10-Q

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

/x/
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2001

Commission File Number 0-22334

LodgeNet Entertainment Corporation
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	46-0371161 (I.R.S. Employer Identification Number)
3900 West Innovation Street, Sioux Falls, South Dakota (Address of Principal Executive Offices)	57107 (ZIP code)

(605) 988-1000
(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report

    Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/  No / /.

    At April 30, 2001, there were 12,213,539 shares outstanding of the Registrant's common stock, $0.01 par value.

LodgeNet Entertainment Corporation

Index

		Page No.
Part I. Financial Information
Item 1—Financial Statements:
	Consolidated Balance Sheets (Unaudited) as of March 31, 2001 and December 31, 2000	3
	Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2001 and 2000	4
	Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2001 and 2000	5
	Notes to Consolidated Financial Statements (Unaudited)	6
Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations		9
Item 3—Quantitative and Qualitative Disclosures About Market Risk		14
Part II. Other Information
Item 1—Legal Proceedings		15
Item 2—Changes in Securities and Use of Proceeds		15
Item 3—Defaults Upon Senior Securities		15
Item 4—Submission of Matters to a Vote of Security Holders		15
Item 5—Other Information		15
Item 6—Exhibits and Reports on Form 8-K		15
Signatures		16

    As used herein (unless the context otherwise requires) "LodgeNet", "the Company" and/or "the Registrant" means LodgeNet Entertainment Corporation and its majority-owned subsidiaries.

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Part I—Financial Information

Item 1—Financial Statements

LodgeNet Entertainment Corporation
Consolidated Balance Sheets (Unaudited)
(Dollar amounts in thousands)

			March 31, 2001			December 31, 2000
Assets
Current assets:
	Cash and cash equivalents		$	6,541		$	4,059
	Marketable securities			176			1,398
	Accounts receivable, net			28,276			26,553
	Prepaid expenses and other			4,014			3,610
		Total current assets		39,007			35,620
Property and equipment, net				227,560			224,927
Investments in and advances to unconsolidated affiliates				3,050			3,500
Debt issuance costs, net				6,723			7,121
Other assets, net				10,152			10,437
			$	286,492		$	281,605
Liabilities and Stockholders' Deficit
Current liabilities:
	Accounts payable		$	15,438		$	12,671
	Current maturities of long-term debt			26,309			21,563
	Accrued expenses and other			15,364			11,988
	Deferred revenue			2,777			2,713
		Total current liabilities		59,888			48,935
Long-term debt				270,720			269,096
Derivative instruments				3,628			—
		Total liabilities		334,236			318,031
Stockholders' deficit:
	Common stock, $.01 par value, 20,000,000 shares authorized; 12,212,439 and 12,212,039 shares outstanding at March 31, 2001 and December 31, 2000, respectively			122			122
	Additional paid-in capital			150,667			150,663
	Accumulated deficit			(192,763	)		(185,981	)
	Accumulated other comprehensive loss			(5,770	)		(1,230	)
		Total stockholders' deficit		(47,744	)		(36,426	)
			$	286,492		$	281,605

The accompanying notes are an integral part of these consolidated financial statements.

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LodgeNet Entertainment Corporation
Consolidated Statements of Operations (Unaudited)
(Dollar amounts, except per share amounts, in thousands)

			Three Months Ended March 31,
			2001			2000
Revenues:
	Guest Pay		$	48,781		$	45,399
	Other			2,257			2,334
		Total revenues		51,038			47,733
Direct costs:
	Guest Pay			19,649			18,764
	Other			1,374			1,592
		Total direct costs		21,023			20,356
Gross profit				30,015			27,377
Operating expenses:
	Guest Pay operations			7,344			7,048
	Selling, general and administrative			5,294			4,772
	Depreciation and amortization			16,501			16,422
		Total operating expenses		29,139			28,242
Operating income (loss)				876			(865	)
Investment losses				(480	)		—
Interest expense				(7,131	)		(6,959	)
Interest income				66			224
Loss before income taxes				(6,669	)		(7,600	)
Provision for income taxes				(113	)		(82	)
Net loss			$	(6,782	)	$	(7,682	)
Per common share (basic and diluted):
	Net loss		$	(0.56	)	$	(0.64	)
Weighted average shares outstanding				12,212,210			12,057,243

The accompanying notes are an integral part of these consolidated financial statements.

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LodgeNet Entertainment Corporation
Consolidated Statements of Cash Flows (Unaudited)
(Dollar amounts in thousands)

				Three Months Ended March 31,
				2001			2000
Operating activities:
	Net loss			$	(6,782	)	$	(7,682	)
	Adjustments to reconcile net loss to net cash provided by operating activities:
		Depreciation and amortization			16,501			16,422
		Investment losses			480			—
		Change in operating assets and liabilities:
			Accounts receivable, net		(1,805	)		1,185
			Prepaid expenses and other		(404	)		(517	)
			Accounts payable		2,789			2,326
			Accrued expenses and other		2,743			3,139
			Other		(176	)		(164	)
Net cash provided by operating activities					13,346			14,709
Investing activities:
	Property and equipment additions				(17,863	)		(17,611	)
	Proceeds from sale of investments				888			7,200
	Proceeds from (investment in) affiliates				267			(104	)
Net cash used for investing activities					(16,708	)		(10,515	)
Financing activities:
	Borrowings under revolving credit facility				6,000			2,000
	Repayments of revolving credit facility				—			(1,500	)
	Repayment of long-term debt				(10	)		(9	)
	Repayment of capital lease obligations				(113	)		(117	)
	Exercise of stock options				4			1,467
Net cash provided by financing activities					5,881			1,841
Effect of exchange rates on cash					(37	)		1
Increase in cash and cash equivalents					2,482			6,036
Cash and cash equivalents at beginning of period					4,059			1,644
Cash and cash equivalents at end of period				$	6,541		$	7,680
Supplemental cash flow information:
	Cash paid for interest			$	5,010		$	3,803

The accompanying notes are an integral part of these consolidated financial statements.

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LodgeNet Entertainment Corporation
Notes to Consolidated Financial Statements (Unaudited)

Note 1—Basis of Presentation

    The accompanying consolidated financial statements as of March 31, 2001, and for the three month periods ended March 31, 2001 and 2000, have been prepared by LodgeNet Entertainment Corporation (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "Commission"). The information furnished in the accompanying consolidated financial statements reflects all adjustments, consisting only of normal recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements.

    Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to the rules and regulations of the Commission. Although the Company believes that the disclosures are adequate to make the information presented herein not misleading, it is recommended that these unaudited consolidated financial statements be read in conjunction with the more detailed information contained in the Company's Annual Report on Form 10-K for 2000, as filed with the Commission. The results of operations for the three-month period ended March 31, 2001 are not necessarily indicative of the results of operations for the full year.

    The consolidated financial statements include the accounts of LodgeNet Entertainment Corporation and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Note 2—Property and Equipment, Net

    Property and equipment was comprised as follows at (in thousands):

			March 31, 2001			December 31, 2000
Land, building and equipment			$	64,897		$	62,432
Free-to-guest equipment				21,229			20,175
Guest Pay systems:
	Installed			360,492			349,313
	System components			25,585			24,565
	Software costs			13,398			12,816
		Total		485,601			469,301
Less—depreciation and amortization				(258,041	)		(244,374	)
Property and equipment, net			$	227,560		$	224,927

Note 3—Comprehensive Income (Loss)

    Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income," provides standards for reporting and disclosure of comprehensive income and its components. Comprehensive income reflects the changes in equity during a period from transactions and other

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events and circumstances from non-owner sources. For the Company, comprehensive loss was as follows for the quarters ended March 31 (in thousands):

	2001			2000
Net loss	$	(6,782	)	$	(7,682	)
Foreign currency translation adjustment		(582	)		(20	)
Unrealized loss on marketable securities		(330	)		(13,603	)
Cumulative effect of adoption of SFAS No. 133		(1,287	)		—
Unrealized loss on derivative instruments		(2,341	)		—
Comprehensive loss	$	(11,322	)	$	(21,305	)

Note 4—Accounting for Derivative Instruments and Hedging Activities

    Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting.

    At January 1, 2001, the Company had interest rate swap agreements on $100 million of long-term debt. The swap agreements, which expire $50 million in March 2003 and $50 million in December 2005, have been designated as, and meet the criteria for cash flow hedges. Initial adoption of SFAS No. 133 resulted in the recording of a liability for the fair value of the swap agreements of $1.3 million, with the offset recorded in equity as a component of accumulated other comprehensive loss.

