Document:

exv10w2

 

Exhibit 10.2

LODGENET ENTERTAINMENT CORPORATION

EXECUTIVE SEVERANCE AGREEMENT

     AGREEMENT, dated as of June 26, 2006, by and between LodgeNet Entertainment Corporation, a
Delaware corporation located at 3900 West Innovation Street, Sioux Falls, South Dakota 57107
(“Corporation”), and James G. Naro (“Executive”).

     WHEREAS, the Executive is presently employed by the Corporation as Senior Vice President and
General Counsel 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, 2011 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

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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, commencing on July 24, 2011, and on July 24th of subsequent year, 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

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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

     (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

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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 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 materially 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;

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          (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.

     (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.

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     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 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

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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.

     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.

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     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.

     (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

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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 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 proceding 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

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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 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

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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 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/ James G. Naro

	 	 	 	By:
	 	/s/ Gary H. Ritondaro
	 

	 	 	 	 	 	 
	Address:	 	 	 	Title: SVP, Chief Financial Officer
	4 East Twin Oaks Est.
	 	 	 	 	 	 
	Sioux Falls, SD 57105
	 	 	 	 	 	 

11exv10w3

 

Exhibit 10.3

LodgeNet Entertainment Corporation 2003 Stock Option and

Incentive Plan Restricted Stock Award Agreement

(Financial Performance Vesting)

Name: James G. Naro

Date of Award: 6-26-06

Number of Shares of Restricted Stock Awarded: 7,500

This Agreement, effective as of the Date of Award, represents an award of Restricted
Stock by LodgeNet Entertainment Corporation, a Delaware corporation (the “Company”),
to you, pursuant to the provisions of the LodgeNet Entertainment Corporation 2003
Stock Option and Incentive Plan (the “Plan”).

The Plan provides a description of the general terms and conditions governing the
Restricted Stock awarded hereunder. The parties hereto also agree to the following
additional terms and conditions governing this award of Restricted Stock:

     1. Termination of Risk of Forfeiture. The shares awarded hereby are subject to a risk of
forfeiture. Subject to Section 15 hereof (which provides for accelerated termination of the risk
of forfeiture under the conditions set forth therein), and Section 8 hereof (which provides for
accelerated termination of the risk of forfeiture in the event of death or, in certain cases,
retirement or disability, and adjustment thereto), the risk of forfeiture of the Restricted Stock
issued pursuant to this Award shall terminate on January 1, 2009 (the “Termination Date”), except
as otherwise provided herein, if, a) you have been continuously employed by the Company from the
Date of Award (excluding any periods during which you are on approved leaves of absence) up to and
including the Termination Date and b) the Company has achieved cumulative earnings for 2006, 2007
and 2008 of at least $1.10 per share (the “Performance-Based Target”). The Performance-Based
Target shall be determined by reference to the Company’s “Net income (loss) per common share
(basic),” as shown in the Company’s audited Consolidated Statements of Operations for 2006, 2007
and 2008. Notwithstanding the Termination Date, no payment of the Award shall be made until, and
shall be subject to, the determination that the Performance-Based Target is achieved. It is
acknowledged that such determination cannot be made until the date on which Company releases its
audited financial statements for 2008, which is expected to occur subsequent to the Termination
Date. In the event the Performance-Based Target is not achieved, the shares of stock awarded
hereby shall be forfeited pursuant to Section 6 hereof, notwithstanding the Termination Date. The
period between the date of this Award and the Termination Date is hereinafter referred to as the
“Restriction Period.”

     2. Restricted Stock Certificates. Any Restricted Stock granted to you hereunder shall be held
by the Corporate Secretary of the Company or designee until such time as the restrictions terminate
or the Restricted Stock is forfeited.

     3. Certificate Legend. Each stock certificate representing shares of Restricted Stock granted
hereunder shall bear the following legend:

 

 

“The sale or other transfer of the shares of common stock represented by this
certificate, whether voluntary, involuntary, or by operation of law, is subject to
certain restrictions on transfer set forth in the LodgeNet Entertainment Corporation
2003 Stock Option and Incentive Plan and a LodgeNet Entertainment Corporation 2003
Stock Option and Incentive Plan Restricted Stock Award Agreement dated June 26,
2006.”

     4. Removal of Restrictions. When your Restricted Stock is no longer subject to the terms of
this Agreement, you will be entitled to have the legend required by Section 3 of this Agreement
removed from the stock certificates representing your shares of Restricted Stock and such
certificates will be distributed to you. The Company shall have no obligation to issue fractional
shares; all share amounts shall be rounded to the nearest whole amount.

     5. Voting Rights and Dividends. You may exercise full voting rights and shall receive any
dividends and other distributions paid with respect to the shares of Restricted Stock. If any such
dividends or distributions are paid in shares of common stock of the Company, those shares shall be
subject to the same restrictions on transferability as the shares of Restricted Stock under this
Agreement.

