Exhibit 10.26
(NAVARRE LOGO) [c27228c2722801.gif]
Annual Incentive Plan
Fiscal Year – 2009
Effective April 1, 2008 – March 31, 2009
(NAVARRE LOGO) [c27228c2722800.gif]

      (NAVARRE LOGO) [c27228c2722800.gif]   (NAVARRE LOGO) [c27228c2722800.gif]

          (ENCORE LOGO) [c27228c2722802.gif]   (BCI LOGO) [c27228c2722803.gif]  
(FUNIMATION LOGO) [c27228c2722804.gif]

May 7, 2008

 

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Contents

I.   Purpose of the Plan   II.   Eligibility   III.   Administration of Plan  
IV.   Plan Design   V.   Financial Objectives   VI.   Individual Objectives  
VII.   Incentive Payments   VIII.   Amendment, Suspension and Termination   IX.
  Unfunded Plan   X.   Other Benefit and Compensation Programs   XI.   Governing
Law

     
Exhibit I:
  FY2009 Incentive Plan Components
 
   
Exhibit II:
  FY2009 Incentive Plan Payout Schedule
 
   
Exhibit III:
  FY2009 Incentive Payout Calculation Examples

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I. Purpose of the Plan
The purpose of the Annual Incentive Plan is to align all participants with the
business objectives of Navarre Corporation and its subsidiaries (the “Company”)
by motivating, rewarding and recognizing participants for their achievements and
impact on the Company’s success.
II. Eligibility
Most management-level employees of Navarre are eligible to participate in the
Plan. New hires must be employed prior to September 1st to be eligible for a
pro-rata incentive payment for that fiscal year. Participants who terminate from
the company, for any reason, prior to the date of the incentive payment, will
lose their eligibility to receive an incentive payment.
III. Administration
The Plan is administered by the Compensation Committee of the Company’s Board of
Directors (the “Compensation Committee”). The Chief Executive Officer of the
Company (the “CEO”) will make recommendations to the Compensation Committee
regarding participation, level of awards, changes to the Plan, financial
objectives, and other aspects of the Plan’s administration. The Compensation
Committee has the authority to interpret the Plan, and, subject to the Plan’s
provisions, to make and amend rules and to make all other decisions necessary
for the Plan’s administration. Any decision of the Compensation Committee in the
interpretation and administration of the Plan shall lie within its sole and
absolute discretion and shall be final, conclusive and binding on all parties
concerned. Specifically, the Compensation Committee has the authority to approve
payout percentages and to approve individual awards, including discretionary
awards, for the executive officers. The CEO has the authority to approve
individual awards, including discretionary awards, for other participants
consistent with the Plan.
IV. Plan Design
The Annual Incentive Plan has two components:

•   Financial Objectives   •   Individual Objectives

The potential bonus percentage based on these components is determined by the
participant’s level and type of position. This is summarized in Exhibit I.
V. Financial Objectives
Early each fiscal year the Compensation Committee will approve the Financial
Objectives for such fiscal year. The Financial Objectives will be based on
attainment of specific levels of performance of the Company (or of a subsidiary,
division, or department thereof) with reference to one or more of the following
criteria: (i) consolidated earnings before or after taxes; (ii) EBITDA (earnings
before interest, taxes, depreciation and amortization); (iii) net income; (iv)
operating income; (v) earnings per share; (vi) return on shareholders’ equity;
(vii)
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expense management; (viii) return on investment; (ix) improvements in capital
structure; (x) net sales; (xi) maintenance or improvements of profit margins;
(xii) stock price; (xiii) market share; (xiv) cash flow; (xv) working capital;
(xviii) return on assets; (xv) asset turnover; (xvi) inventory turnover;
(xvii) economic value added (economic profit) and (xviii) total shareholder
return. Payment is made on each Financial Objective as indicated in the Annual
Incentive Plan Payout Schedule (Exhibit II).
For FY2009, the Compensation Committee has determined that the Financial
Objectives are:

  •   Consolidated Operating Income of $20 million (for all participants)     •
  Consolidated Net Sales of $664 million (for corporate participants)     •  
Subsidiary Budgeted Operating Income (for subsidiary participants)     •  
Subsidiary Budgeted Net Sales (for subsidiary participants)