Note 5—Long-term Debt and Credit Facilities

    Long-term debt was comprised as follows at (in thousands):

		March 31, 2001			December 31, 2000
Bank Credit Facility:
	Bank term loan	$	75,000		$	75,000
	Revolving credit facility		40,000			34,000
10.25% senior notes			150,000			150,000
11.50% senior notes			30,000			30,000
	Less unamortized discount		(470	)		(523	)
Capital leases			1,614			1,287
Other			885			895
			297,029			290,659
Less current maturities			(26,309	)		(21,563	)
		$	270,720		$	269,096

Bank Credit Facility—In February 1999, the Company amended and restated its bank credit facility, increasing the size of the facility to $150 million, comprised of a $75 million term loan and a $75 million revolving credit facility (which may be increased to $100 million, subject to certain limitations). Quarterly repayments on the term loan begin in April 2001. The revolving credit facility

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matures in February 2005. Loans bear interest, payable quarterly, at the Company's option of (1) the bank's base rate (as defined) plus a margin of from 1.00% to 1.75%, depending on leverage as defined, or (2) the eurodollar rate plus a margin of from 2.00% to 2.75%, depending on leverage as defined. The margins applicable to the bank's base rate and/or the eurodollar rate loans are subject to quarterly adjustment as defined in the agreement. Weighted average interest rates as of March 31, 2001 were 7.31% for the term loan and 7.19% for the revolving credit facility. The loans are secured by a first priority security interest in all of the Company's assets. The facility provides for the issuance of letters of credit up to $12 million, subject to customary terms and conditions. As of March 31, 2001, the Company had outstanding letters of credit totaling $2.0 million.

    The facility includes terms and conditions which require the maintenance of certain financial ratios and place limitations on capital expenditures, additional indebtedness, liens, investments, guarantees and certain payments or distributions in respect of the common stock. As of March 31, 2001, the Company was in compliance with all covenants, terms and conditions of the bank credit facility.

10.25% Senior Notes—In December 1996, the Company issued $150 million of unsecured 10.25% senior notes (the "10.25% Notes"), due December 15, 2006. The 10.25% Notes are unsecured, rank pari passu in right of payment with future unsubordinated unsecured indebtedness and rank senior in right of payment to all subordinated indebtedness of the Company. The 10.25% Notes require semi-annual interest payments and contain certain restrictive covenants. As of March 31, 2001, the Company was in compliance with all covenants, terms, and conditions of the 10.25% Notes.

    The 10.25% Notes are redeemable at the option of the Company, in whole or in part, on or after December 15, 2001, initially at 105.125% of their principal amount (plus accrued and unpaid interest) declining ratably to 100% of their principal amount (plus accrued and unpaid interest) on or after December 15, 2003.

11.50% Senior Notes—During 1995, the Company issued $30 million principal amount of unsecured 11.50% senior notes (the "11.50% Notes"). Mandatory annual principal payments of $6 million commence in July 2001 continuing through July 2005. Semi-annual interest payments are required. The Company issued a total of 480,000 warrants to purchase common stock of the Company in connection with the issuance of the 11.50% Notes and the value of the warrants, $1.68 million, was recorded as additional paid-in capital and shown as a discount on the 11.50% Notes. As part of the refinancing transaction in which the 10.25% Notes were issued, the holders of the 11.50% Notes adopted the covenants and ranking of the 10.25% Notes.

    Long-term debt has the following scheduled principal maturities for the years ended December 31 (in thousands of dollars): 2001—$21,563; 2002—$25,161; 2003—$25,805; 2004—$28,652; 2005—$40,000; thereafter—$149,478.

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Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis provides information concerning our results of operations and financial condition. This discussion should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.

Special Note Regarding Forward-Looking Statements—Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements. When used in this Quarterly Report, the words "expects," "anticipates," "estimates," "believes," "no assurance," and similar expressions, and statements which are made in the future tense, are intended to identify such forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the Company's actual performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. In addition to the risks and uncertainties discussed in this Quarterly Report, such factors include, among others, the following: the impact of competition and changes to the competitive environment for the Company's products and services, changes in technology, reliance on strategic partners, uncertainty of litigation, changes in government regulation and other factors detailed, from time to time, in the Company's filings with the Securities and Exchange Commission. These forward-looking statements speak only as of the date of this Quarterly Report. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Overview

    LodgeNet is an interactive services provider specializing in the delivery of interactive television and Internet access services to the lodging industry. Utilizing broadband technology, the Company provides services throughout the United States, Canada and select international markets. These services include on-demand movies, music and music videos, Nintendo® video games, Internet-enhanced television, high-speed Internet access, and other interactive television services designed to serve the needs of the lodging industry and the traveling public.

    Guest Pay Interactive Services.  Guest Pay interactive services are purchased by guests on a per-view, hourly, or daily basis and include on-demand movies, music and music videos, network-based Nintendo video games, Internet enhanced television, and high-speed Internet access services. Guest Pay packages may also include satellite-delivered basic and premium cable television programming that is paid for by the hotel and provided to guests at no charge, and other interactive services such as video review of room charges, video checkout, guest surveying, advertising and merchandising services.

    The Company's Guest Pay interactive revenues depend on a number of factors, including the number of rooms equipped with the Company's systems, hotel occupancy rates and guest demographics, and the popularity, pricing, and availability of programming. The primary direct costs of providing Guest Pay interactive services are (i) license fees paid to studios for non-exclusive distribution rights to recently-released major motion pictures, (ii) nominal one-time license fees paid for independent films, (iii) license fees for other interactive services, (iv) Internet connectivity costs, and (v) the commission retained by the hotel. Guest Pay operating expenses include costs of system maintenance and support, programming delivery and distribution, data retrieval, insurance and personal property taxes.

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    The Company installed its systems in the following number of rooms, net of de-installations, during the three months and twelve months ended March 31, 2001:

	Periods Ended March 31, 2001
	Three Months	Twelve Months
Guest Pay interactive rooms	19,512	63,869
Nintendo video game rooms	19,774	65,596
Internet services rooms	23,189	41,563

    The room installations for the twelve months ended March 31, 2001 represent increases of 9.4% for Guest Pay interactive rooms, 10.1% for Nintendo video game rooms, and 317% for Internet services rooms over the number of installed rooms at March 31, 2000. De-installation activity is generally less than 2% of the installed number of rooms.

    The Company's base of installed rooms was comprised as follows at March 31:

	2001	2000
Guest Pay interactive rooms (1)	744,587	680,718
Nintendo video game rooms	717,477	651,881
Internet services rooms	54,691	13,128
Total rooms served (2)	832,899	777,745

(1)

—100% of Guest Pay interactive rooms are served by the Company's on-demand movie system (as compared to a scheduled movie system that shows movies at predetermined times).

(2)

—Total rooms served represent rooms receiving one or more of the Company's services, including rooms served by international licensees.

    Free-to-Guest and Other Services.  In addition to Guest Pay interactive services, the Company provides satellite-delivered basic and premium cable television programming for which the hotel, rather than its guests, pays the charges. The hotel pays the Company a fixed monthly charge per room for each programming channel provided. The Company obtains its free-to-guest programming pursuant to multi-year agreements and pays a monthly fee per room, which varies depending on incentive programs in effect from time to time.

    To meet the needs of its hotel customers related to the Company's service offerings, the Company provides a variety of other services to its hotel customers including the sale of system equipment and service parts and labor. Results from these other services and free-to-guest services delivered to rooms not receiving Guest Pay interactive services are included in the "other" components of revenues and direct costs in the statements of operations.

    InnMedia LLC.  During the fourth quarter of 2000, the Company entered into an arrangement with Hilton Hotels Corporation to form a new broadband, interactive media company, InnMedia LLC, to offer hotel guests new and innovative interactive television content such as high speed Internet access through the television as well as customized hotel and guest information. Under this arrangement, InnMedia will supply Internet portal and interactive television content to Hilton and other hotels using LodgeNet's broadband, interactive system. InnMedia will report the operations of these activities, of which LodgeNet and Hilton will equally share, and will pay LodgeNet a fee for use of LodgeNet's system. The arrangement includes $5 million financing commitments from both LodgeNet and Hilton to fund start-up and near-term operational costs. InnMedia is expected to begin delivery of content and services during the third quarter of 2001.

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Discussion and Analysis of Results of Operations
Three Months Ended March 31, 2000 and 2001

    Revenue Analysis.  The Company's total revenue for the first quarter of 2001 increased 6.9%, or $3.3 million, in comparison to the first quarter of 2000. The following table sets forth the components of revenue (in thousands) for the quarter ending March 31:

		2001			2000
		Amount		Percent of Total Revenue	Amount		Percent of Total Revenue
Revenue:
	Guest Pay	$	48,781	95.6	$	45,399	95.1
	Other		2,257	4.4		2,334	4.9
		$	51,038	100.0	$	47,733	100.0

    Guest Pay interactive revenue increased 7.4%, or $3.4 million, in the first quarter of 2001 in comparison to the same quarter of 2000. This increase was attributable to a 9.3% increase in the average number of installed Guest Pay interactive rooms, partially offset by a 1.7% decrease in average monthly revenue per room. The following table sets forth information in regard to average monthly revenue per Guest Pay room for the quarter ending March 31:

			2001		2000
Average monthly revenue per room:
	Movie revenue		$	18.03	$	18.74
	Other interactive service revenue			4.21		3.89
		Total per Guest Pay room	$	22.24	$	22.63

    Average movie revenue per room decreased 3.8% due to a less popular line-up of major motion pictures in the first quarter of 2001 compared to 2000. Average other interactive service revenue per room increased 8.2% due to increased revenue from Internet access services and cable television programming services.