     6. Forfeiture. Any Restricted Stock granted to you hereunder shall be forfeited, and such
shares of Restricted Stock shall revert to the Company, without any obligation of the Company to
pay you any consideration therefor, if, during the Restriction Period, (i) you violate the terms of
this Agreement; (ii) your employment with the Company terminates prior to the Termination Date
(other than under the conditions set forth in Sections 8 or 15 hereof); or (iii) the
Performance-Based Target is not achieved. The Company shall initiate a forfeiture of Restricted
Stock pursuant to this Section 6 by giving notice to you at any time within the thirty (30) day
period following the date of forfeiture. Upon the giving of such notice, the Corporate Secretary
of the Company shall promptly cancel the forfeited shares of Restricted Stock and the stock
register of the Company shall be revised accordingly. You are obligated to return to the Company
any certificates representing such forfeited shares, but your failure to do so shall not affect the
forfeiture or cancellation of such shares. You shall have no rights as a stockholder of the
Company with respect to forfeited and cancelled shares.

     7. No Employment Obligation. The award of the Restricted Stock hereunder shall not impose
upon the Company a separate obligation to employ you for any given period, or on any specific terms
of employment.

     8. Termination of Employment Due to Death, Disability or Retirement.

     (a) If your employment is terminated during the Restriction Period due to death, the
restrictions shall terminate with respect to all of the shares covered by this Agreement; provided,
that the Performance-Based Target is achieved.

     (b) If your employment is terminated during the Restriction Period is due to Disability (as
defined in the Plan), the restrictions shall terminate with respect to a pro rata portion of the
shares covered by this Agreement, such pro rata portion to be based on the number of days of
continuous employment subsequent to the Date of Award compared to the number of business days in
the three years 2006, 2007 and 2008 (the “Pro Rata Portion”); provided, the

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Performance-Based Target is achieved.

     (c) If your employment is terminated during the Restriction Period due to retirement (which,
for purposes of this Agreement shall be defined as voluntarily terminating full-time employment
after reaching the age of 62), the restrictions shall terminate with respect to the Pro Rata
Portion; provided, the Performance-Based Target is achieved.

     9. Termination of Employment for Other Reasons. If your employment with the Company is
terminated for any reason other than those reasons set forth in Sections 8 or 15 hereof, including
without limitation a termination of your employment with or without Cause (as defined in Section 15
below) all shares of Restricted Stock held by you at the time of such employment termination, as to
which the restrictions have not terminated, shall be forfeited by you to the Company, in accordance
with the provisions of Section 6 hereof.

     10. Acceleration. Notwithstanding anything to the contrary contained herein, the Compensation
Committee shall always have the power, in its sole discretion, to accelerate the Termination Date
of the Restricted Stock.

     11. Nontransferability. Restricted Stock awarded pursuant to this Agreement that is subject
to a risk of forfeiture may not be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated (each, a “Transfer”), other than by will or by the laws of descent and distribution.
If any Transfer, whether voluntary or involuntary, of Restricted Stock, as to which the
restrictions have not terminated, is made, or if any attachment, execution, garnishment, or lien
shall be issued against or placed upon Restricted Stock, as to which the restrictions have not
terminated, such Restricted Stock shall be immediately forfeited by you to the Company, and this
Agreement shall be of no further effect.

     12. Tax Withholding. The Company shall have the power and the right to deduct or withhold,
or require you or your estate to remit to the Company, an amount sufficient to satisfy federal,
state, and local taxes, domestic or foreign, required by law or regulation to be withheld with
respect to any taxable event arising as a result of this Agreement.

     13. Share Withholding. With respect to withholding required upon any other taxable event
arising as a result of Restricted Stock awards granted hereunder, you may elect, subject to the
approval of the Compensation Committee, to satisfy the withholding requirement, in whole or in
part, by having the Company withhold shares having a fair market value on the date the tax is to be
determined equal to the minimum statutory total tax which could be withheld on the transaction.
All such elections shall be irrevocable, made in writing, signed by you, and shall be subject to
any restrictions or limitations that the Committee, in its sole discretion, deems appropriate.

     14. Administration. This Agreement and your rights hereunder are subject to all the terms
and conditions of the Plan, as the same may be amended from time to time, as well as to such rules
and regulations as the Committee may adopt for administration of the Plan. It is expressly
understood that the Committee is authorized to administer, construe, and make all determinations
necessary or appropriate to the administration of the Plan and this Agreement, all of which shall
be binding upon the Participant. Any inconsistency between this Agreement and

3

 

the Plan shall be resolved in favor of this Agreement.

