificate signed by your duly authorized officer, appropriately
completed, in the form of Schedule G hereto, this Letter of Credit shall
automatically terminate and be delivered to us for cancellation.

      TO THE EXTENT CONSISTENT WITH THE EXPRESS PROVISIONS HEREOF, THIS LETTER
      OF CREDIT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
      UNIFORM CUSTOMS AND PRACTICES FOR DOCUMENTARY CREDITS (1993 REVISION),
      INTERNATIONAL CHAMBER OF COMMERCE PUBLICATION NO. 500, OR ANY SUCCESSOR
      PUBLICATION THERETO (THE "UCP") AS INTERPRETED UNDER THE LAWS OF THE STATE
      OF NEW YORK; PROVIDED, HOWEVER, THAT: (A) NOTWITHSTANDING THE PROVISIONS
      OF ARTICLE 17 OF THE UCP, IF THIS LETTER OF CREDIT EXPIRES DURING AN
      INTERRUPTION OF BUSINESS (AS DESCRIBED IN ARTICLE 17 OF THE UCP), WE AGREE
      TO EFFECT PAYMENT UNDER THIS LETTER OF CREDIT IF A DRAWING WHICH STRICTLY
      CONFORMS TO THE TERMS AND CONDITIONS OF THIS LETTER OF CREDIT IS MADE
      WITHIN FIFTEEN (15) DAYS AFTER THE RESUMPTION OF BUSINESS; (B) WE WILL NOT
      ACCEPT REPRODUCED DOCUMENTS AS ORIGINALS AS PROVIDED IN ARTICLE 20(b) OF
      THE UCP; (C) THIS LETTER OF CREDIT WILL NOT TERMINATE BECAUSE OF A FAILURE
      TO MAKE ANY PERMITTED DRAWINGS HEREUNDER AS PROVIDED IN ARTICLE 41 OF THE
      UCP; AND (D) NOTWITHSTANDING THE PROVISIONS OF SUB-ARTICLE 48(d) OF THE
      UCP, THE CONSENT OF A PRIOR TRUSTEE WILL NOT BE REQUIRED IN CONNECTION
      WITH THE AMENDMENT OF THIS LETTER OF CREDIT FOLLOWING A TRANSFER OF SAID
      LETTER OF CREDIT TO ANY SUCCESSOR TRUSTEE. AS TO MATTERS NOT COVERED BY
      THE UCP, THIS LETTER OF CREDIT SHALL BE GOVERNED BY THE LAWS OF THE STATE
      OF NEW YORK, INCLUDING, TO THE EXTENT NOT INCONSISTENT WITH THE UCP, THE
      UNIFORM COMMERCIAL CODE AS IN EFFECT IN THE STATE OF NEW YORK.


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<PAGE>   5

            Notwithstanding anything in the UCP to the contrary, this Letter of
Credit is transferrable in its entirety (but not in part) and may be
successively transferred upon presentation to us of this Letter of Credit
accompanied by the transfer form attached hereto as Schedule I, to the
transferee specified therein and upon payment to the Bank of a transfer fee in
the amount of $2,500.00.

            All certificates presented to us in connection with any demand for
payment hereunder, as well as all notices and other communications to us in
respect of this Letter of Credit, shall be in writing and addressed and
presented to us at our above address, and shall make specific reference to this
Letter of Credit by number. The certificate(s) you are required to submit to us
along with each drawing should be prepared either (i) in the form of a letter on
your letterhead signed by your authorized officer or (ii) in the form of a
facsimile copy of such a letter sent by one of your authorized officers to one
of the following numbers, or as we shall notify you from time to time (with the
original of any such certificate(s), drafts and letters to be delivered to us on
the next succeeding Business Day):

      Telecopier No. (212) 574-4634 or (212) 574-4757

A drawing shall be deemed to have been presented on the date actually received
by us.

            This Letter of Credit sets forth in full our undertaking, and such
undertaking shall not be in any way modified, amended, amplified or limited by
reference to any document, instrument or agreement referred to herein
(including, without limitation, the Bonds and the UCP referred to herein or the
Indenture), except only Schedules A through I hereto; and any such reference
shall not be deemed to incorporate herein by reference any document, instrument
or agreement except for such Schedules.

