-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HkTifxJYXj4ZYerStdXbYG60Bsxezl5NcGZ8SQvA4YAmrTzGyn2AE88Q6AkzVav1 yMKnRy4fJ62pihiI2HyfvQ== 0000891020-04-000321.txt : 20040311 0000891020-04-000321.hdr.sgml : 20040311 20040310215031 ACCESSION NUMBER: 0000891020-04-000321 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 22 FILED AS OF DATE: 20040311 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BLUE NILE INC CENTRAL INDEX KEY: 0001091171 IRS NUMBER: 911963165 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-113494 FILM NUMBER: 04661608 BUSINESS ADDRESS: STREET 1: 705 FIFTH AVE S STREET 2: STE 900 CITY: SEATTLE STATE: WA ZIP: 98104 BUSINESS PHONE: 2063366700 MAIL ADDRESS: STREET 1: 705 FIFTH AVE S STREET 2: STE 900 CITY: SEATTLE STATE: WA ZIP: 98104 FORMER COMPANY: FORMER CONFORMED NAME: INTERNET DIAMONDS INC DATE OF NAME CHANGE: 20000131 S-1 1 v97093orsv1.htm FORM S-1 sv1
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As Filed with the Securities and Exchange Commission on March 11, 2004
Registration No. 333-            


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


Form S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933


Blue Nile, Inc.

(Exact name of registrant as specified in its charter)

         
Delaware   5944   91-1963165
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

705 Fifth Avenue S, Suite 900

Seattle, Washington 98104
(206) 336-6700
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)


Mark C. Vadon

Chief Executive Officer
Blue Nile, Inc.
705 Fifth Avenue S, Suite 900
Seattle, Washington 98104
(206) 336-6700
(Name, address, including zip code, and telephone number, including area code, of agent for service)


Copies to:

     
Mark P. Tanoury
John M. Geschke
Gordon K. Ho
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, California 94306
(650) 843-5000
  Patrick J. Schultheis
Christian E. Montegut
Wilson Sonsini Goodrich & Rosati
Professional Corporation
5300 Carillon Point
Kirkland, Washington 98033
(425) 576-5800

          Approximate Date of Commencement of Proposed Sale to the Public: As soon as practicable after the effective date of this Registration Statement


          If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”) check the following box. o

          If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) of the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

          If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

          If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering. o

          If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. o

CALCULATION OF REGISTRATION FEE

         


Proposed Maximum Amount of
Title of Class of Aggregate Offering Registration
Securities to be Registered Price(1) Fee

Common Stock, $0.001 par value per share
  $75,000,000   $9,503


(1)  Estimated solely for the purpose of computing the registration fee pursuant to Rule 457(o) of the Securities Act.

          THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.




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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to Completion

Preliminary Prospectus dated March 11, 2004

PROSPECTUS

                           Shares

LOGO

Common Stock

          This is Blue Nile, Inc.’s initial public offering. We are selling                      shares and the selling stockholders are selling                      shares. We will not receive any proceeds from the sale of shares by the selling stockholders.

          We expect the initial public offering price to be between $       and $       per share. Currently, no public market exists for the shares. We have applied to have our common stock listed on the Nasdaq National Market under the symbol “NILE.”

          Investing in our common stock involves risks that are described in the “Risk Factors” section beginning on page       of this prospectus.


                 
Per Share Total


Public offering price
    $       $  
Underwriting discount
    $       $  
Proceeds, before expenses, to Blue Nile, Inc. 
    $       $  
Proceeds, before expenses, to the selling stockholders
    $       $  

          The underwriters may also purchase up to an additional                      shares from us, and up to an additional                      shares from the selling stockholders, at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover overallotments.

          Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

          The shares will be ready for delivery on or about                     , 2004.


 
Merrill Lynch & Co. Bear, Stearns & Co. Inc.
Thomas Weisel Partners LLC


The date of this prospectus is                     , 2004.


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[Inside front cover artwork containing pictures of diamonds, diamond rings, jewelry and jewelry settings, the Blue Nile logo, a computer screen shot from the Blue Nile web site and descriptions under the headings “Education,” “Guidance,” “Diamonds” and “Fine Jewelry.”]

 


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 EXHIBIT 3.1
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 EXHIBIT 10.12
 EXHIBIT 16.1
 EXHIBIT 21.1
 EXHIBIT 23.1

          You should rely only on the information contained in this prospectus. We have not, and the selling stockholders and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the selling stockholders and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.


          Market data and industry statistics used throughout this prospectus are based on independent industry publications and other publicly available information. We do not guarantee, and we have not independently verified this information. Accordingly, investors should not place undue reliance on this information.


          “Blue Nile,” “bluenile.com,” the BN logo and the Blue Nile BN stylized logo are registered trademarks of Blue Nile. All other trademarks or service marks appearing in this prospectus are trademarks or service marks of others.

 


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PROSPECTUS SUMMARY

          This summary is not complete and does not contain all of the information that you should consider before investing in our common stock. You should read this entire prospectus carefully, including “Risk Factors,” our consolidated financial statements and the related notes and the other financial information appearing elsewhere in this prospectus before you decide to invest in our common stock. Unless otherwise indicated, references to “Blue Nile,” the “Company,” “we,” “us” and “our” refer to Blue Nile, Inc. and our consolidated subsidiary, Blue Nile, LLC.

Blue Nile

          We are a leading online retailer of high quality diamonds and fine jewelry. We have built a well respected consumer brand by employing an informative sales process that empowers our customers while offering a broad selection of high quality jewelry at competitive prices. Our web site at www.bluenile.com showcases over 30,000 independently certified diamonds and more than 1,000 styles of fine jewelry, including rings, wedding bands, earrings, necklaces, pendants, bracelets and watches.

          We have developed an efficient online cost structure and a unique supply solution that eliminates traditional layers of diamond wholesalers and brokers, which allows us to purchase most of our product offerings at lower prices by avoiding mark-ups imposed by those intermediaries. Our supply solution also enables us to purchase only those diamonds that our customers have ordered. As a result, we are able to minimize the costs associated with carrying diamond inventory and limit our risk of potential mark-downs.

          Consumers frequently view the purchase of diamonds or fine jewelry as a significant event, and often require substantial information and guidance before completing a purchase. Our web site and extensively trained customer service representatives improve the traditional purchasing experience by providing education and detailed product information that enable our customers to objectively compare diamonds and fine jewelry products and make informed decisions. Our web site features interactive search functionality that allows our customers to quickly find the products that meet their exact needs from our broad selection of diamonds and fine jewelry.

          Our business has grown considerably since its launch in 1999. For the year ended December 31, 2003, we reported net sales of $128.9 million, an increase of 79% from the prior year, and net income before income taxes of $11.3 million as compared to $1.6 million in the prior year.

Our Industry

          We are an online retailer in the U.S. retail jewelry industry. According to U.S. Census Bureau statistics, total U.S. retail jewelry sales were approximately $51 billion in 2001. The U.S. retail jewelry industry is highly fragmented, with approximately 95% of all retail jewelry firms operating only a single store. Forrester Research, Inc., an independent technology research company, estimates that the online jewelry and luxury goods market will grow at a 25% compound annual growth rate, from approximately $2 billion in 2003 to $6 billion in 2008. This growth, and growth in e-commerce in general, is partly a result of the increased awareness of the convenience, selection and product information available through online shopping, continued improvement in network infrastructure and payment security, and growing access to high speed Internet connections, which make online shopping increasingly efficient and attractive to consumers.

Our Value Proposition

          Our business model enables us to generate higher operating margins and returns on invested capital than many traditional jewelry retailers while providing substantial value to both our customers and suppliers.

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Value to Customers

  •  Detailed Information. Our web site provides convenient access to extensive and consistent product information. This information builds our customers’ confidence in their purchases and enables them to control their diamond and fine jewelry purchasing experiences.
 
  •  Broad Selection. We offer our customers more than 30,000 independently certified high quality diamonds, over 100 styles of ring, earring and pendant settings for these diamonds and more than 1,000 styles of diamond, platinum, gold, pearl and sterling silver fine jewelry.
 
  •  Ability to Customize. Our customers can customize their diamond jewelry purchase by selecting individual diamonds to be set in their choice of ring, earring or pendant settings.
 
  •  Lower Pricing. We are able to offer our customers significantly lower prices than traditional jewelry retailers by eliminating numerous intermediaries in the diamond supply chain, establishing an efficient cost structure and creating incentives for our suppliers to provide us with competitive prices.
 
  •  Knowledgeable Customer Support. Our extensively trained customer service staff is available to provide assistance to our customers throughout the purchase process. We do not compensate our staff on a commission-based system.
 
  •  Free Shipping and 30-day Return Guarantee. We provide free shipping for all of our products and offer our customers an unconditional 30-day return policy on most products.

Value to Suppliers

  •  Improved Capital Efficiency. We provide our diamond suppliers with efficient access to a nationwide customer base, which can result in increased inventory turns and improved returns on invested capital.
 
  •  Lower Management Costs. We believe we are one of the largest purchasers of certified diamonds in the U.S. By enabling our diamond suppliers to drive significant sales volumes through a single account, we allow them to substantially reduce the costs associated with their sales operations.
 
  •  Access to Real-time Market Intelligence. Our interactive inventory management system provides suppliers with the real-time information necessary to quickly react to shifting demand and to competitively price their inventories.

Our Growth Strategy

          Our objective is to become a leading retailer of diamonds and fine jewelry in the U.S. by offering exceptional value to our customers through supply chain efficiencies, an efficient cost structure and a high quality customer experience. Key elements of our growth strategy include:

          Increasing Blue Nile Brand Awareness. We continue to build the Blue Nile brand through our integrated and cohesive marketing strategy. We have established and are continuing to develop a brand based on trust, guidance and value.

          Focusing on the Customer Experience. We continue to refine the customer service we provide in every step of the purchase process, from our web site to our customer support and fulfillment operations. The Blue Nile customer experience is designed to empower our customers with knowledge and confidence.

          Increasing Supply Chain Efficiency. We continue to build mutually beneficial supply relationships designed to further enhance supply chain efficiencies and provide value to both our customers and suppliers.

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          Continuing to Scale our Business to Enhance Profitability. We have established and continue to refine a scaleable, lower cost business model that enables us to grow with less working capital than traditional jewelry retailers.

          Expanding Product Offerings. We plan to selectively expand our jewelry offerings, in terms of both price points and product mix, through additional customized and non-customized products.

