<PAGE>   1
                                                        Exhibit 10.61

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


                          Letter of Credit No. S567169
                                December 18, 1996


Norwest Bank Minnesota, N.A., as Trustee
Norwest Center
Sixth & Marquette
Minneapolis, Minnesota 55479-0069
Attention:  Corporate Trust Department

Ladies and Gentlemen:

            At the request and on the instructions of our customer, Hanover
Direct, Inc., a Delaware corporation (the "Company"), the undersigned bank (the
"Bank") hereby establishes, for the account of the Company, in your favor, as
Trustee under that certain Series A Note Agreement dated as of November 9, 1994
(as amended, restated, supplemented or otherwise modified from time to time in
accordance with its terms, the "Note Agreement") between the Company and you, as
Trustee, pursuant to which $10,000,000 in aggregate principal amount of the
Company's Flexible Term Series A Notes (the "Notes") were issued, this
Irrevocable Transferable Letter of Credit No. S567169 (the "Letter of Credit")
in the amount of $9,638,541 (such amount, as it may from time to time be reduced
and reinstated as hereinafter provided, the "Stated Amount"), consisting of (a)
an aggregate amount not exceeding $9,500,000 (as such amount has been reduced to
the date hereat and as the same hereafter may be reduced and reinstated from
time to time as hereinafter provided, the "Principal Component"), which may be
drawn upon with respect to payment of the unpaid principal amount of, or portion
of the purchase price corresponding to the principal of, the Notes and (b) an
aggregate amount not exceeding $138,541 (as reduced and thereafter reinstated
from time to time as hereinafter provided, the "Interest Component"), which may
be drawn upon with respect to (i) the payment of up to 35 days of interest on
the Notes computed at a maximum interest rate of 15% per annum on the basis of
actual number of days elapsed in a year of 360 days (the "Maximum Rate") and
(ii) accrued and unpaid interest on the Notes. This Letter of Credit is
effective immediately and expires at 1:30 p.m., New York City time, on February
18, 1998 (the "Expiration Date"), unless earlier terminated or extended as
provided herein. This Letter


<PAGE>   2

of Credit is issued pursuant to that certain Reimbursement Agreement dated as of
December 18, 1996 (the "Reimbursement Agreement") between the Company and us.

DRAWING AND METHOD OF PAYMENT

            Funds under this Letter of Credit are available to you against
receipt by us of a sight draft drawn on us, referring to this Letter of Credit
by number and signed by an Authorized Officer (as hereinafter defined), and your
certificate or certificates presented for payment on a Business Day (as
hereinafter defined) in the form of either Annex A, Annex B or Annex C attached
hereto appropriately completed and signed by an Authorized Officer (hereinafter
any such sight draft and certificate may be referred to as a "Drawing
Certificate").

            Presentation of any such Drawing Certificate shall be made during
our business hours on a Business Day (as hereinafter defined) on or prior to the
Expiration Date 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 office which may be
designated by us on at least five Business Days' prior written notice to you. In
addition to any means of delivery otherwise approved by us, presentation may be
made by postal service, by courier service or by telecopy at the following
telecopy numbers: (212) 574-4634 or (212) 574-4757; but only after first giving
telephone notice to us by contacting Ms. Virginia Gensch at the following
telephone number: (212) 574-4654, and receiving verbal approval, which approval
shall not be unreasonably withheld, to telecopy such Drawing Certificate to us
at the telecopy numbers shown above. You must confirm our receipt of each
telecopied Drawing Certificate by telephoning the above telephone number. Only
upon such confirmation shall the demand under such Drawing Certificate be deemed
made.

            Demands for payments hereunder shall not (a) in the aggregate exceed
the Stated Amount as it may be reduced and reinstated from time to time, (b)
with respect to drawings for the payment of principal of the Notes or the
portion of purchase price for the Notes representing principal, exceed the
Principal Component, as it may be reduced and reinstated from time to time, and
(c) with respect to drawings for the payment in respect of interest on the
Notes, exceed the Interest Component, as it may be reduced and reinstated from
time to time.