Threshold
The Compensation Committee may determine one or more threshold Financial
Objectives which must be attained in order for any bonus payout to be earned
(other than a discretionary pool payout).
For FY2009, the Compensation Committee has determined that the Financial
Objective threshold is Consolidated Operating Income of $16 million.
Growth Multiplier
For FY2009, subject to the maximum payment provision in Paragraph VII, the
Compensation Committee has determined that if Consolidated Operating Income
exceeds the target, a participant’s incentive payment will be increased by the
same percentage that Consolidated Operating Income exceeds the stated target
(the Growth Multiplier). This provides for an enhanced incentive payout which is
totally funded by improvement in Consolidated Operating Income. See III for a
sample calculation.
Discretionary Pool
The Compensation Committee may also establish a discretionary pool to reward
participants in the plan with exemplary performance during the fiscal year be
paid out whether or not the threshold Financial Objectives are attained.
The Compensation Committee has determined that the maximum discretionary pool
for FY2009 is $500,000, which may be awarded in whole or in part.
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VI. Individual Objectives
Goal Setting
Plan participants and their managers will share accountability for establishing
annual goals for the Individual Objectives component of the incentive plan.
Generally, participants will have three to five specific and measurable goals
which may be weighted or prioritized. These goals should tie directly to the
overall company, subsidiary, or department goals. Joint agreement on goals will
be confirmed with signatures of the participant and his/her manager. These goals
must be provided to Human Resources within two months of becoming eligible for
the Annual Incentive Plan.
Goal Monitoring
Participants will normally meet with their managers at least quarterly to review
progress on the established goals.
Goal Modification
Goals may be modified during the plan year if the business or the individual’s
position requires the change.
Goal Measurement
Plan participants and their managers will discuss the participant’s goal
achievement on their Individual Objectives and managers must submit the
achievement to HR for approval in a timely manner. The Compensation Committee
will evaluate and determine achievement of the CEO’s individual performance and
review the achievement for the other executive officers.
VI. Incentive Payments
Results and Adjustments
Actual business results for the fiscal year will be provided by the Chief
Financial Officer and approved by the Compensation Committee. The Compensation
Committee may approve adjustments to actual business results to reflect
organizational, operational, or other changes which have occurred during the
year, e.g., acquisitions, dispositions, expansions, contractions, material
non-recurring items of income or loss, extraordinary items, effects of
accounting changes or other events which might create unwarranted hardships or
windfalls to participants.
Payments
Payments under the Plan will normally be paid within 45 days of the annual
audit. Payment will be made for the number of full months that the participant
held a qualifying position during the plan year and checks will be taxed in
compliance with Internal Revenue Service
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guidelines for bonuses. Checks will normally be hand delivered in one-on-one
meetings by the participant’s manager.
Maximum Payment
Notwithstanding anything to the contrary provided in this Plan, the Compensation
Committee may establish a maximum pay-out to any one participant for any fiscal
year.
For FY2009, the Compensation Committee has determined that the total payment to
any participant under this Plan shall not exceed 150% of the participant’s base
salary.
Communication
After year-end closing, managers should meet individually with each participant
to communicate the final achievement on specific goals and communicate the
incentive payment amount. Human Resources will prepare a communication document
to assist managers to effectively communicate this information.
VII. Amendment, Suspension and Termination
The Compensation Committee or the Board of Directors may at any time, and
without prior notice, terminate, suspend, amend or modify the Plan or any
incentive payments under the Plan not yet paid. No incentive payment will be
made during any suspension of the Plan or after its termination.
VIII. Unfunded Plan
The Plan shall be unfunded and the Company shall not be required to segregate
any assets for incentive payments under the Plan.
IX. Other Benefit and Compensation Programs
Payments received by a participant under this Plan shall not be deemed a part of
a participant’s regular, recurring compensation for purposes of the termination,
indemnity or severance pay law of any state and shall not be included in, nor
have any effect on, the determination of benefits under any other employee
benefit plan, contract or similar arrangement provided by the Company unless
expressly so provided by such other plan, contract or arrangement. Nothing in
the Plan shall be construed as a contractual payment obligation or guarantee of
employment for any participant.
X. Governing Law
To the extent that Federal laws do not otherwise control, the Plan and all
determinations made and actions taken pursuant to the Plan shall be governed by
the laws of Minnesota and construed accordingly.
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EXHIBIT I
Annual Incentive Plan Components

                                              Consolidated   Subsidiary        
        Operating   Operating   Consolidated   Subsidiary   Individual
Job Level
  Income   Income   Net Sales   Net Sales   Objectives
CEO, CFO and COO
    60 %             20 %             20 %
Subsidiary Presidents
    20 %     40 %             20 %     20 %
Corporate VP’s
    60 %             20 %             20 %
Subsidiary VP’s
    20 %     40 %             20 %     20 %
Corporate Directors
    40 %             20 %             40 %
Subsidiary Directors
    20 %     20 %             20 %     40 %
Corporate Managers
    40 %             20 %             40 %
Subsidiary Managers
    20 %     20 %             20 %     40 %

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EXHIBIT II
Annual Incentive Plan
Payout Schedule for Financial Objectives