                                    Very Truly Yours

                                    SWISS BANK CORPORATION,
                                    New York Branch


                                    By:  _______________________________
                                          Name:
                                          Title:



                                    By:  _______________________________
                                          Name:
                                          Title:


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<PAGE>   6

                                 SCHEDULE A TO
                               LETTER OF CREDIT*

                          CERTIFICATE FOR "A DRAWING"

Swiss Bank Corporation,
  New York Branch
10 East 50th Street
New York, New York  10022

Attention:  Documentary Department [SBT-14-N]

            The undersigned, a duly authorized officer of FLEET NATIONAL BANK,
as Trustee (the "Trustee"), hereby certifies to SWISS BANK CORPORATION, New York
Branch (the "Bank"), with reference to Irrevocable Letter of Credit No. _____
issued by the Bank in favor of the Trustee (the "Letter of Credit") that:

            (1)   The Trustee is the Trustee under the Indenture for
      the owners of the Bonds.

            (2) The Trustee is hereby making a Principal Drawing under the
      Letter of Credit with respect to $__________ to be used for the payment of
      principal of the Bonds in accordance with the terms and provisions of the
      Bonds.

            (3) The amount of principal of the Bonds which is due and payable
      and with respect to the payment of which the Trustee does not have
      available amounts that pursuant to Section 4.02 of the Indenture are to be
      applied to such payment prior to moneys drawn under the Letter of Credit
      is $____________, and the aggregate amount of all drawings referred to in
      paragraph 2 does not exceed such amount of principal.

            (4) The amount set forth in paragraph 2, together with the aggregate
      of all prior payments made pursuant to drawings under this Letter of
      Credit for the payment of principal of the Bonds, does not exceed
      $8,000,000.

            (5) The amount set forth in paragraph 2 does not include any amount
      to be used for the payment of the principal of Bonds owned by the
      Littlestown Industrial Development Authority, Industries, or any Affiliate
      (as defined in the Indenture) of either of them.

            (6) The amount set forth in paragraph 2 should be:

----------
*     For payment of principal of Bonds due to redemption, at maturity or
      acceleration of maturity.


                                     A-1
<PAGE>   7

      |_|   deposited into our account number _________________ maintained with
            you; or

      |_|   wire transferred as follows:
            (name of bank)
            (address of bank)
            for credit to the account of ________________________
            account number ________________

      Any capitalized term used herein and not defined herein shall have the
same meaning herein as ascribed to it in the Letter of Credit.

      IN WITNESS WHEREOF, the Trustee has executed and delivered this
Certificate as of the ____ day of __________, 19____.



                                    FLEET NATIONAL BANK, as Trustee

                                    By:______________________________________
                                          Title:_____________________________


                                     A-2
<PAGE>   8

                                 SCHEDULE B TO
                               LETTER OF CREDIT*

                          CERTIFICATE FOR "B DRAWING"

Swiss Bank Corporation,
  New York Branch
10 East 50th Street
New York, New York  10022

Attention:  Documentary Department [SBT-14-N]

            The undersigned, a duly authorized officer of FLEET NATIONAL BANK,
as Trustee (the "Trustee"), hereby certifies to SWISS BANK CORPORATION, New York
Branch (the "Bank"), with reference to Irrevocable letter of Credit No. _____
issued by the Bank in favor of the Trustee (the "Letter of Credit") that:

            (1) The Trustee is the Trustee under the Indenture for the owners of
      the Bonds.

            (2) The Trustee is hereby making an Interest Drawing under the
      Letter of Credit with respect to $________________ to be used for a
      payment of interest on the Bonds in accordance with the terms and
      provisions of the Bonds.

            (3) The amount of interest on the Bonds that is due and payable and
      with respect to which the Trustee does not have available amounts that,
      pursuant to Section 4.02 of the Indenture, are to be applied to such
      payment prior to monies drawn under the Letter of Credit is
      $________________, and the aggregate amount of all drawings referred to in
      paragraph 2 does not exceed the amount of interest on the Bonds that is
      due and payable and does not exceed an amount equal to 210 days' accrued
      interest on the Bonds computed at the actual rate of interest thereon
      during the period for which this drawing is being made (which rate does
      not exceed twelve percent (12%) per annum).