            Drawings in respect of the payment of principal of the Notes at
maturity or upon redemption or acceleration of the Notes ("Principal Drawings")
must be accompanied by a certificate in the form of Annex A. Drawings in respect
of the payment of interest on the Notes ("Interest Drawings") must be
accompanied by a certificate in the form of Annex B. Drawings in respect of the
payment of the principal portion of the purchase price of the Notes which have
not been extended, renewed or resold by the


                                       -2-

<PAGE>   3

Purchase Date (as defined in the Note Agreement) ("Purchase Drawings") must be
accompanied by a certificate in the form of Annex C.

            In the case of presentation of a Drawing Certificate hereunder, if
such Drawing Certificate is presented hereunder by sight or by facsimile
transmission as permitted hereunder, by 11:00 a.m., New York City time, on a
Business Day, and provided that such Drawing Certificate and the documents and
other items presented in connection therewith, if any, strictly conform to the
terms and conditions hereof, payment shall be made to you, or to your designee,
of the amount specified, in immediately available funds, not later than 1:30
p.m., New York City time, on the same day or on such later Business Day as you
may specify. If a Drawing Certificate is presented by you hereunder after the
time specified hereinabove, on a Business Day, and provided that such Drawing
Certificate and the documents and other items presented in connection therewith,
if any, strictly conform to the terms and conditions hereof, payment shall be
made to you, or to your designee, of the amount specified, in immediately
available funds, not later than 1:30 p.m. New York City time, on the next
Business Day thereafter or on such later Business Day as you may specify. If
requested by you, payment under this Letter of Credit will be made by deposit of
immediately available funds into an account that you or your designee maintains
with us and designates in the applicable Drawing Certificate.

            Any drawing under this Letter of Credit will be paid solely from our
general funds and not from any other source.

            No drawing may be made hereunder to pay principal of, or interest
on, or the purchase price of, any Notes known by you to be Bank Notes (as
defined in the Note Agreement). Multiple drawings may be made hereunder,
provided that drawings with respect to payments hereunder honored by us shall
not, in the aggregate, exceed the Stated Amount, as the Stated Amount may have
been reinstated by us.

REDUCTION OF AVAILABLE AMOUNT

            In the case of a Principal Drawing, (a) the Principal Component
shall automatically be reduced by an amount equal to the entire amount of such
Principal Drawing, and (b) the Interest Component shall automatically be reduced
by an amount equal to 35 days' interest on the amount of such Principal Drawing
calculated at the Maximum Rate. Upon any reduction in the Stated Amount
resulting from a Principal Drawing, we may require you to surrender this Letter
of Credit to us within ten (10) Business Days following the effective date of
such reduction, whereupon we shall issue to you a substitute Letter of Credit,
dated the date of such reduction, for an amount equal to the amount to which the
Stated Amount shall have been so reduced, but otherwise having terms identical
to this Letter of Credit.


                                       -3-

<PAGE>   4

            On October 1, 1997, each of the Principal Component and the Interest
Component shall be permanently reduced (without right of reinstatement) (each
such reduction, a "Scheduled Reduction") to the respective amounts set forth
below unless as of such date the Principal Component and Interest Component have
been theretofore permanently reduced pursuant to one or more Principal Drawings
to amounts at or below the respective amounts set forth below:

                           Remaining           Remaining          Remaining
Effective Date             Principal           Interest           Available
of Reduction               Component           Component          Amount
------------               ---------           ---------          -------  
October 1, 1997            $9,000,000          $131,249           $9,131,249

            In the case of an Interest Drawing, the Interest Component shall
automatically be reduced by an amount equal to the entire amount of such
Interest Drawing.