          Expanding into International Markets. We intend to selectively pursue opportunities in international markets in which we can leverage our existing infrastructure and compelling value proposition. We plan to prioritize and pursue these opportunities based on each market’s consumer spending on jewelry, adoption rate of online purchasing and competitive landscape, among other factors.

Corporate Information

          Our business was incorporated in Delaware on March 18, 1999 as RockShop.com, Inc. On May 21, 1999, we purchased certain assets of Williams & Son, Inc., a Seattle jeweler, including a web site established by that business. In June 1999, we changed our name to Internet Diamonds, Inc. In November 1999, we launched the Blue Nile brand and changed our name to Blue Nile, Inc. Our principal executive offices are located at 705 Fifth Avenue S, Suite 900, Seattle, Washington 98104, and our telephone number is (206) 336-6700. Our web site is located at www.bluenile.com. The information on, or that can be accessed through, our web site is not part of this prospectus.

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The Offering

 
Common stock offered by:
 
Blue Nile, Inc.                       shares
 
The selling stockholders                       shares
______________________________________________________
 
Total                       shares
 
Common stock outstanding after this offering                       shares
 
Use of proceeds We estimate that our net proceeds from this offering will be approximately $           million. We intend to use these net proceeds for general corporate purposes, including working capital and capital expenditures. We will not receive any proceeds from the sale of shares by the selling stockholders.
 
Risk factors See “Risk Factors” and the other information included in this prospectus for a discussion of the factors you should consider carefully before deciding to invest in shares of our common stock.
 
Proposed Nasdaq National Market symbol NILE

          Unless specifically stated otherwise, all information contained in this prospectus:

  •  gives effect to a                     -for-                     reverse split of our common and mandatorily redeemable convertible preferred stock (convertible preferred stock) prior to the closing of this offering;
 
  •  gives effect to the conversion of all of our outstanding convertible preferred stock into 27,300,507 shares of common stock immediately upon the closing of this offering;
 
  •  assumes the cash exercise of warrants to purchase 15,000 shares of our common stock that will terminate if not exercised prior to the completion of this offering; and
 
  •  assumes that the underwriters do not exercise their option to purchase up to                     additional shares from us and up to            additional shares from the selling stockholders in this offering to cover overallotments.

          The number of shares of common stock to be outstanding after this offering excludes the following:

  •  3,506,497 shares of common stock subject to outstanding options under our 1999 Equity Incentive Plan as of December 31, 2003;
 
  •  55,810 shares of common stock issuable upon the exercise of outstanding warrants;
 
  •  an aggregate of 660,076 shares of common stock reserved for future issuance under our 1999 Equity Incentive Plan as of December 31, 2003; and
 
  •  an aggregate of 9,900,000 shares of common stock reserved for future issuance under our 2004 Equity Incentive Plan, 2004 Non-Employee Directors’ Stock Option Plan and 2004 Employee Stock Purchase Plan, each adopted in March 2004 and containing provisions that automatically increase their share reserves each year, as more fully described in “Management — Stock Based Plans.”

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Summary Consolidated Financial Information

          The table below shows summary consolidated financial data for each of our fiscal years ended December 31, 2001, 2002 and 2003. The consolidated statements of operations data and the additional operating data for each of the three fiscal years ended December 31, 2001, 2002 and 2003 and the consolidated balance sheet data as of December 31, 2003 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The pro forma consolidated balance sheet data and the pro forma basic and diluted net income per share data below reflect the automatic conversion of all of our outstanding convertible preferred stock into 27,300,507 shares of our common stock upon the closing of this offering and the issuance of 15,000 shares of common stock upon the cash exercise of outstanding warrants that will expire if not exercised prior to the closing of this offering. The pro forma as adjusted column of the consolidated balance sheet data reflects the sale of                      shares of common stock offered by us at an initial public offering price of $           per share, after deducting the underwriting discount and estimated offering expenses payable by us.

          You should read the following summary consolidated financial and operating information together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the related notes included elsewhere in this prospectus. The historical results presented below are not necessarily indicative of future results.

                           
Year Ended December 31,

2001 2002 2003



(In thousands, except per share data)
Consolidated Statements of Operations Data:
                       
 
Net sales
  $ 48,674     $ 72,120     $ 128,894  
 
Gross profit
    11,123       18,153       29,420  
 
Selling, general and administrative expenses
    15,421       14,126       18,165  
 
Restructuring charges
    1,017       400       (87 )
     
     
     
 
 
Operating income (loss)
    (5,315 )     3,627       11,342  
 
Income (loss) before income taxes
    (7,360 )     1,627       11,330  
 
Income tax expense (benefit)
                (15,700 )
     
     
     
 
 
Net income (loss)
  $ (7,360 )     $1,627       $27,030  
     
     
     
 
 
Basic net income (loss) per share
    $(0.98 )   $ 0.20     $ 2.80  
 
Diluted net income (loss) per share
    $(0.98 )   $ 0.05     $ 0.66  
 
Shares used in computing basic net income (loss) per share
    7,538       8,341       9,669  
 
Shares used in computing diluted net income (loss) per share
    7,538       35,402       40,844  
 
Pro forma basic net income per share
                  $ 0.73  
 
Pro forma diluted net income per share
                  $ 0.66  
 
Pro forma shares used in computing pro forma basic net income per share
                    36,985  
 
Pro forma shares used in computing pro forma diluted net income per share
                    40,945  
Additional Operating Data:
                       
 
Net cash provided by operating activities
    $4,460     $ 16,730     $ 19,816  
 
Gross profit margin
    22.9 %     25.2 %     22.8 %
 
Selling, general and administrative expenses as a percentage of net sales
    31.7 %     19.6 %     14.1 %

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As of December 31, 2003

Pro Forma
Actual Pro Forma As Adjusted



(In thousands)
Consolidated Balance Sheet Data:
                       
Cash and cash equivalents
    $30,383     $ 30,421     $    
Working capital(1)
    15,537       15,575          
Total assets
    62,305       62,343          
Total long-term obligations
                   
Mandatorily redeemable convertible preferred stock
    57,485                
Total stockholders’ equity (deficit)
    (27,238 )     30,285          


(1)  Working capital consists of total current assets, including cash and cash equivalents, less total current liabilities.

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RISK FACTORS

          You should carefully consider the risks described below and the other information in this prospectus before making a decision to invest in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial could negatively impact our business, results of operations or financial condition in the future. If any of such risks actually occur, our business, results of operations or financial condition could be adversely affected. In those cases, the trading price of our common stock could decline and you may lose all or part of your investment.

Risks Related to Our Business

Our limited operating history makes it difficult for us to accurately forecast net sales and appropriately plan our expenses.

          We were formed in March 1999 and have a limited operating history. As a result, it is difficult to accurately forecast our net sales and plan our operating expenses. We base our current and future expense levels on our operating forecasts and estimates of future net sales. Net sales and operating results are difficult to forecast because they generally depend on the volume and timing of the orders we receive, which are uncertain. Some of our expenses are fixed, and, as a result, we may be unable to adjust our spending in a timely manner to compensate for any unexpected shortfall in net sales. This inability could cause our net income in a given quarter to be lower than expected.

We have incurred significant operating losses in the past and may not be able to sustain profitability in the future.

          We experienced significant operating losses in each quarter from our inception in 1999 through the second quarter of 2002. As a result, our business has a limited record of profitability and may not continue to be profitable or increase in profitability. If we are unable to acquire diamonds and fine jewelry at commercially reasonable prices, if net sales decline or if our expenses otherwise exceed our expectations, we may not be able to sustain or increase profitability on a quarterly or annual basis.

          As a result of our significant operating losses in prior periods, we have accrued substantial net operating loss carryforwards. If we are unsuccessful in generating sufficient net income in future periods, these assets may expire before they are utilized.

We expect our quarterly financial results to fluctuate which may lead to volatility in our stock price.

          We expect our net sales and operating results to vary significantly from quarter to quarter due to a number of factors, including changes in:

  •  demand for our products;
 
  •  our ability to attract visitors to our web site and convert those visitors into customers;
 
  •  our ability to retain existing customers or encourage repeat purchases;
 
  •  our ability to manage our product mix and inventory;
 
  •  consumer tastes and preferences for diamonds and fine jewelry;
 
  •  our ability to manage our fulfillment operations;
 
  •  general economic conditions;
 
  •  advertising and other marketing costs;
 
  •  the costs to acquire diamonds and precious metals;
 
  •  our, or our competitors’, pricing and marketing strategies;

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  •  conditions or trends in the diamond and fine jewelry industry;
 
  •  conditions or trends in the Internet and e-commerce industry; and
 
  •  costs of expanding or enhancing our technology or web site.

          As a result of the variability of these and other factors, our operating results in future quarters may be below the expectations of public market analysts and investors. In this event, the price of our common stock may decline.

As a result of seasonal fluctuations in our net sales, our quarterly results may fluctuate and could be below expectations.

          We have experienced and expect to continue to experience seasonal fluctuations in our net sales. In particular, a disproportionate amount of our net sales has been realized during the fourth quarter as a result of the December holiday season, and we expect this seasonality to continue in the future. Over 35%, 42% and 38% of our net sales in 2001, 2002 and 2003, respectively, were generated during the fourth quarter. In anticipation of increased sales activity during the fourth quarter, we may incur significant additional expenses, including higher inventory of jewelry and additional staffing in our fulfillment and customer support operations. If we were to experience lower than expected net sales during any future fourth quarter, it would have a disproportionately large impact on our operating results and financial condition for that year. We also experience considerable fluctuations in net sales in periods preceding other special annual occasions such as Valentine’s Day and Mother’s Day. In the future, our seasonal sales patterns may become more pronounced, may strain our personnel and fulfillment activities and may cause a shortfall in net sales as compared to expenses in a given period, which would substantially harm our business and results of operations.

Our failure to acquire diamonds and fine jewelry at commercially reasonable prices would result in higher costs and lower net sales and damage our competitive position.

          If we are unable to acquire diamonds and fine jewelry at commercially reasonable prices, our costs may exceed our forecasts, our gross margins and operating results may suffer and our competitive position could be damaged. The success of our business model depends, in part, on our ability to offer prices to customers that are significantly below those of traditional jewelry retailers. A significant portion of the world’s supply of rough diamonds is controlled by a small number of diamond mining firms. As a result, any decisions made to restrict the supply of rough diamonds by these firms to our suppliers could substantially impair our ability to acquire diamonds at commercially reasonable prices, if at all. We do not currently have any direct supply relationship with these firms nor do we expect to enter into any such relationship in the foreseeable future. Our ability to acquire diamonds and fine jewelry is also substantially dependent on our relationships with various suppliers. Our inability to maintain and expand these and other future diamond and fine jewelry supply relationships on commercially reasonable terms or the inability of our current and future suppliers to maintain arrangements for the supply of products sold to us on commercially reasonable terms would substantially harm our business and results of operations.