            (4) The amount set forth in paragraph 2 of this Certificate does not
      exceed the amount available on the date hereof to be drawn under the
      Interest Portion of the Letter of Credit in respect of payment of interest
      accrued on the Bonds on or prior to their stated maturity date.

            (5) The amount set forth in paragraph 2 of this Certificate was
      computed in accordance with the terms and conditions of the Bonds and the
      Indenture and does not include any amount to be used to pay interest on
      Bonds owned by the Littlestown Industrial Development Authority,

----------
*     For payment of interest due and payable on the Bonds.


                                     B-1
<PAGE>   9

      Industries or any Affiliate (as defined in the Indenture) of either of
      them.

            (6)   The amount set forth in paragraph 2 should be:

      |_|   deposited into our account number ________________ maintained with
            you; or

      |_|   wire transferred as follows:
            (name of bank)
            (address of bank)
            for credit to the account of ___________________
            account number __________________

            Any capitalized terms used herein and not defined herein shall have
the same meaning herein as ascribed to it in the Letter of Credit.

            IN WITNESS WHEREOF, the Trustee has executed and delivered this
Certificate as of the _____________ day of _________________, 19__.


                                      FLEET NATIONAL BANK, as Trustee


                                      By: ____________________________________
                                          Title:______________________________


                                     B-2
<PAGE>   10

                                 SCHEDULE C TO
                               LETTER OF CREDIT*

                          CERTIFICATE FOR "C DRAWING"


Swiss Bank Corporation,
  New York Branch
10 East 50th Street
New York, New York  10022

Attention: Documentary Department [SBT-14-N]

            The undersigned, a duly authorized officer of FLEET NATIONAL BANK,
as Trustee (the "Trustee"), hereby certifies to SWISS BANK CORPORATION, New York
Branch (the "Bank"), with reference to Irrevocable Letter of Credit No. _____
issued by the Bank in favor of the Trustee (the "Letter of Credit") that:

            (1) The Trustee is the Trustee under the Indenture for the owners of
      the Bonds.

            (2) The Trustee is hereby making a Principal Drawing under the
      Letter of Credit with respect to $ to be used for payment of the portion
      of purchase price of Bonds delivered to the Trustee or Remarketing Agent
      (as defined in the Indenture) in accordance with Section 7 of the Bonds
      equal to the principal amount of such Bonds.

            (3) The Trustee has delivered or caused to be delivered to the Bank,
      as provided in the Indenture, or to its designated agent or account, a
      principal amount of Bonds equal to the aggregate amount stated in
      paragraph 2 above.

            (4) The amount set forth in paragraph 3 should be:

      |_|   deposited into our account number __________________ maintained with
            you; or

      |_|   wire transferred as follows:
            (name of bank)
            (address of bank)
            for credit to the account of ________________
            account number __________________

----------
*     For payment of a portion of purchase price of Bonds corresponding to the
      principal amount thereof delivered to the Trustee or Remarketing Agent
      upon notice at least two Business Days prior to the first day of an
      Interest Rate Period (Put on First Day of Interest Rate Period).


                                     C-1
<PAGE>   11

            Any capitalized term used herein and not defined herein shall have
the same meaning herein as described to it in the Letter of Credit.

            IN WITNESS WHEREOF, the Trustee has executed and delivered this
Certificate as of the _____________ day of ______________________, 19__.


                                    FLEET NATIONAL BANK, as Trustee


                                    By: _____________________________________
                                       Title: _______________________________


                                     C-2
<PAGE>   12

                                 SCHEDULE D TO
                               LETTER OF CREDIT*

                          CERTIFICATE FOR "D DRAWING"


Swiss Bank Corporation,
  New York Branch
10 East 50th Street
New York, New York  10022

Attention: Documentary Department [SBT-14-N]

            The undersigned, a duly authorized officer of FLEET NATIONAL BANK,
as Trustee (the "Trustee"), hereby certifies to SWISS BANK CORPORATION, New York
Branch (the "Bank"), with reference to Irrevocable Letter of Credit No. _____
issued by the Bank in favor of the Trustee (the "Letter of Credit") that:

            (1)   The Trustee is the Trustee under the Indenture for
      the owners of the Bonds.