            In the case of a Purchase Drawing, (a) the Principal Component shall
automatically be reduced by an amount equal to the entire amount of such
Purchase Drawing and (b) the Interest Component shall automatically be reduced
by an amount equal to 35 days' interest on the amount of such Purchase Drawing
calculated at the Maximum Rate.

REINSTATEMENT

            Principal Drawings and the resulting reductions in the Principal and
Interest Components shall not be reinstated. Reductions in the Principal
Component and the Interest Component resulting from the Scheduled Reductions
shall not be reinstated. Reductions described in this paragraph are referred to
herein as "Permanent Reductions."

            The Interest Component shall be automatically reinstated, at 12:01
a.m. on the sixth Business Day following the date of our payment in respect of
such Interest Drawing unless prior to such time we shall have given to you the
notice described to in Section 7.01(d) of the Note Agreement, in an amount equal
to the amount of such Interest Drawing, but in no event to exceed the Interest
Component after giving effect to all applicable Permanent Reductions.

            In the event of a subsequent remarketing of Notes purchased with the
proceeds paid by us pursuant to a Purchase Drawing and a release of the Notes
from their pledge to the Bank in accordance with the provisions of Section
3.08(d)(ii) of the Note Agreement, then the Principal Component shall be
reinstated automatically upon such remarketing of the Notes by an amount equal
to the principal amount of the Notes so remarketed and the Interest Component
shall be reinstated automatically by an amount equal to 35 days' interest on the
Principal Component so reinstated computed at the Maximum Rate.


                                       -4-

<PAGE>   5

DISCHARGE OF OBLIGATIONS

            Only you or your successor, as Trustee under the Note Agreement, may
make a drawing under this Letter of Credit. Upon any payment to you, to your
designee or to your or your designee's account, of the amount demanded
hereunder, we shall be fully discharged on our obligation under this Letter of
Credit with respect to such demand for payment and we shall not thereafter be
obligated to make any further payments under this Letter of Credit in respect of
such demand to you or to any other person who may have made or makes to you or
the Company a demand for payment of principal or purchase price of, or interest
on, the Notes. By paying to you an amount demanded in accordance herewith, we
make no representation as to the correctness of the amount demanded or your
calculations or representations in any certificate required under this Letter of
Credit.

EXPIRATION AND DEFAULT DRAWINGS

            This Letter of Credit shall expire at 1:30 p.m., New York City time
on February 18, 1998 (such date, or any later date to which this Letter of
Credit may from time to time be extended pursuant to the next sentence hereof,
is herein referred to as the "Scheduled Termination Date"). Upon your receipt of
a written notice from us in the form of Annex D attached hereto, the Scheduled
Termination Date of this Letter of Credit in effect at the time of receipt of
such notice shall be extended to the date specified in such notice for the
Scheduled Termination Date as extended. Notwithstanding the foregoing, this
Letter of Credit shall expire earlier than such date upon the first to occur of
(a) the making by you and the honoring by us of the final drawing available to
be made hereunder, (b) our receipt of a certificate signed by your Authorized
Officer stating that the Trustee has accepted a Substitute Letter of Credit, as
defined in the Note Agreement, (c) our receipt of a certificate signed by your
Authorized Officer in the form of Annex E attached hereto stating that the Note
Agreement is discharged and no Notes remain outstanding thereunder, or (d) 15
days after delivery by the Bank to you of written notice in the form of Annex F
attached hereto that an Event of Default under the Reimbursement Agreement has
occurred and is continuing after the expiration of any applicable cure period,
with instructions to accelerate the maturity of the Notes and draw on the Letter
of Credit (a "Default Drawing") to pay them in full. In the case of a Default
Drawing, in the event we wish for you to purchase the Notes with the proceeds of
the Default Drawing, rather than to pay the Notes as would otherwise be the
case, we will give written notice to you of such election in the form of Annex G
attached hereto prior to or simultaneously with the payment of such Default
Drawing.

            In the event the Scheduled Termination Date of this Letter of
Credit, as specified in the preceding paragraph, is not a Business Day, this
Letter of Credit shall expire at 1:30 p.m., New York City time, on the next
following Business Day.