    Revenue from other sources includes revenue from free-to-guest services provided to hotels not receiving Guest Pay services and sales of televisions, system equipment, and service parts and labor. Other revenue decreased $77,000 or 3.3% due to lower revenue from free-to-guest services and decreased sales of televisions.

    Gross Profit.  Gross profit totaled $30.0 million for the three months ended March 31, 2001, an increase of 9.6% over the first quarter of 2000 on a 6.9% increase in revenue.

		2001			2000
Gross profit:
	Guest Pay	$	29,132		$	26,635
	Other		883			742
		$	30,015		$	27,377
Gross profit margin:
	Guest Pay		59.7	%		58.7	%
	Other		39.1	%		31.8	%
	Composite		58.8	%		57.4	%

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    Gross profit on Guest Pay interactive services increased 9.4%, or $2.5 million, on a 7.4% increase in related revenue. Guest Pay direct costs (primarily studio license fees, video game license fees and the commission retained by the hotel) generally tend to vary directly with revenue. The gross profit margin increase from 58.7% to 59.7% was primarily due to decreased movie license fees.

    Gross profit on other services increased $141K or 19% in the first quarter of 2001 from the prior year quarter and the gross profit margin increased from 31.8% to 39.1%. These increases were due to lower costs related to cable television programming services resulting from more favorable pricing arrangements.

    The Company's overall gross profit margin increased to 58.8% in the current quarter from 57.4% in the year earlier quarter due to a shift in sales from other revenue to the more profitable Guest Pay interactive services (95.1% in the first quarter of 2000 to 95.6% in the first quarter of 2001) and the increase in gross margin from Guest Pay interactive services and other revenue as described above.

    Operating Expenses.  The following table sets forth information in regard to the Company's operating expenses for the quarter ending March 31 (dollar amounts in thousands):

			2001			2000
			Amount		Percent of Total Revenues	Amount		Percent of Total Revenues
Operating expenses:
	Guest Pay operations		$	7,344	14.4	$	7,048	14.8
	Selling, general and administrative			5,294	10.4		4,772	10.0
	Depreciation and amortization			16,501	32.3		16,422	34.4
		Total operating expenses	$	29,139	57.1	$	28,242	59.2

    Guest Pay operations expenses consist of costs directly related to the operation of systems at hotel sites. The increase in Guest Pay operations expenses of $296,000 or 4.2% from the prior year quarter was due to a 9.3% increase in average installed rooms, partially offset by lower per room operating costs, including certain non-recurring costs incurred in the first quarter of 2000. Per average installed room, Guest Pay operations expenses were $3.35 per month in the first quarter of 2001 as compared to $3.51 per month in the first quarter of 2000.

    Selling, general and administrative expenses increased $522,000 or 10.9% in the first quarter of 2001 compared to the year earlier quarter due to increased payroll related expenses and approximately $250,000 of one-time fees related to an employee benefit plan.

    Operating Income (Loss).  Due to increased revenue from Guest Pay interactive services, improved gross profit margin and decreased operating expenses as a percent of revenue, the Company generated operating income of $876,000 in the first quarter of 2001 compared to an operating loss of $865,000 in the first quarter of 2000.

    Investment Losses.  Global Interactive Communications Corporation—the Company owns a minority interest in Global Interactive Communications Corporation ("GICC") resulting from the merger transaction involving ResNet Communications LLC (formerly the Company's majority-owned subsidiary) in 1998. Losses of $183,000 were recorded relating to this investment under the equity method of accounting for an investment in the first quarter of 2001.

    InnMedia LLC—As previously described, InnMedia was formed by LodgeNet and Hilton during the fourth quarter of 2000. The Company has a 50% equity interest in InnMedia and recorded losses under the equity method of accounting for an investment of $293,000 in the first quarter of 2001.

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    Interest Expense.  Interest expense increased $172,000 or 2.5%, to $7.1 million during the first quarter of 2001 due to increases in long-term debt to fund the Company's continuing expansion of its business. Average principal amount of long-term debt outstanding during the quarter ended March 31, 2001 was approximately $292 million (at an average interest rate of approximately 9.8%) as compared to an average principal amount outstanding of approximately $284 million (at an average interest rate of approximately 9.8%) during the comparable period of 2000.

    Net Loss.  For the reasons previously described, the Company's net loss decreased to $6.8 million in the first quarter of 2001 from a net loss of $7.7 million in the prior year quarter.

    EBITDA.  EBITDA (defined by the Company as earnings before interest, income taxes, depreciation, amortization and other non-operating income or expenses) increased 11.7% to $17.4 million in the first quarter of 2001 as compared to $15.6 million in the prior year quarter. This increase is primarily due to a 9.3% increase in the average number of installed rooms receiving Guest Pay interactive services and the related increase in Guest Pay revenue, as well as increased gross profit earned on Guest Pay revenue and other revenue as described above. As a percentage of total revenue, EBITDA increased to 34.0% in the current quarter compared to 32.6% in the prior year quarter.

    EBITDA is not intended to represent an alternative to net income or cash flows from operating, financing or investing activities (as determined in accordance with generally accepted accounting principles) as a measure of performance, and is not representative of funds available for discretionary use due to the Company's financing obligations. EBITDA, as defined by the Company, may not be calculated consistently among other companies reporting similarly titled measures. EBITDA is included herein because it is a widely accepted financial indicator used by certain investors and financial analysts to assess and compare companies on the basis of operating performance. Management believes that EBITDA provides an important additional perspective on the Company's operating results and the Company's ability to service its long-term debt and to fund the Company's continuing growth.

Recent Accounting Developments

    See Note 4 in the notes to consolidated financial statements.

Seasonality

    The Company's quarterly operating results are subject to fluctuation depending upon hotel occupancy rates and other factors. Typically, occupancy rates are higher during the second and third calendar quarters due to seasonal travel patterns.

Liquidity and Capital Resources

    Historically, the growth of the Company's business has required substantial amounts of capital. The Company has incurred operating and net losses due in large part to the depreciation, amortization and interest expenses related to the capital required to expand its business. Historically, cash flow from operations has not been sufficient to fund the cost of expanding the Company's business and to service existing indebtedness. For 2000, capital expenditures were $60.2 million and net cash provided by operating activities was $41.2 million. During the first quarter of 2001, capital expenditures were $17.9 million as compared to $17.6 million in the first quarter of 2000, and net cash provided by operating activities was $13.3 million as compared to $14.7 million in the same period of 2000.

    Depending on the rate of growth of its business and other factors, the Company expects to incur capital expenditures between $70 to $80 million during 2001. The Company's cash requirements for 2001 are expected to include $21.6 million of payments for principal maturities of long-term debt. In addition, the Company has committed up to $5 million of financing to InnMedia LLC, of which the

13

Company expects to fund the remaining $4 million during 2001. The Company also has a $20.9 million net working capital deficit as of March 31, 2001.

    As of March 31, 2001, the Company has $35 million available for borrowing under its $75 million revolving credit facility. The revolving credit facility may be increased to $100 million subject to certain conditions. The Company is presently in discussion with two major financial institutions to replace the current credit facility with a larger credit facility. The Company expects the new facility to be in place by the end of the second quarter. While there can be no assurances that the Company will be able to complete a new agreement, the Company's predictable and growing cash flow and its relationships within the financial community are positive indicators that a new facility is likely to be completed at market rates and conditions. The actual amount and timing of the Company's capital expenditures will vary (and such variations could be material) depending upon the number of new contracts for services entered into by the Company, the costs of installations, the timing of the completion of the new credit facility as described above, and other factors.

Item 3—Quantitative and Qualitative Disclosures About Market Risk

    The Company is exposed to various market risks, including potential losses resulting from adverse changes in interest rates and foreign currency exchange rates. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes.

    Interest.  At March 31, 2001, the Company had debt totaling $297 million. The Company has interest rate swap arrangements covering debt with a notional amount of $100 million to effectively change the underlying debt from a variable interest rate to a fixed interest rate for the term of the swap agreements. After giving effect to the interest rate swap arrangements the Company had fixed rate debt of $282 million and variable rate debt of $15 million at March 31, 2001. For fixed rate debt, interest rate changes affect the fair market value but do not impact earnings or cash flows. Conversely, for variable rate debt, interest rate changes generally do not affect the fair market value but do impact future earnings and cash flows, assuming other factors are held constant. Assuming other variables remain constant (such as debt levels), a one percentage point increase in interest rates would decrease the unrealized fair market value of the fixed rate debt by an estimated $26.6 million. The impact on earnings and cash flow for the next year resulting from a one percentage point increase in interest rates would be approximately $150,000 assuming other variables remain constant.