            (2) The Trustee is hereby making an Interest Drawing under the
      Letter of Credit with respect to $______ to be used for payment of the
      portion of purchase price of Bonds delivered to the Trustee or Remarketing
      Agent (as defined in the Indenture) pursuant to Section 7 of the Bonds
      equal to the amount of accrued and unpaid interest on such Bonds to the
      date of purchase thereof.

            (3) The aggregate amount of all drawings referred to in paragraph 2
      does not exceed that amount of such portion of purchase price that is due
      and payable and does not exceed an amount equal to 210 days' accrued
      interest on the Bonds computed at the actual rate of interest thereon
      during the period for which this drawing is being made (which rate does
      not exceed twelve percent (12%) per annum).

            (4) The amount set forth in paragraph 2 of this Certificate does not
      exceed the amount available on the date hereof to be drawn under the
      Interest Portion of the Letter of Credit in respect of payment of interest
      accrued on the Bonds on or prior to their stated maturity date.

            (5) The amount set forth in paragraph 2 of this Certificate was
      computed in accordance with the terms and conditions of the Bonds and the
      Indenture.

----------
*     For payment of a portion of purchase price of Bonds delivered to the
      Trustee or Remarketing Agent upon notice at least two Business Days prior
      to the first day of an Interest Rate Period corresponding to accrued
      interest thereon (Put on First Day of Interest Rate Period).


                                     D-1
<PAGE>   13

            (6)   The amount set forth in paragraph 2 should be:

      |_|   deposited into our account number _____________________ maintained
            with you; or

      |_|   wire transferred as follows:
            (name of bank)
            (address of bank)
            for credit to the account of ________________
            account number _________________

            Any capitalized term used herein and not defined herein shall have
the same meaning herein as described to it in the Letter of Credit.

            IN WITNESS WHEREOF, the Trustee has executed and delivered this
Certificate as of the ____________ day of _________________________, 19__.


                                    FLEET NATIONAL BANK, as Trustee


                                    By: ____________________________________
                                       Title: ______________________________


                                     D-2
<PAGE>   14

                                 SCHEDULE E TO
                               LETTER OF CREDIT*

                          CERTIFICATE FOR "E DRAWING"

Swiss Bank Corporation,
  New York Branch
10 East 50th Street
New York, New York  10022

Attention: Documentary Department [SBT-14-N]

            The undersigned, a duly authorized officer of FLEET NATIONAL BANK,
as Trustee (the "Trustee"), hereby certifies to SWISS BANK CORPORATION, New York
Branch (the "Bank"), with reference to Irrevocable Letter of Credit No. _____
issued by the Bank in favor of the Trustee (the "Letter of Credit") that:

            (1)   The Trustee is the Trustee under the Indenture for
      the owners of the Bonds.

            (2) The Trustee is hereby making a Principal Drawing under the
      Letter of Credit with respect to $_______________ to be used for payment
      of the portion of purchase price of Bonds bearing interest at a Weekly or
      Monthly Interest Rate delivered to the Trustee or Remarketing Agent (as
      defined in the Indenture) in accordance with Section 7 of the Bonds.

            (3) The Trustee has delivered or caused to be delivered to the Bank
      as provided in the Indenture, or to its designated agent or account, a
      principal amount of Bonds equal to the aggregate amount stated in
      paragraph 2 above.

            (4)   The amount set forth in paragraph 2 should be:

      |_|   deposited into our account number __________________ maintained with
            you; or

      |_|   wire transferred as follows:
            (name of bank)
            (address of bank)
            for credit to the account of _________________
            account number ________________

            Any capitalized term used herein and not defined herein
shall have the same meaning herein as ascribed to it in the
Letter of Credit.