                                       -5-

<PAGE>   6

            Upon the expiration of this Letter of Credit, the executed original
Letter of Credit shall be promptly surrendered to us by you.

TRANSFER

            We agree to endorse this Letter of Credit or issue a substitute
letter of credit to any successor Trustee under the Note Agreement (and to
successively replace any such substitute letter of credit) upon the return to us
of the original of the Letter of Credit to be endorsed or replaced, accompanied
by a request relating to such letter of credit, which (a) shall be in the form
of Annex H attached hereto with the blanks appropriately completed, (b) shall be
signed by an Authorized Officer, (c) shall specify where indicated therein the
same letter of credit number as the number of the letter of credit to be
endorsed or replaced, (d) shall state the name and address of the successor
Trustee under the Note Agreement and (e) shall be accompanied by an amount equal
to the transfer fee required pursuant to the Reimbursement Agreement. Each
substitute letter of credit will be in the form of this Letter of Credit except
for the date and letter of credit number.

MISCELLANEOUS

            As used herein (a) "Authorized Officer" means any of your Senior
Vice Presidents, Vice Presidents, Assistant Vice Presidents or Trust Officers
and (b) "Business Day" means any day, other than (i) a Saturday or Sunday, (ii)
a day on which commercial banks in New York, New York or the city or cities in
which the corporate trust office of the Trustee is located, are required or
authorized by law or executive order to close or (iii) a day on which the New
York Stock Exchange is closed.

            Our obligations hereunder are primary obligations and shall not be
affected by the performance or nonperformance by the Company under the Note
Agreement or the Reimbursement Agreement or by the performance or nonperformance
of any party under any agreement between the Company and you.

            Except as set forth in the next paragraph and the certificates
referred to herein, this Letter of Credit sets forth in full our undertaking,
and such undertaking shall not in any way be modified, amended, amplified or
limited by reference to any document, instrument or agreement referred to herein
or in which this Letter of Credit is referred to or to which this Letter of
Credit relates, except for the certificates and Note Agreement definitions and
Reimbursement Agreement definitions referred to herein; and any such reference
shall not be deemed to incorporate herein by reference any document, instrument
or agreement except as set forth in the next paragraph and for the Note
Agreement definitions and Reimbursement Agreement definitions and the
certificates referred to herein.


                                       -6-

<PAGE>   7

      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.


                                       -7-

<PAGE>   8

            Communications with respect to this Letter of Credit shall be in
writing and shall be addressed to us at the address set forth above specifically
referring to the number of this Letter of Credit.

                                          Very truly yours,

                                          SWISS BANK CORPORATION,
                                          New York Branch


                                          By: _______________________
                                                Authorized Officer


                                          By: _______________________
                                                Authorized Officer


                                       -8-

<PAGE>   9

Annex A     -     Draw Certificate for Principal Drawing
Annex B     -     Draw Certificate for Interest Drawing
Annex C     -     Draw Certificate for Purchase Drawing

Annex D     -     Extension of Scheduled Termination Date
Annex E     -     Discharge of Note Agreement and Letter of Credit
                  Cancellation
[Annex F    -     Notice of Demand for Acceleration and Default
                  Drawing
Annex G     -     Notice of Direction to Purchase rather than Pay
                  the Notes
Annex H     -     Instruction to Issue Letter of Credit to Successor
                  Holder


                                    -9-

<PAGE>   10

                                     ANNEX A

                               DRAWING CERTIFICATE
                                       FOR
                                PRINCIPAL DRAWING


                                     [Date]


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

      Re:   Irrevocable Letter of Credit Ref. No. _____
            For the Account of Hanover Direct, Inc.
            ---------------------------------------

Ladies and Gentlemen:

     The undersigned, a duly Authorized Officer of the undersigned Trustee (the
"Trustee"), hereby certifies that:

     1. The undersigned is the Trustee under the Note Agreement.

     2. The undersigned hereby makes demand for payment of $ _________ of the
Principal Component to be used solely for the payment of principal on the Notes
due because of maturity, redemption or acceleration in accordance with the terms
of the Note Agreement.