    Foreign Currency Transactions.  A portion of the Company's revenues are derived from the sale of Guest Pay services in Canada. The results of operations and financial position of the Company's operations in Canada are measured in Canadian dollars and translated into U.S. dollars. The effects of foreign currency fluctuations in Canada are somewhat mitigated by the fact that expenses and liabilities are generally incurred in Canadian dollars. The reported income of the Company's Canadian subsidiary will be higher or lower depending on a weakening or strengthening of the U.S. dollar against the Canadian dollar. In addition, a portion of the Company's assets are based in Canada and are translated into U.S. dollars at foreign currency exchange rates in effect as of the end of each period. Accordingly, the Company's consolidated assets will fluctuate depending on the weakening or strengthening of the U.S. dollar against the Canadian dollar. No significant foreign currency fluctuations occurred in the first quarter of 2001 to materially impact consolidated results of operations or financial condition.

14

Part II—Other Information

Item 1—Legal Proceedings

    The Company is subject to litigation arising in the ordinary course of business. As of the date hereof, the Company believes the resolution of such litigation will not have a material adverse effect upon the Company's financial condition or results of operations.

Item 2—Changes in Securities and Use of Proceeds

    Not applicable.

Item 3—Defaults Upon Senior Securities

    Not applicable.

Item 4—Submission of Matters to a Vote of Security Holders

    Not applicable.

Item 5—Other Information

    Not applicable.

Item 6—Exhibits and Reports on Form 8-K

a. Exhibits:

10.35	Form of Executive Severance Agreement between the Company and Gary H. Ritondaro dated March 1, 2001.
10.36	Form of Employment Agreement between the Company and Gary H. Ritondaro dated March 1, 2001.

b. Reports on Form 8-K:

    The Company filed no Reports on Form 8-K during the quarter ended March 31, 2001.

15

LodgeNet Entertainment Corporation

Signature

    Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	LodgeNet Entertainment Corporation (Registrant)
Date: May 10, 2001	/s/ Scott C. Petersen Scott C. Petersen President and Chief Executive Officer (Principal Executive Officer)
Date: May 10, 2001	/s/ Gary H. Ritondaro Gary H. Ritondaro Senior Vice President, Chief Financial Officer (Principal Financial Officer)
Date: May 10, 2001	/s/ Ronald W. Pierce Ronald W. Pierce Vice President, Corporate Controller (Principal Accounting Officer)

16

QuickLinks

Index
Part I—Financial Information

Item 1—Financial Statements

Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements

Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations

Discussion and Analysis of Results of Operations Three Months Ended March 31, 2000 and 2001

Item 3—Quantitative and Qualitative Disclosures About Market Risk

Part II—Other Information

Item 1—Legal Proceedings
Item 2—Changes in Securities and Use of Proceeds
Item 3—Defaults Upon Senior Securities
Item 4—Submission of Matters to a Vote of Security Holders
Item 5—Other Information
Item 6—Exhibits and Reports on Form 8-K

Signature

EX-10.35

                       LODGENET ENTERTAINMENT CORPORATION
                          EXECUTIVE SEVERANCE AGREEMENT


         AGREEMENT, dated as of March 1, 2001, by and between LodgeNet
Entertainment Corporation, a Delaware corporation located at 3900 West
Innovation Street, Sioux Falls, South Dakota 57107 ("Corporation"), and Gary H.
Ritondaro ("Executive").

         WHEREAS, the Executive is presently employed by the Corporation as
Senior Vice President / Chief Financial Officer of the Corporation:

         WHEREAS, the Board of Directors ("Board") has determined that it would
be in the best interest of the Corporation and its shareholders to reinforce and
encourage the continued attention and dedication of the Executive as a member of
the Corporation's management without the distractions occasioned from the
possibility of an abrupt change in control of the Corporation;

         WHEREAS, the Board has determined that entering into agreements from
time to time with members of senior management in the form hereof will enhance
the ability of the Corporation to attract and retain capable senior executives;
and

         WHEREAS, the Executive is willing to continue serving the Corporation
in accordance with the provisions of this Agreement.

         NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants and obligations hereinafter set forth, the parties hereto
hereby agree as follows:

         1. OPERATION OF AGREEMENT.

         This Agreement sets forth the severance compensation which the
Corporation agrees it will pay to the Executive if the Executive's employment
with the Corporation terminates under one of the circumstances described herein
in connection with or following a Change in Control of the Corporation (as
defined herein). No compensation shall be payable under this Agreement unless
and until: (i) there shall have been a Change in Control of the Corporation and
(ii) the Executive's employment by the Corporation shall have been terminated in
accordance with Section 4. To the extent that the provisions of this Agreement,
or the benefits provided hereunder, conflict with any provisions of any existing
employment agreement between the Executive and the Corporation, this Agreement
shall supersede any such provisions in any such employment agreement.

         2. TERM.

         This Agreement shall terminate, except to the extent that any
obligation of the Corporation hereunder remains unpaid as of such time, upon the
earliest of: (i) July 24, 2006 if a Change in Control of the Corporation has not
occurred within such period; (ii) the termination of the Executive's employment
the with Corporation based on death, Permanent Disability (as defined in Section
4(b)), or Cause (as defined in Section 4 (c)) or by the


                                      1


Executive other than for Good Reason (as defined in Section 4 (d)); (iii) two
(2) years from the date of a Change in Control of the Corporation if the
Executive has not terminated his employment for Good Reason as of such time; and
(iv) prior to a Change in Control, in the discretion of the Board, upon the
Executive's ceasing to be an executive officer of the Corporation.
Notwithstanding clause (i) hereof, on July 24th of each year following the date
this Agreement was first entered, the term of this Agreement automatically shall
be extended for one additional year, unless prior to such anniversary the
Corporation notifies the Executive in writing that it does not wish to extend
the term of the Agreement.

         3. CHANGE IN CONTROL.

         For purposes of this Agreement, a Change in Control of the Corporation
shall mean the occurrence of any of the following:

         (a) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") in effect
on the date hereof) or group of persons acting in concert, other than the
Corporation or any subsidiary thereof or any employee benefit plan of the
Corporation or any subsidiary thereof, becomes the "beneficial owner" (as such
term is defined in Rule 13d-3 of the Exchange Act except that a person shall
also be deemed the beneficial owner of all securities which such person may have
a right to acquire, whether or not such right is presently exercisable),
directly or indirectly, of securities of the Corporation representing thirty
percent (30%) or more of the combined voting power of the Corporation's then
outstanding securities ordinarily having the right to vote in the election of
directors ("voting stock"); BUT EXCLUDING any such acquisition (or series of
acquisitions) effected at a purchase price that results in an actual or implied
average valuation of the Corporation's outstanding common stock of less than
$6.75 per share (adjusted as appropriate for any increase or decrease in the
number of shares resulting from a reclassification, split, subdivision or
consolidation of shares or other distribution of assets or securities to
stockholders without the receipt of consideration by the Corporation or any
other occurrence for which the Board determines an adjustment is appropriate);
or

         (b) during any period subsequent to the date of this Agreement, a
majority of the members of the Board shall not for any reason be the individuals
who at the beginning of such period constitute the Board or those persons who
are nominated as new directors by a majority of the current directors or their
successors who have been so nominated; or

         (c) there shall be consummated any merger, consolidation (including a
series of mergers or consolidations), or any sale, lease, exchange or other
transfer (in one transaction or a series of related transactions) of all, or
substantially all, of the assets of the Corporation (meaning assets representing
thirty percent (30%) or more of the net tangible assets of the Corporation or
generating thirty percent (30%) or more of the Corporation's operating cash
flow), or any other similar business combination or transaction, BUT EXCLUDING
any business combination or transaction which: (i) would result in the voting
stock of the Corporation immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting stock of the
surviving entity) more than 70% of the combined voting power of the voting stock
of the Corporation (or such surviving entity) outstanding immediately after
giving effect to such business combination or transaction; (ii) would be


                                       2


effected to implement a recapitalization (or similar transaction) of the
Corporation in which no "person" (as defined in subsection 3(a) hereof) or group
of persons acting in concert becomes the beneficial owner (as defined in
subsection 3(a) hereof) of thirty percent (30%) or more of the combined voting
power of the then outstanding voting stock of the Corporation; or (iii) is
effected at a purchase price that results in an actual or implied average
valuation of the Corporation's outstanding common stock of less than $6.75 per
share (adjusted as appropriate for any increase or decrease in the number of
shares resulting from a reclassification, split, subdivision or consolidation of
shares or other distribution of assets or securities to stockholders without the
receipt of consideration by the Corporation or any other occurrence for which
the Board determines an adjustment is appropriate); or


                                       3


         (d) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation; or

         (e) the occurrence of any other event that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation 14A of the
Exchange Act in effect on the date hereof.