          Suppliers and manufacturers of diamonds as well as retailers of diamonds and diamond jewelry have vertically integrated and we expect will continue to vertically integrate their operations either by developing retail channels for the products they manufacture or acquiring sources of supply, including, without limitation, diamond mining operations for the products that they sell. To the extent such vertical integration efforts are successful, some of the fragmentation in the existing diamond supply chain could be eliminated and our ability to obtain an adequate supply of diamonds and fine jewelry from multiple sources could be limited.

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Purchasers of diamonds and fine jewelry may not choose to shop online, which would prevent us from increasing net sales.

          The online market for diamonds and fine jewelry is significantly less developed than the online market for books, music, toys and other consumer products. If this market does not gain widespread acceptance, our business may suffer. Our success will depend in part on our ability to attract consumers who have historically purchased diamonds and fine jewelry through traditional retailers. Furthermore, we may have to incur significantly higher and more sustained advertising and promotional expenditures or price our products more competitively than we currently anticipate in order to attract additional online consumers to our web site and convert them into purchasing customers. Specific factors that could prevent consumers from purchasing diamonds and fine jewelry from us include:

  •  concerns about buying luxury products such as diamonds and fine jewelry without a physical storefront, face-to-face interaction with sales personnel and the ability to physically handle and examine products;
 
  •  delivery time associated with Internet orders;
 
  •  product offerings that do not reflect consumer tastes and preferences;
 
  •  pricing that does not meet consumer expectations;
 
  •  concerns about the security of online transactions and the privacy of personal information;
 
  •  delayed shipments or shipments of incorrect or damaged products; and
 
  •  inconvenience associated with returning or exchanging purchased items.

We may not succeed in continuing to establish the Blue Nile brand, which would prevent us from acquiring customers and increasing our net sales.

          A significant component of our business strategy is the continued establishment and promotion of the Blue Nile brand. Due to the competitive nature of the online market for diamonds and fine jewelry, if we do not continue to establish our brand and branded products, we may fail to build the critical mass of customers required to substantially increase our net sales. Promoting and positioning our brand will depend largely on the success of our marketing and merchandising efforts and our ability to provide a consistent, high quality customer experience. To promote our brand and branded products, we have incurred and will continue to incur substantial expense related to advertising and other marketing efforts.

          A critical component of our brand promotion strategy is establishing a relationship of trust with our customers, which we believe can be achieved by providing a high quality customer experience. In order to provide a high quality customer experience, we have invested and will continue to invest substantial amounts of resources in our web site development and functionality, fulfillment operations and customer service operations. Our ability to provide a high quality customer experience is also dependent, in large part, on external factors over which we may have little or no control, including, without limitation, the reliability and performance of our suppliers, third-party carriers and networking vendors. We also rely on third parties for information, including product characteristics and availability that we present to consumers on our web site, which may, on occasion, be inaccurate. Our failure to provide our customers with high quality customer experiences for any reason could substantially harm our reputation and adversely impact our efforts to develop Blue Nile as a trusted brand. The failure of our brand promotion activities could adversely affect our ability to attract new customers and maintain customer relationships, and, as a result, substantially harm our business and results of operations.

We face significant competition and may be unsuccessful in competing against current and future competitors.

          The retail jewelry industry is intensely competitive, and we expect competition in the sale of diamonds and fine jewelry to increase and intensify in the future. Increased competition may result in price

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pressure, reduced gross margins and loss of market share, any of which could substantially harm our business and results of operations. Current and potential competitors include:

  •  independent jewelry stores;
 
  •  retail jewelry store chains;
 
  •  other online retailers that sell jewelry;
 
  •  department stores, chain stores and mass retailers;
 
  •  catalog and television shopping retailers;
 
  •  discount superstores and wholesale clubs; and
 
  •  online auction sites.

          Many of our current and potential competitors have advantages over us, including longer operating histories, greater brand recognition, existing customer and supplier relationships, and significantly greater financial, marketing and other resources. In addition, traditional store-based retailers offer consumers the ability to physically handle and examine products in a manner that is not possible over the Internet as well as a more convenient means of returning and exchanging purchased products.

          Some of our competitors seeking to establish an online presence may be able to devote substantially more resources to web site systems development and exert more leverage over the supply chain for diamonds and fine jewelry than we can. In addition, larger, more established and better capitalized entities may acquire, invest or partner with traditional and online competitors as use of the Internet and other online services increases. Our online competitors can duplicate many of the products, services and content we offer, which could harm our business and results of operations.

In order to increase net sales and to sustain or increase profitability, we must attract customers in a cost-effective manner.

          Our success depends on our ability to attract customers in a cost-effective manner. We have relationships with providers of online services, search engines, directories and other web sites and e-commerce businesses to provide content, advertising banners and other links that direct customers to our web site. We rely on these relationships as significant sources of traffic to our web site. Our agreements with these providers generally have terms of one year or less. If we are unable to develop or maintain these relationships on acceptable terms, our ability to attract new customers would be harmed. In addition, many of the parties with which we have online-advertising arrangements could provide advertising services to other online or traditional retailers, including retailers with whom we compete. As a result, these parties may be reluctant to enter into or maintain relationships with us. Without these relationships, traffic to our web site could be reduced, which would substantially harm our business and results of operations.

Our failure to meet customer expectations with respect to price would adversely affect our business and results of operations.

          Demand for our products has been highly sensitive to pricing changes. Changes in our pricing strategies have had and may continue to have a significant impact on our net sales, gross margins and net income. If we fail to meet customer expectations with respect to price in any given period, our business and results of operations would suffer.

We rely exclusively on the sale of diamonds and fine jewelry for our net sales, and demand for these products could decline.

          Luxury products, such as diamonds and fine jewelry, are discretionary purchases for consumers. The volume and dollar value of such purchases may significantly decrease during economic downturns. The success of our business depends in part on macroeconomic factors such as employment levels, salary levels, tax rates and credit availability, all of which affect consumer spending and disposable income. Any

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reduction in consumer spending or disposable income may affect us more significantly than companies in other industries.

          Our net sales and results of operations are highly dependent on the demand for diamonds and diamond jewelry, particularly engagement rings. Should prevailing consumer tastes for diamonds decline or customs with respect to engagement shift away from the presentation of diamond jewelry, demand for our products would decline and our business and results of operations would be substantially harmed.

          The significant cost of diamonds results in large part from their scarcity. From time to time, attempts have been made to develop and market synthetic stones and gems to compete in the market for diamonds and diamond jewelry. We expect such efforts to continue in the future. If any such efforts are successful in creating widespread demand for alternative diamond products, demand and price levels for our products would decline and our business and results of operations would be substantially harmed.

          In recent years, increasing attention has been focused on “conflict” diamonds, which are diamonds extracted from war-torn regions in Africa and sold by rebel forces to fund insurrection. Diamonds are, in some cases, also believed to be used to fund terrorist activities in some regions. Although we believe that the suppliers from whom we purchase our diamonds seek to exclude such diamonds from their inventories, we cannot independently verify whether any diamond we offer was extracted from these regions. Current efforts to increase consumer awareness of this issue and encourage legislative response could adversely affect consumer demand for diamonds.

          Our jewelry offerings must reflect the tastes and preferences of a wide range of consumers whose preferences may change regularly. Our strategy has been to offer primarily what we consider to be classic styles of fine jewelry, but there can be no assurance that these styles will continue to be popular with consumers in the future. If the styles we offer become less popular with consumers and we are not able to adjust our inventory in a timely manner, our net sales may decline or fail to meet expected levels.

The success of our business may depend on our ability to successfully expand our product offerings.

          Our ability to significantly increase our net sales and maintain and increase our profitability may depend on our ability to successfully expand our product lines beyond our current offerings. If we offer a new product category that is not accepted by consumers, the Blue Nile brand and reputation could be adversely affected, our net sales may fall short of expectations and we may incur substantial expenses that are not offset by increased net sales. Expansion of our product lines may also strain our management and operational resources.

If our fulfillment operations are interrupted for any significant period of time, our business and results of operations would be substantially harmed.

          Our success depends on our ability to successfully receive and fulfill orders and to promptly and securely deliver our products to our customers. Our inventory management, jewelry assembly, packaging, labeling and product return processes are performed in a single fulfillment center. This facility is susceptible to damage or interruption from human error, fire, flood, power loss, telecommunications failure, terrorist attacks, acts of war, break-ins, earthquake and similar events. We do not currently maintain back-up power systems at our fulfillment center. We do not presently have a formal disaster recovery plan and our business interruption insurance may be insufficient to compensate us for losses that may occur in the event operations at our fulfillment center are interrupted. We may transfer our fulfillment operations to a larger fulfillment center in the future. Any interruptions in our fulfillment center operations for any significant period of time, including interruptions resulting from the transfer to a new facility, could damage our reputation and brand and substantially harm our business and results of operations.

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We may fail to successfully expand our fulfillment capabilities, which would substantially harm our business and results of operations.

          We currently provide, through a single fulfillment center, our own order fulfillment services for substantially all products we sell. If we fail to quickly and efficiently fill customer orders, our operating results may suffer. We believe that increased demand and other considerations will require us to significantly expand our fulfillment capabilities and facilities in the near future. Our need to rapidly adapt and expand our fulfillment capabilities is particularly acute during the fourth quarter. If we do not successfully expand our fulfillment capabilities to accommodate increases in demand, we may not be able to substantially increase our net sales. Our efforts at expanding our fulfillment capabilities may cause disruptions in other areas of our business which could substantially harm our business and results of operations.

We rely on our suppliers and third-party carriers as part of our fulfillment process, and these third parties may fail to adequately serve our customers.

          In general, we rely on our suppliers to promptly ship us diamonds ordered by our customers. Any failure by our suppliers to sell and ship such products to us in a timely manner will have an adverse effect on our ability to fulfill customer orders and harm our business and results of operations. Our suppliers, in turn, rely on third-party carriers to ship diamonds to us, and in some cases, directly to our customers. We also rely on third-party carriers for product shipments to our customers. We and our suppliers are therefore subject to the risks, including employee strikes and inclement weather, associated with such carriers’ abilities to provide delivery services to meet our and our suppliers’ shipping needs. Our suppliers’ and third-party carriers’ failure to deliver products to us or our customers in a timely manner or to otherwise adequately serve our customers would damage our reputation and brand and substantially harm our business and results of operations.