     3. With respect to the drawing referred to in this Certificate, the amount
demanded hereby in the aggregate does not exceed the now applicable Stated
Amount or the now applicable Principal Component.

     4. Upon receipt by the undersigned or its designee of the amount demanded
hereby, (a) the undersigned or its designee will apply (or cause to be applied)
the same directly to the payment when due of the principal amount owing on Notes
(other than Bank Notes as defined in the Note Agreement), (b) no portion of said
amount shall be applied for any other purpose, and (c) no portion of said amount
will be commingled with other funds (except other funds drawn under the
above-referenced Letter of Credit).

     5. The amount demanded in this Certificate was computed in accordance with
the terms and conditions of the Note Agreement.

     6. Upon payment by you of this Principal Drawing and the accompanying
Interest Drawing, the Stated Amount of the Letter of Credit shall automatically
be reduced by $ [insert amount of this Principal Drawing plus 35 days' interest
on the


                                       A-1

<PAGE>   11

     amount of such Principal Drawing calculated at the Maximum Rate of 15% per
annum] and thereafter shall be equal to $ _________ , consisting of a $ ________
Principal Component and a $ ________ Interest Component.

     Please remit payment of the amount demanded herein by_____________ .

     Terms used but not otherwise defined herein shall have the meanings
provided in the above-referenced Letter of Credit or in the Note Agreement (as
defined in the Letter of Credit).

     IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate
as of the _______ day of _______ , ________ .


                                    [NAME OF NOTE AGREEMENT TRUSTEE],
                                    as Trustee


                                       By: __________________________
                                           [Name and Title]


                                       A-2

<PAGE>   12

                                     ANNEX B

                               DRAWING CERTIFICATE
                                       FOR
                                INTEREST DRAWING

                                     [Date]


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

      Re:   Irrevocable Letter of Credit Ref. No. _____
            For the Account of Hanover Direct, Inc.
            ---------------------------------------

Ladies and Gentlemen:

     The undersigned, a duly Authorized Officer of the undersigned Trustee (the
"Trustee"), hereby certifies that:

     1. The undersigned is the Trustee under the Note Agreement.

     2. The undersigned hereby makes demand for payment of $ _________ of the
Interest Component to be used solely for the payment of accrued interest on the
Notes in accordance with the terms of the Note Agreement.

     3. With respect to the drawing referred to in this Certificate, the amount
demanded hereby in the aggregate does not exceed the now applicable Stated
Amount or the now applicable Interest Component.

     4. Upon receipt by the undersigned or its designee of the amount demanded
hereby, (a) such amount shall be deposited into the [Interest Reserve Account]
to be used as provided in the Note Agreement, (b) no portion of said amount
shall be applied for any other purpose, and (c) no portion of said amount will
be commingled with other funds (except other funds drawn under the Letter of
Credit).

     5. The amount demanded in this Certificate was computed in accordance with
the terms and conditions of the Note Agreement.

     Please remit payment of the amount demanded herein by _____________ .


                                       B-1

<PAGE>   13

     Terms used but not otherwise defined herein shall have the meanings
provided in the above-referenced Letter of Credit or in the Note Agreement (as
defined in the Letter of Credit).



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


                                    [NAME OF NOTE AGREEMENT TRUSTEE],
                                    as Trustee


                                    By: ____________________________
                                        [Name and Title]


                                       B-2

<PAGE>   14

                                     ANNEX C

                               DRAWING CERTIFICATE
                                       FOR
                                PURCHASE DRAWING


                                     [Date]

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

      Re:   Irrevocable Letter of Credit Ref. No. _____
            For the Account of Hanover Direct, Inc.
            ---------------------------------------

Ladies and Gentlemen:

     The undersigned, a duly Authorized Officer of the undersigned Trustee (the
"Trustee"), hereby certifies that:

     1. The undersigned is the Trustee under the Note Agreement.

     2. In accordance with the terms of the Note Agreement, the undersigned
hereby makes demand for payment of $ _________ of the Principal Component to be
used solely for the payment of the Purchase Price (as defined in the Note
Agreement) of an equal principal amount of Notes.