         4. TERMINATION FOLLOWING CHANGE IN CONTROL.

         (a) If a Change in Control of the Corporation shall have occurred while
the Executive is still an employee of the Corporation, or if Executive's
employment with the Corporation shall have been terminated prior to but in
connection with a Change in Control (meaning that at the time of such
termination the Company had entered into an agreement, the consummation of which
would result in a Change in Control, or any person had publicly announced its
intent to take or consider actions that would constitute a Change in Control, or
the Board adopts a resolution to the effect that a potential Change in Control
for purposes of this Agreement has occurred), THEN the Executive shall be
entitled to the compensation provided in Section 5 upon the termination of the
Executive's employment by the Corporation or by the Executive, UNLESS such
termination is as a result of: (i) the Executive's death; (ii) the Executive's
Permanent Disability (as defined in Section 4(b) below); (iii) the Executive's
termination by the Corporation for Cause (as defined in Section 4(c) below); or
(iv) the Executive's decision to terminate employment other than for Good Reason
(as defined in Section 4(d) below).

         (b) PERMANENT DISABILITY. If, as a result of the Executive's incapacity
due to physical or mental illness, the Executive shall have been absent from his
duties with the Corporation on a full-time basis for six (6) months and within
thirty (30) days after written notice of termination is thereafter given by the
Corporation the Executive shall not have returned to the full-time performance
of the Executive's duties, the Corporation may terminate this Agreement for
"Permanent Disability."

         (c) CAUSE. The Corporation may terminate the employment of the
Executive for Cause. For purposes of this Agreement, the termination of the
Executive's employment shall be deemed to have been for "Cause" only if
termination of his employment shall have been the result of: (i) the Executive's
willful engaging in dishonest or fraudulent actions or omissions resulting or
intended to result directly or indirectly in any demonstrable material financial
or economic harm to the Corporation or (ii) the Executive's willful breach or
willful and habitual neglect of his material duties, and such breach or neglect
remains uncured for a period of ninety (90) days after written notice as
described below. Notwithstanding the foregoing, the Executive shall not be
deemed to have been terminated for Cause under either clause (i) or (ii) above
unless and until there shall have been delivered to the Executive a Notice of
Termination (as defined in Section 4(f)) and a certified copy of a resolution of
the Board adopted by the affirmative vote of not less than a majority of the
entire membership of the Board (other than the Executive if he is a member of
the Board at such time) at a meeting called and held for that purpose and at
which the Executive was given an opportunity to be heard, finding that the
Executive was guilty of conduct set forth above based on reasonable evidence,
specifying the particulars thereof in detail. For purposes of this Section 4(c),
no act


                                       4


or failure to act on the Executive's part shall be considered "willful" unless
done or omitted to be done by him not in good faith and without reasonable
belief that his action or omission was in the best interest of the Corporation.

         (d) GOOD REASON. The Executive may terminate his employment by the
Corporation for Good Reason at any time following a Change in Control during the
term of this Agreement. For purposes of this Agreement, "Good Reason" shall mean
any of the following:

                  (i) the assignment to the Executive of any duties inconsistent
with the Executive's positions, duties, responsibilities and status with the
Corporation immediately prior to a Change in Control, or a significant adverse
alteration in the nature of the Executive's reporting responsibilities, titles,
or offices as in effect immediately prior to a Change in Control, or any removal
of the Executive from, or any failure to reelect the Executive to, any such
positions, except in connection with a termination of the employment of the
Executive for Cause, Permanent Disability, or as a result of the Executive's
death or by the Executive other than for Good Reason;

                  (ii) a reduction by the Corporation in the Executive's base
salary in effect immediately prior to a Change in Control;

                  (iii) failure by the Corporation to continue in effect (and
without substitution of a comparable plan) any benefit or compensation plan,
stock purchase plan, stock option plan, life insurance plan, health and
hospitalization plan or disability plan in which the Executive is participating
at the time of a Change in Control, or the taking of any action by the
Corporation which would adversely affect Executive's participation in or
materially reduce Executive's benefits under any of such plans;

                  (iv) any material breach by the Corporation of any provision
of this Agreement;

                  (v) following a Change in Control, the Executive is excluded
(without substitution of a substantially equivalent plan) from participation in
any benefit, incentive, stock option, health, dental, insurance or pension plan
generally made available to persons at Executive's level of responsibility in
the Corporation;

                  (vi) without the Executive's express written consent, the
requirement by the Corporation that the Executive's principal place of
employment be relocated more than twenty-five (25) miles from his place of
employment prior to the Change in Control, or travel on the Corporation's
business to an extent materially greater than the Executive's customary business
travel obligations;

                  (vii) The Corporation's failure to obtain a satisfactory
agreement from any successor to assume and agree to perform the Corporation's
obligations under this Agreement, as contemplated in Section 7(a) hereof.


                                       5


         (e) NOTICE OF GOOD REASON. If Executive believes that he is entitled to
terminate his employment with the Corporation for Good Reason as defined in
Section 4(d) above, he may apply in writing to the Corporation for confirmation
of such entitlement prior to the Executive's actual separation from employment,
by following the claims procedure set forth in Section 10 hereof. The submission
of such a request by an Executive shall not constitute "Cause" for the
Corporation to terminate an Executive under Section 4(c) hereof; and Executive
shall continue to receive all compensation and benefits he was receiving at the
time of such submission throughout the resolution of the matter pursuant to the
procedures set forth in Section 10 hereof. If the Executive's request for a
termination of employment for Good Reason is denied under both the request and
appeal procedures set forth in Sections 10(b) and (c) hereof, then the parties
shall use their best efforts to resolve the claim within ninety (90) days after
the claim is submitted to binding arbitration pursuant to Section 10(d).

         (f) NOTICE OF TERMINATION. Any termination of the Executive's
employment by the Corporation or by the Executive (other than termination based
on the Executive's death) following a Change in Control shall be communicated by
a written Notice of Termination to the other party hereto. For purposes of this
Agreement, a "Notice of Termination" shall mean a notice which shall indicate
the specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provision so
indicated. For purposes of this Agreement, no purported termination shall be
effective without the delivery of such Notice of Termination.

         (g) DATE OF TERMINATION. "Date of Termination" following a Change in
Control shall mean (i) if the Executive is terminated by his death, the date of
his death, (ii) if the Executive's employment is terminated due to a Permanent
Disability, thirty (30) days after the Notice of Termination is given (provided
that the Executive shall not have returned to the performance of his duties on a
full-time basis during such period), (iii) if the Executive's employment is
terminated pursuant to a termination for Cause, the date specified in the Notice
of Termination, and (iv) if the Executive's employment is terminated for any
other reason, the date shall be thirty (30) days after termination as provided
by the Notice of Termination or the date of the final resolution of the
arbitration and claims procedures set forth in Section 10 hereof, unless
otherwise agreed by the Executive and Corporation or otherwise provided in this
Agreement.

         5. TERMINATION BENEFITS.

         If the Executive shall be terminated from employment with the
Corporation as described in Section 4(a) such that Executive is entitled to the
compensation set forth in this Section 5, then the Executive shall be entitled
to receive the following severance benefits:

         (a) SEVERANCE PAYMENT. In lieu of any further payments to the Executive
including any payments to which the Executive would be entitled under any
existing employment agreement, the Corporation shall pay as severance pay to the
Executive an amount equal to the compensation that Executive would have received
for a thirty (30) month period (the "payment period") at an annualized rate
equal to the higher of the rate in effect immediately prior to the Change in
Control or the rate in effect on the date of the Notice of


                                       6


Termination. Such cash payment shall be payable in a single sum, within 10
business days following the Executive's Date of Termination.

         (b) INCENTIVE AWARDS. The Executive shall receive a cash payment in a
single sum, within 10 business days following the Executive's Date of
Termination, in the amount equal to the pro rata portion of any bonus the
Executive shall be deemed to have earned under any incentive or compensation
plan in which Executive is then participating for the year in which the
Executive's termination occurs based on the number of completed months (a
partial month shall be counted as a completed month) in the calendar year as of
his Date of Termination. The method of calculating any bonus under such plan
shall be adjusted and/or weighted in such manner as is appropriate and equitable
to reflect partial year results and the Corporation's historical operating
results, including rates of growth and seasonality.

         (c) STOCK OPTIONS. Any non-vested stock options granted to the
Executive by the Corporation shall become 100% vested without change to the
stated expiration dates thereof.

         (d) INSURANCE AND WELFARE BENEFITS. During the payment period the
Executive shall be entitled to the continuation of the same or equivalent life,
health, hospitalization, dental and disability insurance coverage and other
employee insurance or welfare benefits that he had received (including
equivalent coverage for his spouse and dependent children) immediately prior to
the Change in Control. In the event that Executive is ineligible under the terms
of such insurance to continue to be so covered, the Corporation shall provide
the Executive with substantially equivalent coverage through other sources or
will provide Executive with a lump sum payment equal to the cost of obtaining
such coverage for the payment period. If the Executive prior to a Change in
Control was receiving any cash-in-lieu payments designed to enable the Executive
to obtain insurance coverage of his choosing, the Corporation shall, in addition
to any other benefits to be provided under this Section 5(d), provide Executive
with a lump-sum payment equal to the amount of such in-lieu payments that the
Executive would have been entitled to receive over the payment period. The
benefits to be provided under this Section 5(d) shall be reduced to the extent
of the receipt of substantially equivalent coverage by the Executive from any
successor employer.