     15. Acceleration of Termination Date.

	 	a.	 	If, in connection with or within two (2) years following the
occurrence of a Change in Control (as defined in subsection 15 (b) below), your
employment with the Company terminates voluntarily for Good Reason (as defined in
subsection 15 (b) below), or involuntarily for any reason other than for Cause (as
defined in subsection 15 (b) below), the restrictions on all outstanding shares of
Restricted Stock not previously terminated pursuant to the terms of Section 1
hereof shall, without further action, terminate as of the date of such employment
termination.
	 
	 	b.	 	For purposes hereof: (i) termination of employment for “Cause” shall
mean termination of your employment by the Company or any of its subsidiaries
because of: (A) your dishonesty, fraud or breach of trust or substantial
misconduct in the performance of, or substantial nonperformance of, your duties,
(B) any act or omission by you that is a substantial cause for a regulatory body
with jurisdiction over the Company or any of its subsidiaries to request or
recommend your suspension or removal or to impose sanctions upon the Company, or
(C) a material breach by you of any applicable employment agreement between you
and the Company or any of its subsidiaries; (ii) termination with “Good Reason”
shall mean voluntary termination of your employment because, without your express
written consent: (A) the Company or any subsidiary materially breaches any of the
terms of an employment agreement, severance agreement or other compensation
arrangement between the Company or any of its subsidiaries and you, (B) you are
assigned duties materially inconsistent with your position, duties, and status
immediately prior the Change in Control, (C) the Company or any subsidiary reduces
your base salary and/or benefits under the Company’s or a subsidiary’s incentive,
stock option, retirement, welfare, disability, health, insurance, benefit or other
compensatory plan (including, without limitation, cash paid in lieu of any such
benefit) in existence immediately prior to the Change in Control (without
substitution of a substantially equivalent plan or benefit), such that your
compensation, in the aggregate, has been materially reduced, or (D) failure by the
Company to cause any successor or resulting entity to expressly assume and agree
to perform the Company’s obligations under this Agreement; and (iii) a “Change in
Control” shall mean the occurrence of any of the following: (A) any person (as
such term is used in Section 13 of the Securities Exchange Act of 1934 (the
“Exchange Act”) and the rules and regulations thereunder and including any
Affiliate or Associate of such person, as defined in Rule 12b-2 under said Act,
and any person acting in concert with such person), directly or indirectly,
acquires or otherwise becomes the “beneficial owner” (as such term is defined in
Rule 13d-3 of the Exchange Act, except that a person or entity shall also be
deemed the beneficial owner of all securities which such person or entity may have
a right to acquire, whether or not such right is presently exercisable) of

4

 

	 	 	 	securities representing thirty percent (30%) or more of the voting power entitled
to be cast at elections for directors (“Voting Power”) of the Company; or (B) there
occurs any merger or consolidation (in one or more transactions) of the Company, or
any sale, lease or exchange (in one or more transactions) of all or any substantial
part of the consolidated assets of the Company (meaning assets representing thirty
percent (30%) or more of the Company’s consolidated net tangible assets or
generating thirty percent (30%) or more of the Company’s consolidated operating
cash flow, in each case as measured over the Company’s preceding four full fiscal
quarters) to any other person and (y) in the case of a merger or consolidation, the
holders of outstanding stock of the Company entitled to vote in elections of
directors immediately before such merger or consolidation (excluding for this
purpose any person (including any Affiliate or Associate) that directly or
indirectly owns or is entitled to vote thirty percent (30%) of more of the Voting
Power of the Company) hold less than seventy percent (70%) of the Voting Power of
the survivor of such merger or consolidation or its parent, or (z) in the case of
any such sale, lease or exchange, the Company does not own more than fifty percent
(50%) of the Voting Power of the other person; or (C) during any period subsequent
hereto, a majority of the Company’s directors shall not for any reason be board
members who at the beginning of such period constituted a majority of the Board of
Directors or persons nominated as new directors by a majority of such continuing
directors.

     16. Adjustments. In the event of any stock split, stock dividend, reverse stock split,
recapitalization of the Company, or issuance of shares of stock by the Company, the number of
shares of Restricted Stock subject to this Award and/or the Performance-Based Target shall be
appropriately adjusted by the Compensation Committee. By way of illustration only, in the event
the Company split its stock on a two-for-one basis, the number of shares of Restricted Stock
subject to the Award would similarly be subject to such split and the Performance-Based Target
would be adjusted to take into account the increased number of shares which would go into the
calculation of the Performance-Based Target, as well as the time at which the split occurred.

     17. Miscellaneous.

a. All obligations of the Company under the Plan and this Agreement, with respect to the
Restricted Stock, shall be binding on any successor as to the Company, whether the
existence of such successor is the result of a direct or indirect purchase, merger,
consolidation, or otherwise, of all or substantially all of the business and/or assets
of the Company.

b. To the extent not preempted by federal law, this Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, without regard to such
jurisdiction’s conflict of laws principles.

5

 

     IN WITNESS WHEREOF, the parties have caused this Agreement to be executed effective as of the
Date of Award first above written.

	 	 	 	 	 
	 	LODGENET ENTERTAINMENT CORPORATION

 	 
	 	By:  	/s/ Gary H. Ritondaro
 	 
	 	 	Gary H. Ritondaro – SVP/CFO 	 
	 	 	 	 
	 

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