     3. With respect to the drawing referred to in this Certificate, the amount
demanded hereby in the aggregate does not exceed the now applicable Stated
Amount or the now applicable Principal Component.

     4. Upon receipt by the undersigned or its designee of the amount demanded
hereby, (a) the undersigned or its designee will apply (or cause to be applied)
the same directly to the payment of such Purchase Price owing in respect of such
Notes, (b) no portion of said amount shall be applied for any other purpose, and
(c) no portion of said amount will be commingled with other funds (except other
funds drawn under the above-referenced Letter of Credit).

     5. The amount demanded in this Certificate was computed in accordance with
the terms and conditions of the Note Agreement.

     6. The Notes purchased with the amount demanded herein are subject to a
security interest in your favor until such Notes have been remarketed in
accordance with the provisions of [Section 3.08 of the Note Agreement.]


                                       C-1

<PAGE>   15

     Please remit payment of the amount demanded herein by ___________ .

     Terms used but not otherwise defined herein shall have the meanings
provided in the above-referenced Letter of Credit or in the Note Agreement (as
defined in the Letter of Credit).

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


                                    [NAME OF NOTE AGREEMENT TRUSTEE],
                                    as Trustee


                                     By: ____________________________
                                         [Name and Title]


                                       C-2

<PAGE>   16

                                     ANNEX D

                     EXTENSION OF SCHEDULED TERMINATION DATE

_________________________________ , as Trustee
_________________________________
_________________________________
_________________________________
Attention: ______________________

      Re:   Irrevocable Letter of Credit Ref. No. _____
            For the Account of Hanover Direct, Inc.
            ---------------------------------------

Ladies and Gentlemen:

     The undersigned, a duly authorized officer of Swiss Bank Corporation, New
York Branch (the "Bank"), hereby notifies the Trustee with respect to the
above-referenced Letter of Credit issued by the Bank in favor of the Trustee
(the "Letter of Credit"), that the Scheduled Termination Date of the Letter of
Credit heretofore in effect has been extended and that the Scheduled Termination
Date as so extended is __________________. The terms used in this Certificate
and not defined herein shall have the meanings given in the Letter of Credit.

     IN WITNESS WHEREOF, the Bank has executed and delivered this Certificate
this _______ day of __________ , ________ .


                                    SWISS BANK CORPORATION,
                                    New York Branch

                                    By: ____________________
                                        [Name and Title]


                                    By: ____________________
                                        [Name and Title]


                                       D-1

<PAGE>   17

                                     ANNEX E

                         DISCHARGE OF NOTE AGREEMENT AND
                          LETTER OF CREDIT CANCELLATION


                                     [Date]

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

      Re:   Irrevocable Letter of Credit Ref. No. _____
            For the Account of Hanover Direct, Inc.
            ---------------------------------------

     The undersigned, a duly authorized officer of the undersigned 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, that no Notes remain
outstanding under the Note Agreement dated as of November 9, 1994, between
Hanover Direct, Inc. and the Trustee (the "Note Agreement"), and the Note
Agreement is discharged.

     Pursuant to the Note Agreement, we are delivering herewith the Letter of
Credit for cancellation.