         (e) TAX GROSS-UP. If any payments received by Executive pursuant to
this Agreement will be subject to the excise tax (the "Excise Tax") imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or
any successor or similar provision of the Code, the Corporation shall pay to the
Executive additional compensation such that the net amount received by the
Executive after deduction of any Excise Tax (and taking into account any
federal, state and local income taxes payable by the Executive as a result of
the receipt of such gross-up compensation), shall be equal to the total payments
he would have received had no such Excise Tax (or any interest or penalties
thereon) been paid or incurred. The Corporation shall pay such additional
compensation at the time when the Corporation withholds such Excise Tax from any
payments to the Executive. The calculation of the tax gross-up payment shall be
approved by the Corporation's independent certified public accounting firm and
the Executive's designated financial adviser.

         6. NO MITIGATION.


                                       7


         The Executive shall not be required to mitigate the amount of any
payments provided for by this Agreement by seeking employment or otherwise, nor
shall the amount of any cash payments or benefit provided under this Agreement
be reduced by any compensation or benefit earned by the Executive after his Date
of Termination (except as provided in Section 5(d) above).

         7. SUCCESSORS.

         (a) The Corporation shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Corporation, by agreement
in form and substance reasonably satisfactory to the Executive, to expressly
assume and agree to perform the obligations of the Corporation under this
Agreement in the same manner and to the same extent that the Corporation would
be required to perform this Agreement if no such succession had taken place.
Failure of the Corporation to obtain such agreement prior to the effective date
of any such succession shall be a breach of this Agreement and shall entitle the
Executive to compensation from the Corporation in the same amount and on the
same terms as he would be entitled to receive hereunder if he terminated his
employment for Good Reason, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination. As used in this Agreement, "Corporation" shall
mean the Corporation as hereinbefore defined and any successor to its business
and/or assets as aforesaid, which successor executes and delivers the agreement
provided for in this Section 7(a) or which otherwise becomes bound by the terms
and provisions of this Agreement by operation of law.

         (b) This Agreement and all rights of the Executive hereunder shall
inure to the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Executive should die after his termination while
any amounts would still be payable to him hereunder if he had continued to live,
all such amounts, unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to the Executive's devisee, legatee, or other
designee or, if there be no such designee, to the Executive's estate.

         8. NOTICES.

         Any notice required or permitted by this Agreement shall be in writing,
sent by registered or certified mail, return receipt requested, or by recognized
courier service (regularly providing proof of delivery), addressed to the Board
and the Corporation at the Corporation's then principal office, or to the
Executive at the address set forth under the Executive's signature below, as the
case may be, or to such other address or addresses as any party hereto may from
time to time specify in writing for the purpose in a notice given to the other
parties in compliance with this Section 8. Notices shall be deemed given when
received.

         9. LIMITATION ON RIGHTS.


                                       8


         (a) This Agreement shall not be deemed to create a contract of
employment between the Corporation and the Executive and shall create no right
in the Executive to continue in the Corporation's employment for any specific
period of time, or to create any other rights in the Executive or obligations on
the part of the Corporation, except as set forth herein. This Agreement shall
not restrict the right of the Corporation to terminate the Executive, or
restrict the right of the Executive to terminate his employment.

         (b) This Agreement shall not be construed to exclude the Executive from
participation in any other compensation or benefit programs in which he is
specifically eligible to participate either prior to or following the execution
of this Agreement, or any such programs that generally are available to other
executive personnel of the Corporation, nor shall it affect the kind and amount
of other compensation to which the Executive is entitled.

         10. ADMINISTRATOR AND CLAIMS PROCEDURE.

         (a) The Administrator for purposes of this Agreement shall be the
Corporation. The Corporation shall have the right to designate one or more
Corporation employees as the Administrator at any time. The Corporation shall
give the Executive written notice of any change in the Administrator, or in the
address or telephone number of the same.

         (b) The Executive, or other person claiming through the Executive, must
file a written claim for benefits with the Administrator as a prerequisite to
the payment of benefits under this Agreement. The Administrator shall make all
determinations as to the right of any person to receive benefits under
subsections (b) and (c) of this Section 10. Any denial by the Administrator of a
claim for benefits by the Executive, his heirs or personal representative ("the
claimant") shall be stated in writing by the Administrator and delivered or
mailed to the claimant within 10 days after receipt of the claim, unless special
circumstances require an extension of time for processing the claim. If such an
extension is required, written notice of the extension shall be furnished to the
claimant prior to the termination of the initial 10-day period. In no event
shall such extension exceed a period of 10 days from the end of the initial
period. Any notice of denial shall set forth the specific reasons for the
denial, specific reference to pertinent provisions of this Agreement upon which
the denial is based, a description of any additional material or information
necessary for the claimant to perfect his claim, with an explanation of why such
material or information is necessary, and any explanation of claim review
procedures, written to the best of the Administrator's ability in a manner that
may be understood without legal or actuarial counsel.

         (c) A claimant whose claim for benefits has been wholly or partially
denied by the Administrator may request, within 10 days following the date of
such denial, in a writing addressed to the Administrator, a review of such
denial. The claimant shall be entitled to submit such issues or comments in
writing or otherwise as he shall consider relevant to a determination of his
claim, and he may include a request for a hearing in person before the
Administrator. Prior to submitting his request, the claimant shall be entitled
to review such documents as the Administrator shall agree are pertinent to his
claim. The claimant may, at all stages of review, be represented by counsel,
legal or otherwise, of his choice, provided that the fees and expenses of such
counsel shall be borne by the claimant, unless the claimant


                                       9


is successful, in which case, such costs shall be borne by the Corporation. All
requests for review shall be promptly resolved. The Administrator's decision
with respect to any such review shall be set forth in writing and shall be
mailed to the claimant not later than 10 days following receipt by the
Administrator of the claimant's request unless special circumstances, such as
the need to hold a hearing, require an extension of time for processing, in
which case the Administrator's decision shall be so mailed not later than 20
days after receipt of such request.

         (d) A claimant who has followed the procedure in subsections (b) and
(c) of this section, but who has not obtained full relief on his claim for
benefits, may, within 60 days following his receipt of the Administrator's
written decision on review, apply in writing to the Administrator for expedited
and binding arbitration of his claim before an arbitrator in Minnehaha County,
South Dakota, in accordance with the commercial arbitration rules of the
American Arbitration Association, as then in effect, or pursuant to such other
form of alternative dispute resolution as the parties may agree (collectively,
the "arbitration"). The Corporation shall advance filing fees and other costs
required to initiate the arbitration, as well as up to $2,500 for Executive's
initial attorney fees (which fees and costs shall not be recoverable by the
Corporation). The arbitrator's sole authority shall be to interpret and apply
the provisions of this Agreement; he shall not change, add to, or subtract from,
any of its provisions. The arbitrator shall have the power to compel attendance
of witnesses at the hearing. Any court having jurisdiction may enter a judgment
based upon such arbitration. The arbitrator shall be appointed by mutual
agreement of the Corporation and the claimant pursuant to the applicable
commercial arbitration rules. The arbitrator shall be a professional person with
a reputation in the community for expertise in employee benefit matters and who
is unrelated to the claimant and any employees of the Corporation. All decisions
of the arbitrator shall be final and binding on the claimant and the
Corporation.

         11. LEGAL FEES AND EXPENSE.

         If any dispute arises between the parties with respect to the
interpretation or performance of this Agreement, the prevailing party in any
arbitration or proceeding shall be entitled to recover from the other party its
attorneys' fees, arbitration or court costs and other expenses incurred in
connection with any such proceeding (subject to the second sentence of Section
10(d) above). Amounts, if any, paid to Executive under this Section 11 shall be
in addition to all other amounts due to Executive pursuant to this Agreement.

         12. NON-ALIENATION OF BENEFITS.

         Except in so far as this provision may be contrary to applicable law,
no sale, transfer, alienation, assignment, pledge, collateralization or
attachment of any benefits under this Agreement shall be valid or recognized by
the Corporation.

         13. ERISA.

         This Agreement is an unfunded compensation arrangement for a member of
a select group of the Corporation's management and any exemptions under the
Employee Retirement


                                       10


Income Security Act of 1974, as amended, as applicable to such an arrangement
shall be applicable to this Agreement.

         14. DEFERRAL.

         The Executive may, by delivery of written notice to the Corporation
within ten (10) business days following the Executive's Date of Termination,
elect to defer any payment to be made under this Agreement to a date not more
than one (1) year after the Date of Termination.