If we are unable to accurately manage our inventory of fine jewelry, our reputation and results of operations could suffer.

          Except for loose diamonds, substantially all of the fine jewelry we sell is from our physical inventory. Changes in consumer tastes for these products subject us to significant inventory risks. The demand for specific products can change between the time we order an item and the date we receive it. If we under-stock one or more of our products, we may not be able to obtain additional units in a timely manner on terms favorable to us, if at all, which would damage our reputation and substantially harm our business and results of operations. In addition, if demand for our products increases over time, we may be forced to increase inventory levels. If one or more of our products does not achieve widespread consumer acceptance, we may be required to take significant inventory markdowns, or may not be able to sell the product at all, which would substantially harm our results of operations.

We face the risk of theft of our products from inventory or during shipment.

          We may experience theft of our products while they are being held in our fulfillment center or during the course of shipment to our customers by third-party shipping carriers. We have taken steps to prevent such theft and maintain insurance to cover losses resulting from theft. However, if security measures fail, losses exceed our insurance coverage or we are not able to maintain insurance at a reasonable cost, we could incur significant losses from theft, which would substantially harm our business and results of operations.

Our failure to effectively manage the growth in our operations may prevent us from successfully expanding our business.

          We have experienced, and in the future may experience, rapid growth in operations which has placed, and could continue to place, a significant strain on our operations, services, internal controls and

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other managerial, operational and financial resources. To effectively manage future expansion, we will need to maintain our operational and financial systems and managerial controls and procedures, which include the following processes:

  •  transaction-processing and fulfillment;
 
  •  inventory management;
 
  •  customer support;
 
  •  management of multiple supplier relationships;
 
  •  operational, financial and managerial controls;
 
  •  reporting procedures; and
 
  •  training, supervision, retention and management of our employees.

          If we are unable to manage future expansion, our ability to provide a high quality customer experience could be harmed, which would damage our reputation and brand and substantially harm our business and results of operations.

If the single facility where substantially all of our computer and communications hardware is located fails, our business, results of operations and financial condition would be harmed.

          Our ability to successfully receive and fulfill orders and to provide high quality customer service depends in part on the efficient and uninterrupted operation of our computer and communications systems. Substantially all of the computer hardware necessary to operate our web site is located at a single leased facility. Our systems and operations are vulnerable to damage or interruption from human error, fire, flood, power loss, telecommunications failure, terrorist attacks, acts of war, break-ins, earthquake and similar events. Although we have developed an alternative call center, we do not presently have redundant systems in multiple locations or a formal disaster recovery plan, and our business interruption insurance may be insufficient to compensate us for losses that may occur. In addition, our servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays, loss of critical data, the inability to accept and fulfill customer orders or the unauthorized disclosure of confidential customer data. The occurrence of any of the foregoing risks could substantially harm our business and results of operations.

We rely on the services of our key personnel, any of whom would be difficult to replace.

          We rely upon the continued service and performance of key technical, fulfillment and senior management personnel. If we lose any of these personnel, our business could suffer. Our future success depends on our retention of key employees, including Mark Vadon, our Chief Executive Officer, on whom we rely for management of our company, development of our business strategy and management of our strategic relationships. None of our key technical, fulfillment or senior management personnel are bound by employment or noncompetition agreements, and, as a result, any of these employees could leave with little or no prior notice. In addition, other than for Mr. Vadon, we do not have “key person” life insurance policies covering any of our employees.

Failure to adequately protect our intellectual property could substantially harm our business and results of operations.

          We rely on a combination of patent, trademark, trade secret and copyright law and contractual restrictions to protect our intellectual property. These afford only limited protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our web site features and functionality or to obtain and use information that we consider as proprietary, such as the technology used to operate our web site, our content and our trademarks.

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          We have registered “Blue Nile,” “bluenile.com,” the BN logo and the Blue Nile BN stylized logo as trademarks in the U.S. and in certain other countries. Our competitors have, and other competitors may, adopt service names similar to ours, thereby impeding our ability to build brand identity and possibly leading to customer confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of the term Blue Nile or our other trademarks. Any claims or customer confusion related to our trademarks could damage our reputation and brand and substantially harm our business and results of operations.

          We currently hold the bluenile.com Internet domain name and various other related domain names. Domain names generally are regulated by Internet regulatory bodies. If we lose the ability to use a domain name in a particular country, we would be forced to either incur significant additional expenses to market our products within that country, including the development of a new brand and the creation of new promotional materials and packaging, or elect not to sell products in that country. Either result could substantially harm our business and results of operations. The regulation of domain names in the United States and in foreign countries is subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may not be able to acquire or maintain the domain names that utilize the name Blue Nile in all of the countries in which we currently or intend to conduct business.

          Litigation or proceedings before the U.S. Patent and Trademark Office may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets and domain names and to determine the validity and scope of the proprietary rights of others. Any litigation or adverse priority proceeding could result in substantial costs and diversion of resources and could substantially harm our business and results of operations. Finally, we intend to sell our products internationally, and the laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States.

Assertions by third parties of infringement by us of their intellectual property rights could result in significant costs and substantially harm our business and results of operations.

          Other parties have, and may in the future, assert that we have infringed their technology or other intellectual property rights. We cannot predict whether any such assertions or claims arising from such assertions will substantially harm our business and results of operations. If we are forced to defend against any infringement claims, whether they are with or without merit or are determined in our favor, we may face costly litigation, diversion of technical and management personnel or product shipment delays. Furthermore, the outcome of a dispute may be that we would need to develop non-infringing technology or enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may be unavailable on terms acceptable to us, or at all.

Increased product returns and the failure to accurately predict product returns could substantially harm our business and results of operations.

          We offer our customers an unconditional 30-day return policy that allows our customers to return most products if they are not satisfied for any reason. We make allowances for product returns in our financial statements based on historical return rates. Actual merchandise returns are difficult to predict and may significantly exceed our allowances. Any significant increase in merchandise returns above our allowances would substantially harm our business and results of operations.

We may be unsuccessful in expanding our operations internationally.

          To date, we have made very limited international sales, but we anticipate expanding our international sales and operations in the future either by building local versions of our web site for foreign markets or through acquisitions or alliances with third parties. Any international expansion plans we choose to undertake will require management attention and resources and may be unsuccessful. We have minimal experience in selling our products in international markets or in conforming to the local cultures,

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standards or policies necessary to successfully compete in those markets. We do not currently have any overseas fulfillment, distribution or server facilities or any web site content localized for foreign markets and we cannot be certain that we will be able to establish a global presence if we choose to expand internationally. In addition, we may have to compete with retailers that have more experience with local markets. Our ability to expand internationally may also be limited by the demand for our products and the adoption of electronic commerce in these markets. Different privacy, censorship and liability standards and regulations and different intellectual property laws in foreign countries may cause our business and results of operations to suffer.

          Any future international operations may also fail to succeed due to other risks inherent in foreign operations, including:

  •  the need to develop new supplier and jeweler relationships;
 
  •  unexpected changes in international regulatory requirements and tariffs;
 
  •  difficulties in staffing and managing foreign operations;
 
  •  longer payment cycles from credit card companies;
 
  •  greater difficulty in accounts receivable collection;
 
  •  potential adverse tax consequences;
 
  •  lack of infrastructure to adequately conduct electronic commerce transactions or fulfillment operations;
 
  •  price controls or other restrictions on foreign currency; and
 
  •  difficulties in obtaining export and import licenses.

Our failure to successfully expand our operations internationally may cause our business and results of operations to suffer.

We rely on our relationship with a third-party consumer credit company to offer financing for the purchase of our products.

          The purchase of the diamond and fine jewelry products we sell is a substantial expense for many of our customers. We currently rely on our relationship with a single financial institution to provide financing to our customers. If we are unable to maintain this or other similar arrangements, we may not be able to offer financing alternatives to our customers, which may reduce demand for our products and substantially harm our business and results of operations.

We may undertake acquisitions to expand our business, which may pose risks to our business and dilute the ownership of our existing stockholders.

          Integrating any newly acquired businesses, technologies or services may be expensive and time-consuming. To finance any acquisitions, it may be necessary for us to raise additional funds through public or private financings. Additional funds may not be available on terms that are favorable to us, and, in the case of equity financings, would result in dilution to our stockholders. If we do complete any acquisitions, we may be unable to operate such acquired businesses profitably or otherwise implement our strategy successfully. If we are unable to integrate any newly acquired entities or technologies effectively, our business and results of operations could suffer. The time and expense associated with finding suitable and compatible businesses, technologies or services could also disrupt our ongoing business and divert our management’s attention. Future acquisitions by us could also result in large and immediate write-offs or assumptions of debt and contingent liabilities, any of which could substantially harm our business and results of operations.

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Risks Related to Our Industry

If use of the Internet, particularly with respect to online commerce, does not continue to increase as rapidly as we anticipate, our business will be harmed.

          Our future net sales and profits are substantially dependent upon the continued use of the Internet as an effective medium of business and communication by our target customers. Internet use may not continue to develop at historical rates and consumers may not continue to use the Internet and other online services as a medium for commerce. Highly publicized failures by some online retailers to meet consumer demands could result in consumer reluctance to adopt the Internet as a means for commerce, and thereby damage our reputation and brand and substantially harm our business and results of operations.

          In addition, the Internet may not be accepted as a viable long-term commercial marketplace for a number of reasons, including:

  •  actual or perceived lack of security of information or privacy protection;
 
  •  possible disruptions, computer viruses or other damage to the Internet servers or to users’ computers; and
 
  •  excessive governmental regulation.

          Our success will depend, in large part, upon third parties maintaining the Internet infrastructure to provide a reliable network backbone with the speed, data capacity, security and hardware necessary for reliable Internet access and services. Our business, which relies on a contextually rich web site that requires the transmission of substantial data, is also significantly dependent upon the availability and adoption of broadband Internet access and other high speed Internet connectivity technologies.

Our net sales may be negatively affected if we are required to charge taxes on purchases.

          We do not collect or have imposed upon us sales or other taxes related to the products we sell, except for certain corporate level taxes and sales taxes with respect to purchases by customers located in the State of Washington. However, one or more states or foreign countries may seek to impose sales or other tax collection obligations on us in the future. A successful assertion by one or more states or foreign countries that we should be collecting sales or other taxes on the sale of our products could result in substantial tax liabilities for past sales, discourage customers from purchasing products from us, decrease our ability to compete with traditional retailers or otherwise substantially harm our business and results of operations.