                                    [NAME OF NOTE AGREEMENT TRUSTEE],
                                    as Trustee



                                     By: ____________________________
                                         [Name and Title]


                                       E-1

<PAGE>   18

                                     ANNEX F

              NOTICE OF DEMAND FOR ACCELERATION AND DEFAULT DRAWING

_________________________________ , as Trustee
under a Note Agreement dated as of
November 9, 1994 with
Hanover Direct, Inc. (the "Note Agreement")

_____________________________
_____________________________
Attention: __________________

      Re:   Irrevocable Letter of Credit Ref. No. _____
            For the Account of Hanover Direct, Inc.
            ---------------------------------------

Ladies and Gentlemen:

     Please be advised that with regard to the above-referenced Letter of Credit
(the "Letter of Credit"; terms not otherwise defined herein shall have the same
meaning as provided in the Letter of Credit or the Note Agreement), there has
occurred an Event of Default under the Reimbursement Agreement, and in
accordance with the provisions of Sections 7.01 and 7.02 of the Note Agreement,
demand is hereby made of you, as Trustee under the Note Agreement, to declare
the entire unpaid principal of and interest on the Notes immediately due and
payable and to take such other action as provided in the Note Agreement.

     IN WITNESS WHEREOF, the undersigned has executed and delivered this notice
as of the _________ day of ________ , ________ .


                                    SWISS BANK CORPORATION,
                                    New York Branch


                                    By: ___________________
                                        [Name and Title]


                                    By: ___________________
                                        [Name and Title]


                                       F-1

<PAGE>   19

                                     ANNEX G

                         NOTICE OF DIRECTION TO PURCHASE
                            RATHER THAN PAY THE NOTES


_________________________________ , as Trustee
under a Note Agreement dated as of
November 9, 1994 with
Hanover Direct, Inc. (the "Note Agreement")
______________________________
______________________________
______________________________
Attention: ___________________


      Re:   Irrevocable Letter of Credit Ref. No. _____
            For the Account of Hanover Direct, Inc.
            ---------------------------------------

Ladies and Gentlemen:

     We either have received, or will shortly hereafter receive, from you a
Default Drawing for payment under the above-referenced Letter of Credit (the
"Letter of Credit"; terms not otherwise defined herein shall have the same
meaning as provided in the Letter of Credit or the Note Agreement). We hereby
give you notice and direction that, in accordance with the provisions of Section
7.03 of the Note Agreement, the proceeds from such Default Drawing should be
used and applied to purchase the Notes (other than Bank Notes or Borrower Notes)
as provided therein rather than to pay them.

      IN WITNESS WHEREOF, the undersigned has executed and
delivered this notice as of the ________ day of _________ , _______.


                                    SWISS BANK CORPORATION,
                                    New York Branch


                                    By: ___________________
                                        [Name and Title]


                                    By: ___________________
                                        [Name and Title]


                                       G-1

<PAGE>   20

                                     ANNEX H

            INSTRUCTION TO ISSUE LETTER OF CREDIT TO SUCCESSOR HOLDER

                                     [Date]

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

      Re:   Irrevocable Letter of Credit Ref. No. _____
            For the Account of Hanover Direct, Inc.
            ---------------------------------------

Ladies and Gentlemen:

     Reference is made to (a) the above-referenced Letter of Credit (the "Old
Letter of Credit") and (b) the Note Agreement dated as of November 9, 1994 (the
"Note Agreement") between Hanover Direct, Inc. and [Name of Trustee], as
Trustee.

     [Name and address of successor Trustee] (the "Successor Trustee") has
replaced and succeeded to our rights and obligations as Trustee under the Note
Agreement. You are hereby requested to endorse the Old Letter of Credit to the
Successor Trustee or to issue in accordance with the terms of the Old Letter of
Credit, a new letter of credit to the Successor Trustee having the same terms
and providing for the same Available Amount as the Old Letter of Credit.

     We submit herewith for endorsement or cancellation the original of the Old
Letter of Credit.

     The individual signing below on our behalf hereby represents that he or she
is duly authorized to so sign on our behalf.


                                    Very truly yours,

                                    [NAME OF NOTE AGREEMENT TRUSTEE],
                                    as Trustee


                                    By: _____________________________
                                        [Name and Title]


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