         15. NON-COMPETITION.

         If Executive receives compensation under this Agreement, or if
Executive is terminated for Cause (as defined in Section 4(c)), Executive agrees
that he will not, without the prior written consent of the Corporation, directly
or indirectly, during the six (6) month period following the Date of
Termination, engage in any business or employment or provide any consulting
service which is in competition with the Corporation's business in the lodging
industry in the United States (provided, however, that the parties acknowledge
and agree that all aspects of the cable television business shall not be deemed
to be a business competitive with the Corporation's business).

         16. EXECUTIVE ACKNOWLEDGMENT.

         Executive acknowledges that he has consulted with or has had the
opportunity to consult with independent counsel of his choice concerning this
Agreement, that he has read and understands this Agreement and is fully aware of
its legal effect .

         17. MISCELLANEOUS.

         This Agreement contains the entire agreement of the parties relating to
the subject matter hereof and supersedes any prior written or oral agreements or
understandings relating to the subject matter hereof. No modification or
amendment of this Agreement shall be valid unless in writing and signed by or on
behalf of the parties hereto. A waiver of the breach of any term or condition of
this Agreement shall not be deemed to constitute a waiver of any subsequent
breach of the same or any other term or condition. This Agreement is intended to
be performed in accordance with, and only to the extent permitted by, all
applicable laws, ordinances, rules and regulations. If any provisions of this
Agreement, or the application thereof to any person or circumstance, shall, for
any reason and to any extent, be held invalid or unenforceable, such invalidity
and unenforceability shall not affect the remaining provisions hereof and the
application of such provisions to other persons or circumstances, all of which
shall be enforced to the greatest extent permitted by law. Subject to the
provisions of Section 5(e), the compensation provided to the Executive pursuant
to this Agreement shall be subject to any withholdings and deductions required
by any applicable tax laws. Any amounts payable to the Executive hereunder after
the death of the Executive shall be paid to the Executive's estate or legal
representative. The headings in this Agreement are inserted for convenience of
reference only and shall not be a part of or control or affect the meaning of
any provision hereof. For purposes hereof, the masculine gender shall be deemed
to include


                                       11


the feminine gender, as appropriate. This Agreement may be executed in one or
more counterparts and each counterpart shall be deemed an original but all
counterparts together shall constitute one instrument.


         18. GOVERNING LAW.

         This Agreement shall be governed and construed in accordance with the
internal laws of the State of South Dakota. The parties agree that any suit or
proceeding arising out of this Agreement shall be brought and maintained
exclusively in the federal or state courts located in such state, and each of
the parties hereby irrevocably submits to the exclusive jurisdiction and venue
of such courts.

         IN WITNESS WHEREOF, the parties have duly executed and delivered this
Agreement as of the day and year first above written.



EXECUTIVE:                                  LODGENET ENTERTAINMENT
                                            CORPORATION:


/s/                                         By:
   --------------------------                  --------------------------
Address:                                    Title:
Shadow Ridge Trail                                -----------------------
- ------------------
Sioux Falls, SD  57108
- ----------------------


                                       12

EX-10.36

                              EMPLOYMENT AGREEMENT

                  THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated as of
March 1, 2001 is made by and between LodgeNet Entertainment Corporation, a
Delaware corporation (the "Corporation" or "LodgeNet"), and Gary H. Ritondaro
("Executive") with reference to the following circumstances, namely:

                  A.  Executive is to be employed by LodgeNet as its Senior Vice
                      President and Chief Financial Officer, and as such will be
                      making an important contribution to the development and
                      operation of LodgeNet's business.

                  B.  Because of the foregoing, the Corporation desires to
                      provide for its employment of Executive as hereinafter
                      provided, and Executive desires such employment, upon the
                      terms hereinafter provided.

                  NOW, THEREFORE, the Corporation agrees to employ Executive,
and Executive agrees to such employment, upon the following terms and
conditions:

         1. PERIOD OF EMPLOYMENT. The employment of Executive by the Corporation
pursuant to this Agreement shall be for a period (sometimes referred to herein
as the "period of employment") beginning on the date hereof and continuing,
unless sooner terminated as provided in Section 6 or 8 herein, through December
31, 2001; provided, however, that on each December 31, commencing with December
31, 2001, such period of employment shall automatically be extended for an
additional year unless sixty (60) days prior thereto either party hereto has
given written notice to the other that such party does not wish to extend the
period of employment.

         2. DUTIES. During the period of employment, Executive shall serve as
Senior Vice President and Chief Financial Officer of the Corporation, or in such
other office or


                                      1


offices to which he shall be elected by the Board of Directors of the
Corporation ("Board") with his approval, performing the duties of such office or
offices held at the time and such other duties not inconsistent with his
position as such an officer as are assigned to him by the Board or committees of
the Board. During the period of employment, Executive shall devote his full time
and attention to the business of the Corporation and the discharge of the
aforementioned duties, except for permitted vacations, absences due to illness,
and reasonable time for attention to personal affairs.

         3. OFFICE FACILITIES. During the period of employment, Executive shall
have his office where the Corporation's principal executive offices are located
from time to time, which currently are at 3900 West Innovation Street, Sioux
Falls, South Dakota, and the Corporation shall furnish Executive with office
facilities reasonably suitable to his position at such location.

         4. COMPENSATION. As compensation for his services performed hereunder,
the Corporation shall pay or provide to Executive the following:

                  (a.) The Corporation shall pay Executive a salary (the "Base
     Salary"), calculated at the rate of Two Hundred Ninety Five Thousand
     Dollars ($295,000.00) per annum. On January 1, 2002, Executive's Base
     Salary shall be increased to Three Hundred Thirty Thousand Dollars
     ($330,000.00) per annum. Executive's Base Salary (which may be increased by
     the Board at any time and from time to time in its discretion) shall be
     payable monthly, semi-monthly or weekly according to the Corporation's
     general practice for its executives, for the period of employment under
     this Agreement.

                  (b.) During the period of employment, Executive shall be
     allowed to participate in such bonus and other incentive compensation
     programs in accordance with


                                       2


     their terms as the Corporation may have in effect from time to time for its
     executive personnel, and all compensation and other entitlements earned
     thereunder shall be in addition to, and shall not in any way reduce, the
     amount payable as Base Salary.

                  (c.) During the period of employment, Executive shall be
     entitled to:

                           (I) participate in such retirement, investment,
              health (medical, hospital and/or dental) insurance, life
              insurance, disability insurance and accident insurance plans and
              programs as are maintained in effect from time to time by the
              Corporation for its salaried employees;

                  (ii) participate in other non-duplicative benefit programs
              which the Corporation may from time to time offer generally to
              executive personnel of the Corporation; and

                  (iii) take vacations and be entitled to sick leave in
              accordance with the Corporation's policy for executive personnel
              of the Corporation.

         (d.) During the period of employment, the Board from time to time in
     its discretion may grant to Executive stock options, and other rights
     related to shares of the Corporation's common stock.

         5. EFFECT OF DISABILITY AND CERTAIN HAZARDS. Executive shall not be
obligated to perform the services required of him by this Agreement during any
period in which he is disabled or his health is impaired to an extent which
would render his performance of such services hazardous to his health or life,
and relief from such obligation shall not in any way affect his rights hereunder
except to the extent that such disability may result in termination of his
employment by the Corporation pursuant to Section 6 herein.


                                       3


         6. TERMINATION OF EMPLOYMENT. The employment of Executive by the
Corporation pursuant to this Agreement may be terminated prior to December 31,
2001, or any subsequent December 31 to which the end of the period of employment
may have been extended under Section 1, as follows:

         (a) In the event of Executive's death prior to said date, such
     employment shall terminate on the date of death.

         (b) Such employment may be terminated prior to said date due to
     Executive's physical or mental disability which prevents the effective
     performance by Executive of his duties hereunder on a full time basis, with
     such termination to occur on or after the time which Executive becomes
     entitled to disability compensation benefits under the Corporation's long
     term disability benefit program then in effect. Any dispute as to
     Executive's physical or mental disability shall be settled by the opinion
     of an impartial physician selected by the parties or their representatives
     or, in the event of failure to make a joint selection after request
     therefore by either party to the other, a physician selected by the
     Corporation, with the fees and expenses of any such physician to be borne
     by the Corporation.

          (c) The Corporation, by giving written notice of termination to
     Executive, may terminate such employment at any time prior to said date for
     Cause, which means that such termination must be due to (1) acts during the
     term of this Agreement (A) involving dishonesty or moral turpitude by
     Executive or (B) substantial non-performance of Executive of his employment
     duties required by this Agreement or (2) Executive having directly or
     indirectly made any material misrepresentation(s) or fail to disclose any
     material factors to the Corporation during his pre-employment interviews or
     otherwise


                                       4


     during the hiring process for his employment with the Corporation or (3)
     Executive willfully engaging in gross misconduct injurious to the
     Corporation during the term of this Agreement, with "Cause" to be
     determined in any case by the Board after reasonable written notice to
     Executive and an opportunity for Executive to be heard at a meeting of the
     Board and with reasonable opportunity (of not less than 30 days) in the
     case of clause (1)(B) to cease substantial non-performance.