          Currently, decisions of the U.S. Supreme Court restrict the imposition of obligations to collect state and local sales and use taxes with respect to sales made over the Internet. However, implementation of the restrictions imposed by these Supreme Court decisions is subject to interpretation by state and local taxing authorities. While we believe that these Supreme Court decisions currently restrict state and local taxing authorities outside the State of Washington from requiring us to collect sales and use taxes from purchasers located within their jurisdictions, taxing authorities outside the State of Washington could disagree with our interpretation of these decisions. Moreover, a number of states, as well as the U.S. Congress, have been considering various initiatives that could limit or supercede the Supreme Court’s position regarding sales and use taxes on Internet sales. If any state or local taxing jurisdiction were to disagree with our interpretation of the Supreme Court’s current position regarding state and local taxation of Internet sales, or if any of these initiatives were to address the Supreme Court’s constitutional concerns and result in a reversal of its current position, we could be required to collect sales and use taxes from purchasers located in states other than Washington. The imposition by state and local governments of various taxes upon Internet commerce could create administrative burdens for us and could decrease our future net sales.

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Changes in accounting standards or our accounting policy relating to stock-based compensation may negatively affect our reported results of operations.

          We currently are not required to record stock-based compensation charges if the employee’s stock option exercise price equals or exceeds the deemed fair value of our common stock at the date of grant. However, several companies recently have elected to change their accounting policies and begun to record the fair value of stock options as an expense. Although the standards have not been finalized and the timing of a final statement has not been established, the Financial Accounting Standards Board, or FASB, has announced its support for recording expense for the fair value of stock options granted. We account for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations. Under APB 25, compensation expense is recognized for the difference between the fair value of our stock on the date of grant and the exercise price. We have elected to apply the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation” (“SFAS No. 123”). Had compensation cost for the Company’s stock options been determined based on the fair value of the options at the date of grant under SFAS No. 123, our pro forma net income (loss) would have been as set forth in Note 1 to our consolidated financial statements included elsewhere in this prospectus.

Government regulation of the Internet and e-commerce is evolving and unfavorable changes could substantially harm our business and results of operations.

          We are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet and e-commerce. Existing and future laws and regulations may impede the growth of the Internet or other online services. These regulations and laws may cover taxation, restrictions on imports and exports, customs, tariffs, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, the provision of online payment services, broadband residential Internet access and the characteristics and quality of products and services. It is not clear how existing laws governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the Internet and e-commerce. Unfavorable resolution of these issues may substantially harm our business and results of operations.

Our failure to protect confidential information of our customers and our network against security breaches could damage our reputation and brand and substantially harm our business and results of operations.

          A significant barrier to online commerce and communications is the secure transmission of confidential information over public networks, and our failure to prevent security breaches could damage our reputation and brand and substantially harm our business and results of operations. Currently, a significant number of our customers authorize us to bill their credit card accounts directly. We rely on encryption and authentication technology licensed from third parties to effect secure transmission of confidential information, including credit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in a compromise or breach of the technology used by us to protect customer transaction data. Any such compromise of our security could damage our reputation and brand and expose us to a risk of loss or litigation and possible liability which would substantially harm our business and results of operations. In addition, anyone who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches.

Interruptions to our systems that impair customer access to our web site would damage our reputation and brand and substantially harm our business and results of operations.

          The satisfactory performance, reliability and availability of our web site, transaction processing systems and network infrastructure are critical to our reputation and our ability to attract and retain

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customers and to maintain adequate customer service levels. Any future systems interruption that results in the unavailability of our web site or reduced order fulfillment performance could result in negative publicity, damage our reputation and brand and cause our business and results of operations to suffer. Although we have not experienced any material disruption in our services to date, we may be susceptible to such disruptions in the future. We may also experience temporary system interruptions for a variety of other reasons in the future, including power failures, software errors or an overwhelming number of visitors trying to reach our web site during periods of strong seasonal demand or promotions. Because we are dependent in part on third parties for the implementation and maintenance of certain aspects of our systems and because some of the causes of system interruptions may be outside of our control, we may not be able to remedy such interruptions in a timely manner, or at all.

Our failure to address risks associated with credit card fraud could damage our reputation and brand and may cause our business and results of operations to suffer.

          Under current credit card practices, we are liable for fraudulent credit card transactions because we do not obtain a cardholder’s signature. We do not currently carry insurance against this risk. To date, we have experienced minimal losses from credit card fraud, but we face the risk of significant losses from this type of fraud as our net sales increase. Our failure to adequately control fraudulent credit card transactions could damage our reputation and brand and substantially harm our business and results of operations.

Our failure to rapidly respond to technological change could result in our services or systems becoming obsolete and substantially harm our business and results of operations.

          As the Internet and online commerce industries evolve, we may be required to license emerging technologies useful in our business, enhance our existing services, develop new services and technologies that address the increasingly sophisticated and varied needs of our prospective customers and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. We may not be able to successfully implement new technologies or adapt our web site, proprietary technologies and transaction-processing systems to customer requirements or emerging industry standards. Our failure to do so would substantially harm our business and results of operations.

Risks Related to this Offering

Our stock price will fluctuate after this offering, which could result in substantial losses for investors and significant costs related to litigation.

          The market price for our common stock will vary from the initial public offering price after trading commences. This could result in substantial losses for investors. The market price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control. These factors include:

  •  quarterly and seasonal variations in operating results;
 
  •  changes in financial estimates and ratings by securities analysts;
 
  •  announcements by us or our competitors of new product and service offerings, significant contracts, acquisitions or strategic relationships;
 
  •  publicity about our company, our products and services, our competitors or electronic commerce in general;
 
  •  additions or departures of key personnel;
 
  •  fluctuations in the costs of acquiring diamonds and precious metals;
 
  •  any future sales of our common stock or other securities; and

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  •  stock market price and volume fluctuations of publicly-traded companies in general and Internet-related companies and specialty retailers in particular.

          The trading prices of Internet-related companies and electronic commerce companies have been especially volatile. Investors may be unable to resell their shares of our common stock at or above the initial public offering price. In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We may be the target of similar litigation in the future. Securities litigation could result in significant costs and divert management’s attention and resources, which could substantially harm our business and results of operations.

No public market for our common stock currently exists and an active trading market may not develop or be sustained following this offering.

          Prior to this offering, there has been no public market for our common stock. We cannot be certain that an active trading market for our common stock will develop or be sustained following this offering. Further, we cannot be certain that the market price of our common stock will not decline below the initial public offering price. The initial public offering price was determined by negotiation among us and the underwriters based upon several factors and may not be indicative of future market prices for our common stock.

If securities or industry analysts do not publish research or reports about our business, our stock price and trading volume could decline.

          The trading market for our common stock will depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.

Future sales of our common stock could lower the market price of our common stock.

          After this offering, we will have                    shares of common stock outstanding, assuming no exercise of the underwriters’ overallotment option and no exercise of outstanding options and warrants, other than 15,000 shares of common stock issued upon the cash exercise of outstanding warrants that will terminate if not exercised prior to the closing of this offering. Of these shares, the shares being offered in this offering will be freely tradable under federal and state securities laws. Each of our officers and directors and existing holders of substantially all of our securities have entered into the lock-up agreements described in “Underwriting.”

          All but                     of the                    shares of our common stock that are not being sold in this offering will be eligible for sale in the public market 180 days after the date of this prospectus under Rules 144, 144(k) and 701, subject in some cases to volume and other limitations. In addition, of the 3,506,497 shares issuable upon exercise of options to purchase our common stock outstanding as of December 31, 2003, approximately                    shares will be vested and eligible for sale upon exercise 180 days after the date of this prospectus. For a further description of the eligibility of shares for sale into the public market following this offering see “Shares Eligible for Future Sale.”

          A number of our current security holders hold registration rights relating to our common stock. If we propose to register any of our securities under the Securities Act either for our own account or for the accounts of other security holders after this offering, subject to certain conditions and limitations, the holders of registration rights will be entitled to include their shares of common stock in the registered offering. In addition, holders of registration rights may require us on not more than two occasions at any time beginning approximately six months from the date of the closing of this offering, to file a registration statement under the Securities Act with respect to their shares of common stock. Further, the holders of registration rights may require us to register their shares on Form S-3 if and when we become eligible to use that form.

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          In the future, we may also issue additional shares to our employees, directors or consultants, in connection with corporate alliances or acquisitions and in follow-on offerings to raise additional capital. As such, sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales could reduce the market price of our common stock.

New stockholders will incur substantial and immediate dilution as a result of this offering.

          The initial public offering price is expected to be substantially higher than the book value per share of our outstanding common stock. As a result, investors purchasing common stock in this offering will incur substantial and immediate dilution. In addition, we have issued options to acquire common stock at prices significantly below the initial offering price. To the extent such options are ultimately exercised, there will be further dilution to investors in this offering.

Our executive officers, directors and entities affiliated with them will own approximately           % of our common stock after this offering, which may delay or prevent an acquisition.

          Executive officers, directors and entities affiliated with them, if acting together, would be able to significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. These stockholders will, in the aggregate, beneficially own approximately           % of our outstanding common stock following the completion of this offering.

Our management’s broad discretion in the use of proceeds from this offering may result in application of the net proceeds in a manner not favored by investors.

          Presently, we intend to use the proceeds from our sale of common stock in this offering for general corporate purposes, including working capital and capital expenditures. We may also use a portion of the proceeds to expand our business through strategic alliances and acquisitions. We have not yet determined the amount of net proceeds to be used specifically for any of the foregoing purposes. As a result, investors in this offering will be relying on management’s judgment with only limited information about its specific intentions regarding the use of proceeds.

Anti-takeover provisions in our charter documents and Delaware law could prevent or delay a change in control.

          Our restated certificate of incorporation and amended and restated bylaws include several provisions that may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable by:

  •  authorizing the issuance of up to 5,000,000 shares of preferred stock with terms and conditions set by our board of directors as a means to discourage a third-party from attempting to acquire a majority of our outstanding voting stock;
 
  •  providing a classified board of directors with staggered, three-year terms, which generally increases the time required for stockholders to change the composition of our board of directors; and
 
  •  limiting the persons who may call special meetings of the stockholders.

          In addition to these provisions and several other provisions of our restated certificate of incorporation and amended and restated bylaws that may deter an unsolicited offer to acquire us, Section 203 of the General Corporation Law of Delaware prohibits us from engaging in a transaction involving a sale of assets, merger or consolidation of our company with an “interested stockholder,” as defined under Section 203, of our company for a period of three years following the date of the transaction in which the stockholder became an “interested stockholder” unless the transaction is approved in a prescribed manner.