----------
*     For payment of the purchase price of Bonds corresponding to the principal
      amount thereof delivered to the Trustee or Remarketing Agent upon
      seven-days' notice (Weekly or Monthly Interest Rate Put).



                                     E-1
<PAGE>   15

            IN WITNESS WHEREOF, the Trustee has executed and delivered this
Certificate as of the ____ day of _________________, 19__.


                                    FLEET NATIONAL BANK, as Trustee


                                    By: _____________________________________
                                       Title: _______________________________


                                     E-2
<PAGE>   16

                                 SCHEDULE F TO
                               LETTER OF CREDIT*

                          CERTIFICATE FOR "F DRAWING"

Swiss Bank Corporation,
  New York Branch
10 East 50th Street
New York, New York  10022

Attention: Documentary Department [SBT-14-N]

            The undersigned, a duly authorized officer of FLEET NATIONAL BANK,
as Trustee (the "Trustee"), hereby certifies to SWISS BANK CORPORATION, New York
Branch (the "Bank"), with reference to Irrevocable Letter of Credit No. _____
issued by the Bank in favor of the Trustee (the "Letter of Credit") that:

            (1)   The Trustee is the Trustee under the Indenture for
      the owners of the Bonds.

            (2) The Trustee is hereby making an Interest Drawing under the
      Letter of Credit with respect to $_______________ to be used for payment
      of the portion of purchase price of Bonds bearing interest at a Weekly or
      Monthly Interest Rate delivered to the Trustee or Remarketing Agent (as
      defined in the Indenture) pursuant to Section 7 of the Bonds equal to the
      amount of accrued and unpaid interest on such Bonds to the date of
      purchase thereof.

            (3) The aggregate amount of all drawings referred to in paragraph 2
      does not exceed the amount of such portion of purchase price that is due
      and payable and does not exceed an amount equal to 210 days' accrued
      interest on the Bonds computed at the actual rate of interest thereon
      during the period for which this drawing is being made (which rate does
      not exceed twelve percent (12%) per annum).

            (4) The amount set forth in paragraph 2 of this Certificate does not
      exceed the amount available on the date hereof to be drawn under the
      Interest Portion of the Letter of Credit in respect of payment of interest
      accrued on the Bonds on or prior to their stated maturity date.

            (5) The amount set forth in paragraph 2 of this Certificate was
      computed in accordance with the terms and conditions of the Bonds and the
      Indenture.

----------
*     For payment of the portion of purchase price of Bond delivered to the
      Trustee or Remarketing Agent upon seven-days' notice corresponding to
      accrued interest thereon (Weekly or Monthly Interest Rate Put).


                                     F-1
<PAGE>   17

            (6)   The amount set forth in paragraph 2 should be:

      |_|   deposited into our account number _________________ maintained with
            you; or

      |_|   wire transferred as follows:
            (name of bank)
            (address of bank)
            for credit to the account of ___________________
            account number __________________

            Any capitalized term used herein and not defined herein shall have
the same meaning herein as ascribed to it in the Letter of Credit.

            IN WITNESS WHEREOF, the Trustee has executed and delivered this
Certificate as of the _____ day of _________________, 19__.


                                    FLEET NATIONAL BANK, as Trustee


                                    By: __________________________________
                                       Title: ____________________________


                                     F-2
<PAGE>   18

                                 SCHEDULE G TO
                               LETTER OF CREDIT

Swiss Bank Corporation,
  New York Branch
10 East 50th Street
New York, New York  10022

Attention:  Documentary Department [SBT-14-N]

      Re:   Irrevocable Letter of Credit
            No. ________________________

Ladies and Gentlemen:

            The undersigned, a duly authorized officer of FLEET NATIONAL BANK,
as Trustee (the "Trustee"), hereby certifies to SWISS BANK CORPORATION, New York
Branch (the "Bank"), with respect to the above-referenced Letter of Credit (the
"Letter of Credit") issued by the Bank in favor of the Trustee as follows:

            (1) The conditions precedent to the acceptances of an "Alternate
      Security Arrangement" set forth in Section 5.01 of the Indenture of Trust
      dated as of September 1, 1987, between the Littlestown Industrial
      Development Authority and National Westminster Bank, USA (to which the
      undersigned is a successor Trustee) (the "Indenture") have been satisfied,
      and

            (2) As trustee under the Indenture, the Trustee has accepted such
      Alternate Security Arrangement.