                      Percent of   Payout     Target / Budget   %
Target
    100 %     100 %
 
    99 %     97.5 %
 
    98 %     95.0 %
 
    97 %     92.5 %
 
    96 %     90.0 %
 
    95 %     87.5 %
 
    94 %     85.0 %
 
    93 %     82.5 %
 
    92 %     80.0 %
 
    91 %     77.5 %
 
    90 %     75.0 %
 
    89 %     72.5 %
 
    88 %     70.0 %
 
    87 %     67.5 %
 
    86 %     65.0 %
 
    85 %     62.5 %
 
    84 %     60.0 %
 
    83 %     57.5 %
 
    82 %     55.0 %
 
    81 %     52.5 %
Minimum
    80 %     50 %
 
       
 
  Below 80%   0% Payout

Incentive Plan Upside Potential: Incentive Payments may exceed 100% of the
targeted bonus opportunity, up to a maximum of 150% of base salary, if
Consolidated Operating Income exceeds budget. This is accomplished through the
use of the Growth Multiplier which increases the final incentive payment by the
same percentage that Consolidated Operating Income exceeds the stated objective.
Please see example two in Exhibit III for details.
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EXHIBIT III
Incentive Payout Calculation Examples
Example #1: Navarre achieves 80% of Consolidated Operating Income, 100% of
Consolidated Net Sales, and participant achieves 80% of their individual
objectives.
Corporate Director ($80,000 base salary with a bonus opportunity of 25%)

                  Consolidated   Subsidiary   Consolidated Net         Operating
Income   Operating Income   Sales   Subsidiary Net Sales   Individual Objectives
10% of base salary -
(40% of total)
      5% of base salary -
(20% of total)       10% of base salary -
(40% of total)

                                 
Incentive Component
  % Attained     Payout %     Calculation     Payout  
Consolidated Op Income
    80 %     50 %     $80,000 x 10% x 50%     $ 4,000  
Subsidiary Op Income
    — %     — %     —     $ 0  
Consolidated Net Sales
    100 %     100 %   $ 80,000 x 5% x 100 %   $ 4,000  
Subsidiary Net Sales
    — %     — %     —     $ 0  
Individual Objectives
    80 %     80 %   $ 80,000 x 10% x 80 %   $ 6,400  
 
                       
 
                          $ 14,400  
 
                             

Example #2: Navarre achieves 90% of Consolidated Operating Income, 100% of
Subsidiary Operating Income, 80% of Subsidiary Net Sales, and the participant
achieves 95% of their individual objectives.
Subsidiary VP ($100,000 base salary with a bonus opportunity of 40%)

                  Consolidated   Subsidiary   Consolidated Net         Operating
Income   Operating Income   Sales   Subsidiary Net Sales   Individual Objectives
8% of base salary -
(20% of total)
  16% of base salary -
(40% of total)       8% of base salary -
(20% of total)   8% of base salary -
(20% of total)

                                 
Incentive Component
  % Attained     Payout %     Calculation     Payout  
Consolidated Op Income
    90 %     75 %     $100,000 x 8% x 75%     $ 6,000  
Subsidayr Op Income
    100 %     100 %   $ 100,000 x 16% x 100 %   $ 16,000  
Consolidated Net Sales
    — %     — %     —     $ 0  
Subsidiary Net Sales
    80 %     50 %   $ 100,000 x 8% x 50 %   $ 4,000  
Individual Objectives
    95 %     95 %   $ 100,000 x 8% x 95 %   $ 7,600  
 
                       
 
                          $ 33,600  
 
                             

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Example #3 – Growth Multiplier: Navarre achieves 110% of Consolidated Operating
Income, 100% of Subsidiary Operating Income, 90% of Subsidiary Net Sales, and
the participant achieves 100% of their individual objectives.
Subsidiary VP ($100,000 base salary with a bonus opportunity of 40%)

                  Consolidated   Subsidiary   Consolidated Net         Operating
Income   Operating Income   Sales   Subsidiary Net Sales   Individual Objectives
8% of base salary -
(20% of total)
  16% of base salary -
(40% of total)       8% base salary -
(20% of total)   8% of base salary -
(20% of total)

                                 
Incentive Component
  % Attained     Payout %     Calculation     Payout  
Consolidated Op Income
    110 %     100 %     $100,000 x 8% x 100%     $ 8,000  
Subsidiary Op Income
    100 %     100 %   $ 100,000 x 16% x 100 %   $ 16,000  
Consolidated Net Sales
    — %     — %     —     $ 0  
Subsidiary Net Sales
    90 %     75 %   $ 100,000 x 8% x 75 %   $ 6,000  
Individual Objectives
    100 %     100 %   $ 100,000 x 8% x 100 %   $ 8,000  
 
                       
 
                          $ 38,000               110% Achievement = 10%
Multiplier   $ 3,800                      
 
                          $ 41,800  
 
                             

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