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FORWARD-LOOKING STATEMENTS

          This prospectus contains forward-looking statements that involve many risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology including “would,” “could,” “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks described above and in other parts of this prospectus. These factors may cause our actual results to differ materially from any forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We cannot guarantee future results, levels of activity, performance or achievements.

USE OF PROCEEDS

          At an assumed public offering price of $          per share, we will receive $          million from our sale of                    shares of common stock in this offering, after deducting estimated offering expenses of approximately $                    million and the underwriting discount. At an assumed public offering price of $          per share, the selling stockholders will receive $                    million from their sale of shares of our common stock in this offering, after deducting the underwriting discount. We will not receive any portion of the net proceeds received by the selling stockholders from the sale of their shares. If the underwriters exercise their over allotment option in full, we will receive an additional $                    million and the selling stockholders will receive an additional $                    million in net proceeds at a public offering price of $          per share.

          The principal purposes of this offering are to create a public market for our common stock, to facilitate our future access to the public capital markets and to provide us with flexibility in the future, including the flexibility to acquire additional businesses, products or technologies either with the net proceeds from this offering or through the publicly traded common stock we create through this offering. We have no present intention to acquire any such businesses, products or technologies. We intend to use the net proceeds of this offering for general corporate purposes, including working capital and capital expenditures. Pending use of the net proceeds of this offering, we intend to invest the funds in short-term, interest bearing, investment grade securities.

          Management’s plans for the proceeds of this offering are subject to change due to unforeseen opportunities. We cannot specify with certainty the particular uses for the net proceeds to be received upon completion of this offering. Accordingly, our management team will have broad discretion in using the net proceeds of this offering.

DIVIDEND POLICY

          We have never declared or paid any cash dividends on our capital stock. We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.

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CAPITALIZATION

          The following table sets forth our capitalization and our cash and cash equivalents as of December 31, 2003 on:

  •  an actual basis;
 
  •  a pro forma basis to reflect (i) the automatic conversion of our outstanding shares of convertible preferred stock into 27,300,507 shares of our common stock upon the closing of this offering and (ii) the issuance of 15,000 shares of common stock upon the cash exercise of outstanding warrants that will terminate if not exercised prior to the closing of this offering, for $37,500 in cash proceeds; and
 
  •  a pro forma as adjusted basis to give effect to the sale of                 shares of common stock by us in this offering after deducting the underwriting discount and estimated offering expenses payable by us.

          If the holders referred to above exercise their warrants on a cashless basis based on an assumed initial public offering price of $          per share, we will issue an aggregate of                    shares of common stock and our cash and cash equivalents will be reduced by $                    on a pro forma and pro forma as adjusted basis.

          You should read this table in conjunction with our consolidated financial statements and the related notes as well as the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.

                             
As of December 31, 2003

Pro Forma
Actual Pro Forma As Adjusted



(In thousands, except par value data)
Cash and cash equivalents
    $30,383       $30,421       $  
Total long-term obligations
                   
Mandatorily redeemable convertible preferred stock, $0.001 par value; 25,856 shares authorized, 25,000 shares issued and outstanding (actual); no shares authorized, issued or outstanding (pro forma and pro forma as adjusted)
    57,485                
Stockholders’ equity:
                       
 
Preferred stock, $0.001 par value; no shares authorized, issued or outstanding (actual); 5,000 shares authorized, no shares issued or outstanding (pro forma and pro forma as adjusted)
                   
 
Common stock, $0.001 par value; 48,000 shares authorized, 10,945 shares issued and outstanding (actual); 300,000 shares authorized,            shares issued and outstanding (pro forma) and            shares issued and outstanding (pro forma as adjusted)
    13       40          
 
Additional paid-in capital
    3,541       61,037          
 
Deferred compensation
    (698 )     (698 )        
 
Accumulated deficit
    (29,458 )     (29,458 )        
 
Treasury stock, at cost; 1,874 shares outstanding
    (636 )     (636 )        
     
     
     
 
   
Total stockholders’ equity (deficit)
    (27,238 )     30,285          
     
     
     
 
Total capitalization
    $60,630       $60,706       $  
     
     
     
 

          This table excludes the following shares:

  •  3,506,497 shares of common stock subject to outstanding options under our 1999 Equity Incentive Plan;

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  •  55,810 shares of common stock issuable upon the exercise of outstanding warrants;
 
  •  an aggregate of 660,076 shares of common stock reserved for future issuance under our 1999 Equity Incentive Plan; and
 
  •  an aggregate of 9,990,000 shares of common stock reserved for future issuance under our 2004 Equity Incentive Plan, 2004 Non-Employee Directors’ Stock Option Plan and 2004 Employee Stock Purchase Plan, each adopted in March 2004 and containing provisions that automatically increase their share reserves each year, as more fully described in “Management — Stock Based Plans.”

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DILUTION

          If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock upon the completion of this offering. The pro forma net tangible book value attributable to our common stock as of December 31, 2003 was $                    million, or $                    per share. Our pro forma net tangible book value assumes the automatic conversion of our outstanding shares of convertible preferred stock into 27,300,507 shares of our common stock immediately upon the closing of this offering and the cash exercise of warrants to purchase 15,000 shares of our common stock that will expire if not exercised prior to the closing of this offering.

          Net tangible book value per share of common stock is determined by dividing the number of outstanding shares of common stock into the pro forma net tangible book value attributable to our common stock, which is our total tangible assets less our total liabilities. After giving effect to the sale of common stock by us in this offering at an initial public offering price of $           per share and after deducting the estimated underwriting discount and offering expenses payable by us, the adjusted pro forma net tangible book value attributable to our common stock as of December 31, 2003 would have been approximately $           million, or $           per share. This represents an immediate increase in pro forma net tangible book value of $          per share to the holders of our existing common stock and an immediate dilution of $          per share to new investors purchasing shares of common stock at the initial public offering price.

                 
Assumed initial public offering price per share
          $    
Pro forma net tangible book value per share as of December 31, 2003
  $            
Increase per share attributable to new investors
               
     
         
Adjusted net tangible book value per share after the offering
               
             
 
Dilution in pro forma net tangible book value per share to new investors
          $    
             
 

          The following table sets forth, as of December 31, 2003, the differences between the number of shares of common stock purchased from us, the total price paid and average price per share paid by existing stockholders and by the new investors in this offering at an assumed initial public offering price of $          per share, before deducting the underwriting discount and estimated offering expenses payable by us.

                                           
Shares Purchased Total Consideration


Average Price
Number Percent Amount Percent Per Share





Existing stockholders
              %   $           %   $    
New investors
                                       
     
     
     
     
         
 
Total
              %   $           %        
     
     
     
     
         

          If the underwriters’ overallotment option is exercised in full, the following will occur:

  •  the number of shares of common stock held by existing stockholders will represent approximately           % of the total number of shares of our common stock outstanding after this offering; and
 
  •  the number of shares held by new public investors will increase to                     or approximately        % of the total number of shares of our common stock outstanding after this offering.

          The foregoing discussion and tables assume no exercise of the warrants to purchase 55,810 shares of common stock at a weighted average exercise price of $2.02 per share outstanding as of December 31, 2003 or stock options to purchase 3,506,497 shares of common stock under our 1999 Equity Incentive Plan at a weighted average exercise price of $0.99 per share outstanding as of December 31, 2003. To the extent that any warrants or options having an exercise price that is less than the offering price of this offering are exercised, new investors will experience further dilution. See “Management — Stock Based Plans — 1999 Equity Incentive Plan.”

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SELECTED CONSOLIDATED FINANCIAL INFORMATION

          The table below shows selected consolidated financial data for the period from our inception through December 31, 1999 and each of our fiscal years ended December 31, 2000, 2001, 2002 and 2003. The consolidated statements of operations data and the additional operating data for each of the fiscal years ended December 31, 2001, 2002 and 2003 and the consolidated balance sheet data as of December 31, 2002 and 2003 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated balance sheet data as of December 31, 2001 is derived from audited consolidated financial statements not included in this prospectus. The consolidated statements of operations data for the period from our inception through December 31, 1999 and for the year ended December 31, 2000 and the consolidated balance sheet data as of December 31, 1999 and 2000 are derived from unaudited consolidated financial statements not included in this prospectus.

          You should read the following selected consolidated financial and operating information together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the related notes included elsewhere in this prospectus. The historical results presented below are not necessarily indicative of future results. The pro forma basic and diluted net income per share data reflect the conversion of all outstanding convertible preferred stock into common stock immediately upon the closing of this offering and the issuance of 15,000 shares of common stock upon the cash exercise of outstanding warrants that will expire if not exercised prior to the closing of this offering. See Note 11 of the related notes to our consolidated financial statements for the calculation of weighted average shares outstanding used in computing pro forma basic and diluted net income per share.

          The pro forma consolidated balance sheet data below reflects the automatic conversion of all of our outstanding shares of convertible preferred stock into 27,300,507 shares of our common stock upon the closing of this offering and the issuance of 15,000 shares of our common stock upon the cash exercise of outstanding warrants that will terminate if not exercised prior to the closing of this offering. The pro forma consolidated balance sheet data does not give effect to the net proceeds to be received by us in this offering.