Pursuant to the Indenture, we are delivering herewith the letter of Credit for
cancellation on the 15th day from the date hereof.

                                          Very truly yours,

                                          FLEET NATIONAL BANK


                                          By: _______________________________
                                                Title: ______________________


Approved:

HANOVER DIRECT PENNSYLVANIA, INC. (formerly
HANOVER HOUSE INDUSTRIES, INC.)

By: ____________________________________
      Title:____________________________
      Date:_____________________________


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<PAGE>   19

                                 SCHEDULE H TO
                               LETTER OF CREDIT


Swiss Bank Corporation,
  New York Branch
10 East 50th Street
New York, New York  10022

Attention:  Documentary Department [SBT-14-N]

      Re:   Irrevocable Letter of Credit
            No. ________________________

Ladies and Gentlemen:

            The undersigned, a duly authorized officer of FLEET NATIONAL BANK,
as Trustee (the "Trustee"), hereby certifies to SWISS BANK CORPORATION, New York
Branch (the "Bank"), with reference to Irrevocable Letter of Credit No. _____
issued by the Bank in favor of the Trustee (the "Letter of Credit") that:

            (1)  The Trustee is the Trustee under the Indenture for
      the owners of the Bonds.

            (2) The aggregate principal amount of the Bonds outstanding on
      __________________________________________ is _________________________.
      The amount equal to 210 days' accrued interest (at an assumed rate of 12%
      per annum) computed on the basis of a year of 360 days on the outstanding
      Bonds is $___________.

            (3) You are entitled to adjust the Principal Portion and Interest
      Portion of the Letter of Credit in accordance with paragraph 2 above.

            Any capitalized term used herein and not defined herein shall have
the same meaning herein as ascribed to it in the Letter of Credit.


                                     H-1
<PAGE>   20

            IN WITNESS WHEREOF, the Trustee has executed and delivered this
Certificate as of the _____ day of _________________, 19__.

                                    FLEET NATIONAL BANK, as Trustee


                                    By: ____________________________________
                                       Title: ______________________________


Approved:

HANOVER DIRECT PENNSYLVANIA, INC. (formerly
HANOVER HOUSE INDUSTRIES, INC.)

By: ________________________________________
      Title: _______________________________
      Date: ________________________________


                                     H-2
<PAGE>   21

                                 SCHEDULE I TO
                               LETTER OF CREDIT

                                                                 [Date]

Swiss Bank Corporation,
  New York Branch
10 East 50th Street
New York, New York  10022

Attention:  Documentary Department [SBT-14-N]

      Re:   Irrevocable Letter of Credit
            No. ________________________

Ladies and Gentlemen:

            For value received, the undersigned beneficiary hereby irrevocably
transfers to

            (Name of Transferee)
            (Address)

all rights of the undersigned beneficiary to draw under the above Letter of
Credit in its entirety. It is hereby certified that the transferee is successor
Trustee under the Indenture of Trust dated as of September 1, 1987, between
National Westminster Bank USA (to which the undersigned is a successor) and the
Littlestown Industrial Development Authority.

            By this transfer, all rights of the undersigned beneficiary in such
Letter of Credit are transferred to the transferee and the transferee shall have
the sole rights as beneficiary thereof, including sole rights relating to any
amendments, whether increases or extensions or other amendments and whether now
existing or hereafter made. All amendments are to be advised direct to the
transferee without necessity of any consent of or notice to the undersigned
beneficiary.

            The advice of such Letter of Credit is returned herewith and we ask
you to endorse the transfer of the reverse thereof, and forward it directly to
the transferee with your customary notice of transfer.

                                          Yours very truly,


Accepted and Approved:

NAME OF TRANSFEREE

By: ____________________________          ____________________________
      (Authorized Officer)                Title: _____________________
     


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