         (d) The Corporation may terminate such employment at any time prior to
     said date without Cause (which shall be for any reason not covered by
     preceding subsections (a) through (c)) upon 60 days prior written notice to
     Executive.

         (e) In the event that a Termination Event (as that term is defined in
     the Executive Severance Agreement, dated March 1, 2001) has occurred, then
     the Executive may terminate such employment according to the terms and
     conditions set forth in said Executive Severance Agreement, and shall then
     be exclusively entitled to any and all payments and benefits provided under
     said Agreement to the exclusion of any provisions contained herein.

     7. PAYMENTS UPON TERMINATION.

         (a) Except as otherwise provided in subsection (b) of this Section 7,
     upon termination of Executive's employment by the Corporation, all
     compensation due Executive under this Agreement and under each plan or
     program of the Corporation in which he may be participating at the time
     shall cease to accrue as of the date of such termination (except, in the
     case of any such plan or program, if and to the extent otherwise provided
     in the terms of such plan or program), and all such compensation accrued as
     of the date of such termination but not previously paid shall be paid to
     Executive at the time such payment


                                       5


     otherwise would be due. Unless otherwise expressly provided in the terms of
     the bonus plan or program of the Corporation in which the Executive is a
     participant at the time of his termination, if the termination of
     Executive's employment is not for Cause, then a pro rata portion of the
     "target" full year's bonus shall be deemed to have accrued for the
     Executive under such bonus plan or program for the portion of the year
     ended on the date of the termination, which shall be paid to the Executive
     at the time bonus payment otherwise would be due.

         (b) If Executive's employment pursuant to this Agreement is terminated
     without Cause pursuant to subsection (d) of Section 6 herein, then, in
     addition to the payments required by subsection (a) of this Section 7,
     Executive shall be entitled to the vesting of all options previously
     granted but still subject to vesting, and shall receive, subject to the
     mitigation provisions of Section 11(a) below, for a period of twenty-four
     months (the "Severance Period") a cash severance payment (the "Severance
     Payment") from the Corporation. The amount of the Severance Payment shall
     be equal to the Executive's then monthly Base Salary increased by a factor
     of twenty percent (20%) to account for the Executive's loss of benefits.
     The Severance Payment shall be due and payable on the 20th day of each
     month and is subject to required withholding. The Executive shall also be
     entitled to the benefits under this Section in the event the Corporation
     elects at any time not to renew or extend this Agreement pursuant to
     Section 1. The Executive shall not be entitled to a Severance Payment in
     any event if he is terminated for Cause as permitted by Section 6.

      8. CONFIDENTIAL INFORMATION. Executive shall not at any time during the
period of employment and thereafter disclose to others or use any trade secrets
or any other


                                       6


confidential information belonging to the Corporation or any of its
subsidiaries, including, without limitation, drawings, plans, programs,
specifications and non-public information relating to customers of the
Corporation or its subsidiaries, except as may be required to perform his duties
hereunder. The Corporation or its subsidiaries, except as may be required to
perform his duties hereunder. The provisions of this Section 9 shall survive the
termination of Executive's employment with the Corporation, provided that after
the termination of Executive's employment with the Corporation, the restrictions
contained in this Section 8 shall not apply to any such trade secret or
confidential information which becomes generally known in the trade.

     9. PATENTS AND OTHER INTELLECTUAL PROPERTY The Corporation shall be
entitled to any and all ideas, know-how and inventions, whether patentable or
not, which Executive shall conceive, make or develop during the period of his
employment with the Corporation, relating to the business of the Corporation or
any of his subsidiaries. Executive shall, from time to time, at the request of
the Corporation, execute and deliver such instruments or documents, and shall
perform or do such acts or things, as reasonably may be requested in order that
the Corporation may have the benefit of such ideas, know-how and inventions and,
in particular, so that patent applications may be prepared and filed in the
United States Patent Office, or in appropriate places in foreign countries,
covering any of the patentable ideas on intentions covered by this Agreement as
aforesaid, including appropriate assignments vesting in the Corporation or any
of its subsidiaries (or any successor to the Corporation or any of its
subsidiaries) full title to any and all such ideas, inventions and applications.
Further, Executive will cooperate and assist the Corporation in the prosecution
of any such applications in order that patents may issue thereon.


                                       7


     10. NON-COMPETITION: NON-MITIGATION: LITIGATION EXPENSES.

             (a) For the first eighteen months following termination of his
     employment with the Corporation, Executive shall not be required to
     mitigate the amount of any termination benefits due him under Section 7
     herein, by seeking employment with others, or otherwise, nor shall the
     amount of such benefits be reduced or offset in any way by any income or
     benefits earned by Executive from another employer or other source during
     said period; thereafter, said termination benefits shall be reduced by
     one-half of the amount Executive may earn from any full time employment
     position or occupation. However, if Executive becomes employed, as a full
     or part time employee, or as a consultant or advisor, to any enterprise
     engaged in competition with the business then being conducted by the
     Corporation, any obligation which the Corporation otherwise would have had
     under Section 7 shall thereupon terminate and cease to be of any further
     force and effect other than to the extent theretofore performed by the
     Corporation.

             (b) Until the period of employment expires (which for these
     purposes shall be calculated without giving effect to early termination
     pursuant to Section 6), Executive shall not enter into endeavors that are
     competitive with the business or operations of the Corporation in the
     lodging pay-per-view/guest services market, and shall not own an interest
     in, manage, operate, join, control, lend money or render financial or other
     assistance to or participate in or be connected with, as an officer,
     employee, director, partner, stockholder (expect for passive investments of
     not more than a one percent interest in the securities of a publicly held
     corporation regularly traded on a national securities exchange or in an
     over-the-counter securities market), consultant or otherwise, any
     individual, partnership, firm, corporation or other business organization
     or entity that


                                       8


     engages in a business which competes with the Company in the lodging
     pay-per-view/guest services market. For these purposes, employment with a
     vendor of cable television services shall not be treated as competitive
     with the business or operations of the Corporation in the lodging
     per-view/guest services market.

             (c) The Corporation shall pay Executive's out-of-pocket expenses,
     including attorneys' fees, but not to exceed a total of $10,000 for any
     proceeding or group of related proceedings to enforce, construe or
     determine the validity of the provisions for termination benefits in
     Section 7 or 8 herein.

     11. ARBITRATION. Any dispute or controversy arising under or in connection
with the Agreement shall be settled exclusively by arbitration in the city where
the principal executive offices of the Corporation are then located, in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.

     12. MISCELLANEOUS.

             (a) This Agreement shall inure to the benefit of and shall be
     binding upon the successors and assigns of the Corporation, including any
     party with which the Corporation may merge or consolidate or to which it
     may transfer substantially all of its assets.

             (b) The rights and obligations of Executive under this Agreement
     are expressly declared and agreed to be personal, non-assignable and
     nontransferable during his life, but upon his death this Agreement shall
     inure to the benefit of his heirs, legatees and legal representatives of
     his estate.


                                       9


             (c) The waiver by either party hereto of its rights with respect
     to a breach of any provision of this Agreement by the other shall not
     operate or be construed as a waiver of any rights with respect to any
     subsequent breach.

             (d) No modification, amendment, addition, alteration or waiver of
     any of the terms, covenants or conditions hereof shall be effective unless
     made in writing and duly executed by the Corporation and Executive.

             (e) This Agreement may be executed in any number of counterparts,
     each of which shall be deemed an original, but all of which together will
     constitute but one and the same agreement.

             (f)  This Agreement shall be construed according to the laws of the
     State of South Dakota.

             (g) If any provision of this Agreement is determined to be invalid
     or unenforceable under any applicable statute or rule of law, it is to that
     extent to be deemed omitted and it shall not affect the validity or
     enforceability of any other provision.

             (h) Any notice required or permitted to be given under this
     Agreement shall be in writing, and shall be deemed given when sent by
     registered or certified mail, postage prepaid, addressed as follows:



                If to Executive:            Gary H. Ritondaro
                                            Shadow Ridge Trail
                                            Sioux Falls, SD  57108



               If to the Corporation:       LodgeNet Entertainment Corporation
                                            3900 West Innovation Street
                                            Sioux Falls, SD 57107
                                            Attn: General Counsel


                                       10


     or mailed to such other person and/or address as the party to be notified
     may hereafter have designated by notice given to the other party in a
     similar manner.

         13. PRIOR AGREEMENTS SUPERSEDED. This agreement supersedes all prior
agreements between the parties hereto with respect to the subject matter hereof
including any prior employment agreement.

         IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed on the date and year first above written.

                                          LodgeNet Entertainment Corporation



                                          By:_______________________________
                                             President




                                             _______________________________
                                             Gary H. Ritondaro


                                       11