                                         
Period from
March 18,
1999
(inception)
through Year Ended December 31,
December 31,
1999 2000 2001 2002 2003





(In thousands, except per share data)
Consolidated Statements of Operations Data:                                        
Net sales
    $14,010       $44,232       $48,674       $72,120       $128,894  
Gross profit
    1,070       6,745       11,123       18,153       29,420  
Selling, general and administrative expenses
    16,557       41,808       15,421       14,126       18,165  
Restructuring charges
                1,017       400       (87 )
     
     
     
     
     
 
Operating income (loss)
    (15,487 )     (35,063 )     (5,315 )     3,627       11,342  
Income (loss) before income taxes
    (15,174 )     (35,581 )     (7,360 )     1,627       11,330  
Income tax expense (benefit)
                            (15,700 )
     
     
     
     
     
 
Net income (loss)
    $(15,174 )     $(35,581 )     $(7,360 )     $1,627       $27,030  
     
     
     
     
     
 

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Period from
March 18,
1999
(inception)
through Year Ended December 31,
December 31,
1999 2000 2001 2002 2003





(In thousands, except per share data)
Basic net income (loss) per share
    $(6.24 )     $(6.14 )     $(0.98 )     $0.20       $2.80  
Diluted net income (loss) per share
    $(6.24 )     $(6.14 )     $(0.98 )     $0.05       $0.66  
Shares used in computing basic net income (loss) per share
    2,433       5,792       7,538       8,341       9,669  
Shares used in computing diluted net income (loss) per share
    2,433       5,792       7,538       35,402       40,844  
Pro forma basic net income per
share
                                    $0.73  
Pro forma diluted net income per share
                                    $0.66  
Pro forma shares used in computing pro forma basic net income per share
                                    36,985  
Pro forma shares used in computing pro forma diluted net income per share
                                    40,945  
Additional Operating Data:
                                       
Net cash provided by operating activities
    $(19,374 )     $(36,047 )     $4,460       $16,730       $19,816  
Gross profit margin
    7.6 %     15.2 %     22.9 %     25.2 %     22.8 %
Selling, general and administrative expenses as a percentage of net sales
    118.2 %     94.5 %     31.7 %     19.6 %     14.1 %
                                                 
Pro Forma
As of December 31, as of

December 31,
1999 2000 2001 2002 2003 2003






(In thousands)
Consolidated Balance Sheet Data:                                        
Cash and cash equivalents
    $11,748       $12,142       $16,298       $22,597       $30,383       $30,421  
Accounts receivable
    307       599       71       402       843       843  
Inventories
    6,933       14,049       6,619       5,181       10,204       10,204  
Accounts payable
    5,449       4,084       5,253       15,791       26,288       26,288  
Working capital(1)
    18,729       14,372       9,010       1,779       15,537       15,575  
Total assets
    29,576       34,056       26,545       30,914       62,305       62,343  
Total long-term obligations
    1,356       16,361       10,778       1,075              
Mandatorily redeemable convertible preferred stock
    35,493       50,570       57,215       57,215       57,485        
Total stockholders’ equity (deficit)
    (14,390 )     (48,723 )     (56,199 )     (54,560 )     (27,238 )     30,285  


(1)  Working capital consists of total current assets, including cash and cash equivalents, less total current liabilities.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          The following discussion should be read in conjunction with the consolidated financial statements and related notes which appear elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly under the heading “Risk Factors.”

Overview

          We are a leading online retailer of high quality diamonds and fine jewelry. We have built a well respected consumer brand by employing an informative sales process that empowers our customers while offering a broad selection of high quality jewelry at competitive prices. Our web site at www.bluenile.com showcases over 30,000 independently certified diamonds and more than 1,000 styles of fine jewelry, including rings, wedding bands, earrings, necklaces, pendants, bracelets and watches.

          Our business model enables us to eliminate much of the cost associated with carrying diamond inventory. We generally do not hold in our inventory the diamonds we offer for sale until we receive a customer order. With limited exceptions, the diamonds we display are owned by our suppliers. Upon receipt of a customer order for a specific diamond, we purchase that diamond from our supplier, who generally ships it to us in one business day. We take title to the diamond at the time of its shipment from our supplier. Unlike diamonds, we typically take rings, wedding bands, earrings, necklaces, pendants, bracelets and watches into inventory before they are ordered by our customers.

          A principal component of our value proposition is providing a high quality customer experience. We measure success based on our financial results as well as various non-financial measures, including customer feedback and customer satisfaction ratings compiled by third parties. We believe that maintaining high overall customer satisfaction is critical to our ongoing efforts to promote the Blue Nile brand and increase our net sales and net income.

          We were incorporated in Delaware on March 18, 1999 as RockShop.com, Inc. On May 21, 1999, we purchased certain assets of Williams & Son, Inc., a Seattle jeweler, including a web site established by that business. In June 1999, we changed our name to Internet Diamonds, Inc. In November 1999, we launched the Blue Nile brand and changed our name to Blue Nile, Inc. Since inception, we have focused on increasing brand awareness, providing a quality customer experience, improving supply chain efficiency, scaling our business to enhance profitability and expanding our product offerings.

Critical Accounting Policies

          The preparation of our consolidated financial statements requires that we make certain estimates and judgments that affect amounts reported and disclosed in our consolidated financial statements and related notes. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. The following are the critical accounting policies that we believe require significant estimation and management judgment.

Revenue Recognition

          We recognize revenue and the related gross profit on the date on which we estimate that the customer has received the product. We require payment prior to shipment, so any payments received prior to the customer receipt date are recorded as a deposit. We utilize our freight vendors’ tracking information to determine when delivery has occurred, which is typically within one to six days after shipment. We reduce revenue by a provision for returns, which is based on our historical product return rates.

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Fraud Reserve

          A significant portion of our sales is paid by credit card. Although we have measures in place to detect and prevent credit card fraud, we have exposure to losses from fraudulent charges. We record a reserve for fraud losses based on our historical rate of such losses, which has been minimal.

Income Taxes

          We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized by applying statutory tax rates in effect in the years in which the differences between the financial reporting and tax filing bases of existing assets and liabilities are expected to reverse. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance against our deferred tax assets. We believe that all net deferred tax assets shown on our balance sheet are more likely than not to be realized in the future and no valuation allowance is necessary. In the event that actual results differ from those estimates or we adjust those estimates in future periods, we may need to record a valuation allowance, which will impact deferred tax assets and the results of operations in the period the change is made.

Stock-based Compensation

          We account for our employee compensation plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. We amortize stock-based compensation using the straight-line method over the vesting period of the related options, which is generally four years.

          We have recorded deferred stock-based compensation representing the difference between the option exercise price and the deemed fair value of our common stock on the grant date for financial reporting purposes. We determined the deemed fair value of our common stock based upon several factors, including the market capitalization of similar retailers and the expected valuation we would obtain in an initial public offering. Had different assumptions or criteria been used to determine the deemed fair value of our common stock, different amounts of stock-based compensation could have been reported.

          Pro forma information regarding net income (loss) attributable to common stockholders and net income (loss) per share attributable to common stockholders is required in order to show our net income (loss) as if we had accounted for employee stock options under the fair value method of SFAS No. 123, as amended by SFAS No. 148. This information is contained in Note 1 to our financial statements. The fair values of options and shares issued pursuant to our option plan at each grant date were estimated using the Black-Scholes option pricing model.

Results of Operations

          The following table presents our historical operating results for the periods indicated as a percentage of net sales:

                           
Year Ended December 31,

2001 2002 2003



Net sales
    100.0 %     100.0 %     100.0 %
Gross profit
    22.9       25.2       22.8  
Selling, general and administrative expenses
    31.7       19.6       14.1  
Restructuring charges
    2.1       0.6       (0.1 )
     
     
     
 
 
Operating income (loss)
    (10.9 )     5.0       8.8  
Other income (expense), net
    (4.2 )     (2.7 )     0.0  
     
     
     
 
 
Income (loss) before income taxes
    (15.1 )     2.3       8.8  
Income tax expense (benefit)
    0.0       0.0       (12.2 )
     
     
     
 
 
Net income (loss)
    (15.1 )%     2.3 %     21.0 %
     
     
     
 

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          The following describes certain line items set forth in our consolidated statement of operations:

          Net Sales. Substantially all of our net sales consist of diamonds and fine jewelry sold via the Internet, net of estimated returns. Historically, net sales have been higher in the fourth quarter as a result of higher consumer spending during the December holiday season. We expect this seasonal trend to continue in the foreseeable future. We also generate net sales from upgrades to our free standard shipping.

          Gross Profit. Our gross profit consists of net sales less the cost of sales. Our cost of sales consists of the cost of diamonds and jewelry products sold to customers, inbound and outbound shipping costs, insurance on shipments and the costs incurred to set diamonds into ring, earring and pendant settings, including labor and related facilities costs. Our gross profit has fluctuated historically based primarily on our product acquisition costs, product mix and pricing decisions.

          Selling, General and Administrative Expenses. Our selling, general and administrative expenses consist primarily of payroll and related benefit costs for our employees, and marketing costs. These expenses also include credit card fees and certain facilities, fulfillment, customer service, technology and depreciation expenses, as well as professional fees and other general corporate expenses.

          As of December 31, 2003, we had an aggregate of $698,000 of unamortized deferred stock-based compensation relating to certain stock option grants. These options are considered compensatory because the deemed fair value of our stock on the grant date for financial reporting purposes is greater than the exercise price of the options. We amortize deferred stock-based compensation over the vesting period of the related options, which is generally four years. Substantially all of these expenses are included in selling, general and administrative costs. Assuming these options fully vest, we will recognize amortization of deferred stock-based compensation from these options of $190,000, $188,000, $187,000 and $133,000 in 2004, 2005, 2006 and 2007, respectively.

          Income Taxes. In 2003, we recognized an income tax benefit of $15.7 million due to the release of our valuation allowance relating primarily to our net operating loss carryforwards. Prior to 2003, we recorded no provision for federal and state income taxes since inception. Our aggregate net operating loss carryforwards for federal income tax purposes were approximately $37.7 million at December 31, 2003. These net operating loss carryforwards expire periodically between 2019 and 2021, although we expect to utilize all loss carryforwards in advance of their expiration dates. We expect to recognize expense related to provision for income taxes in future periods.

Comparison of Year Ended December 31, 2003 to Year Ended December 31, 2002

Net Sales

          Net sales increased 78.7% to $128.9 million in 2003 from $72.1 million in 2002. This increase resulted primarily from the growth of our customer base in our core diamond engagement business. The increase in net sales also resulted from an increase in the number of repeat orders from our existing customer base and an increase in the number of selections in our customized diamond jewelry and non-customized jewelry product categories.

Gross Profit

          Gross profit increased 62.1% to $29.4 million in 2003 from $18.2 million in 2002. The increase in gross profit in 2003 primarily resulted from increases in sales volume and relative decreases in product acquisition costs relating to diamonds, partially offset by retail price reductions we instituted beginning in the second quarter of 2003 as part of our strategy to stimulate growth in net sales and optimize aggregate gross profits. Gross profit as a percentage of net sales was 22.8% and 25.2% in 2003 and 2002, respectively. The decrease in gross profit as a percentage of net sales resulted primarily from the retail price reductions we instituted. Additionally, our gross profit as a percentage of net sales was negatively impacted in 2003 by increases in product acquisition costs related to precious metals, particularly gold and platinum that we did not fully pass on to our customers. We expect that gross profit will fluctuate in the future based primarily on changes in product acquisition costs, product mix and pricing decisions.

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Selling, General and Administrative Expenses

          Selling, general and administrative expenses increased 28.6% to $18.2 million in 2003 from $14.1 million in 2002. The increase in selling, general and administrative expenses in 2003 was due primarily to an increase in marketing costs, higher credit card processing fees based on increased volume and higher payroll and payroll related expenses resulting from the addition of new employees. As a percentage of net sales, these expenses were 14.1% and 19.6% in 2003 and 2002, respectively. The decrease in selling, general and administrative expenses as a percent of net sales in 2003 resulted primarily from our ability to leverage our fixed cost base. During 2003, we recorded deferred compensation of approximately $744,000, of which approximately $46,000 was amortized as stock compensation expense in 2003. There was no corresponding expense in 2002.

          We expect selling, general and administrative expenses to increase in absolute dollars in future periods as a result of expansion of our marketing efforts to drive increases in net sales, growth in our fulfillment capacity, increases in credit card processing fees and other variable expenses, and increases in administrative costs related to becoming a public reporting company.

Restructuring Charges

          We recorded a restructuring benefit of approximately $87,000 in 2003 as compared to a restructuring charge of approximately $400,000 in 2002 in relation to a leased facility that we no longer occupied. As of December 31, 2003, the remaining liability related to this facility was $0.

Other Expense, Net

          Other expense, net primarily consists of interest expense and interest income. Other expense, net was approximately $12,000 in 2003 as compared to $2.0 million in 2002. The decrease in other expense, net was primarily attributable to a reduction in interest expense resulting from the repayment of the outstanding balances on our notes payable and capital lease obligations in early 2003, compared to a full year of interest expense in 2002 on outstanding balances on our notes payable and capital lease obligations.

Income Taxes

          In 2003, we recognized an income tax benefit of $15.7 million due to the release of our valuation allowance relating primarily to our net operating loss carryforwards. Prior to 2003, our financial statements reflected a valuation allowance against the deferred tax asset, and we did not recognize any income tax benefit related to the unutilized net operating loss carryforwards. In 2003, we concluded that a valuation allowance was no longer necessary based on the determination that it was more likely than not that our net operating loss carryforwards will be utilized in the future. As a result, we reversed the existing valuation allowance of $19.7 million in the fourth quarter of 2003. We expect that in future periods we will recognize expense related to provision for income taxes at the federal statutory rate.

Comparison of Year Ended December 31, 2002 to Year Ended December 31, 2001

Net Sales

          Net sales increased 48.2% to $72.1 million in 2002 from $48.7 million in 2001. This increase resulted primarily from the growth of our customer base in our core diamond engagement business. The increase in net sales also resulted from an increase in the number of repeat orders from our existing customer base and an increase in the number of selections in our customized diamond jewelry and non-customized jewelry product categories. In 2002, we undertook numerous efforts designed to increase net sales, including enhancing our web site features and functionality, expanding our offerings of lower price point merchandise to encourage purchases by first time buyers and reducing retail prices on diamonds.

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Gross Profit

          Gross profit increased 63.2% to $18.2 million in 2002 from $11.1 million in 2001. The increase in gross profit in 2002 was primarily attributable to increases in net sales and relative decreases in product acquisition costs. Gross profit as a percentage of net sales was 25.2% and 22.9% in 2002 and 2001, respectively. The increase in gross profit as a percentage of net sales in 2002 resulted primarily from decreases in product acquisition costs related to diamonds and fine jewelry, pricing decisions and product mix.

Selling, General and Administrative Expenses

          Selling, general and administrative expenses decreased 8.4% to $14.1 million in 2002 from $15.4 million in 2001. The decrease in selling, general and administrative expenses in 2002 was primarily attributable to lower marketing costs resulting from lower pricing for our online advertising, partially offset by an increase in credit card processing fees of approximately $387,000 due to higher sales volumes. Selling, general and administrative expenses as a percentage of net sales were 19.6% and 31.7% in 2002 and 2001, respectively. The decrease in selling, general and administrative expenses as a percentage of net sales is primarily attributable to the decrease in overall selling, general and administrative expenses and our ability to leverage our fixed cost base.

Restructuring Charges

          In 2001, we recorded a restructuring charge of $1.0 million related to two leased facilities that we no longer occupied and the write-off of leasehold improvements at these facilities. In 2002, we recorded an additional restructuring charge of approximately $400,000 for the decrease in estimated sublease income at one of the facilities.

Other Expense, Net

          Other expense, net was $2.0 million in 2002 and 2001. Our interest expense decreased slightly in 2002 as a result of declining outstanding balances on our notes payable and capital lease obligations.

Income Taxes

          In 2002 and 2001, we had net operating loss carryforwards of $50.3 million and $52.4 million, respectively, for federal income tax purposes. For years 2002 and 2001, the related net deferred tax asset was fully reduced by a valuation allowance. This valuation allowance was deemed appropriate due to available evidence indicating that some or all of the deferred tax asset would not be realized in future years.

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Quarterly Operations Data

          The following tables set forth quarterly consolidated statements of operations data for the eight quarters ended December 31, 2003, including amounts expressed as a percentage of net sales. This quarterly information is unaudited, but has been prepared on the same basis as the annual consolidated financial statements and, in the opinion of our management, reflects all adjustments necessary for a fair representation of the information for the periods presented. This quarterly statement of operations data should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this prospectus. Operating results for any quarter are not necessarily indicative of results for any future period.

                                                                 
Quarter Ended

Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
2002 2002 2002 2002 2003 2003 2003 2003








(In thousands)
Net sales
    $11,592     $ 14,813     $ 15,404     $ 30,311     $ 24,628     $ 27,254     $ 27,457     $ 49,555  
Gross profit
    2,960       3,600       3,852       7,741       6,153       6,107       6,071       11,089  
Selling, general and administrative expenses
    3,042       3,288       3,224       4,572       4,317       3,890       3,922       6,036  
Restructuring charges
          400                                     (87 )
     
     
     
     
     
     
     
     
 
Operating income (loss)
    (82 )     (88 )     628       3,169       1,836       2,217       2,149       5,140  
Other income (expense), net
    (504 )     (481 )     (503 )     (512 )     (145 )     26       39       68  
     
     
     
     
     
     
     
     
 
Income (loss) before income taxes
    (586 )     (569 )     125       2,657       1,691       2,243       2,188       5,208  
Income tax expense (benefit)
                                              (15,700 )
     
     
     
     
     
     
     
     
 
Net income (loss)
    $(586 )   $ (569 )   $ 125     $ 2,657     $ 1,691     $ 2,243     $ 2,188     $ 20,908  
     
     
     
     
     
     
     
     
 
                                                                 
Quarter Ended

Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
2002 2002 2002 2002 2003 2003 2003 2003








Net sales
    100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
Gross profit
    25.5       24.3       25.0       25.5       25.0       22.4       22.1       22.4  
Selling, general and administrative expenses
    26.2       22.2       20.9       15.1       17.5       14.3       14.3       12.2  
Restructuring charges
          2.7                                     (0.2 )
     
     
     
     
     
     
     
     
 
Operating income (loss)
    (0.7 )     (0.6 )     4.1       10.5       7.5       8.1       7.8       10.4  
Other income (expense), net
    (4.4 )     (3.2 )     (3.3 )     (1.7 )     (0.6 )     0.1       0.1       0.1  
     
     
     
     
     
     
     
     
 
Income (loss) before income taxes
    (5.1 )     (3.8 )     0.8       8.8       6.9       8.2       8.0       10.5  
Income tax expense (benefit)
                                              (31.7 )
     
     
     
     
     
     
     
     
 
Net income (loss)
    (5.1 )%     (3.8 )%     0.8 %     8.8 %     6.9 %     8.2 %     8.0 %     42.2 %
     
     
     
     
     
     
     
     
 

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          The increases in our net sales for the quarters ended December 31, 2002 and 2003 are attributable to our overall growth as well as the seasonality of our business related to the December holiday season. Our selling, general and administrative expenses are also seasonal as we increase our inventory and staffing in anticipation of increased sales activity. The overall growth of our net sales over the periods presented may obscure the seasonality of our overall results and cause quarter to quarter and year to year comparisons of our operating results to not be meaningful. The decrease in our gross profit as a percentage of net sales beginning in the second quarter of 2003 resulted primarily from retail price reductions we instituted as part of our strategy to stimulate growth in net sales and optimize aggregate gross profit.

Liquidity and Capital Resources

          Since inception, we have funded our operations through the sale of equity securities, subordinated indebtedness, credit facilities, capital lease obligations and cash generated from operations. The significant components of our working capital are inventory and liquid assets such as cash and trade accounts receivable, reduced by accounts payable and accrued expenses. Our business model contains beneficial working capital characteristics. While we collect cash from sales to customers within several business days of the related sale, we typically have extended payment terms with our suppliers.

          As of December 31, 2003, we had working capital of $15.5 million, including cash and cash equivalents of $30.4 million, partially offset by accounts payable of $26.3 million. In the first half of 2003, we paid off the outstanding balances on our notes payable and capital lease obligations. As of December 31, 2003, we had no long-term debt or capital lease obligations. Due to the seasonal nature of our business, cash and cash equivalents, inventory and accounts payable are generally higher in the fourth quarter, resulting in fluctuations in our working capital.

          Net cash provided by operating activities was $19.8 million, $16.7 million and $4.5 million in 2003, 2002 and 2001, respectively. The increase in cash provided by operating activities in 2003 as compared to 2002 was primarily due to an increase in net income, which was partially offset by an increase in inventory balances resulting from a seasonal increase in inventory of settings and non-customized jewelry and accessories in the fourth quarter of 2003. The increase in cash provided by operating activities in 2002 as compared to 2001 was primarily due to an increase in net income and changes in our working capital resulting from an extension of vendor payment terms.

          Net cash used in investing activities was $3.5 million and $1.0 million in 2003 and 2002, respectively, and was primarily related to capital expenditures for our technology system infrastructure, including software. In 2003, we utilized $1.3 million to undertake certain leasehold improvements for our new corporate office under a lease that began in August 2003. Net cash provided by investing activities was $1.1 million in 2001 resulting from sales of marketable securities of $2.3 million, partially offset by capital expenditures of $1.2 million. In 2001, we utilized approximately $361,000 to undertake certain leasehold improvements for our fulfillment center that we occupied beginning in October 2001.

          Net cash used in financing activities was $8.5 million, $9.4 million and $1.4 million in 2003, 2002 and 2001, respectively, and primarily related to payments on the remaining balances on our notes payable and capital lease obligations. In 2001, net cash used in financing activities also included repayment of the balance of a working capital line of credit that was terminated in November 2002, partially offset by net proceeds of $6.6 million from the sale of our Series E convertible preferred stock in June 2001.

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          We have no material commitments outside the ordinary course of business except for our non-cancelable operating leases. The following table summarizes our operating leases as of December 31, 2003 (in thousands).

         
Operating
Leases

2004
    $412  
2005
    373  
2006
    361  
2007
    269  
2008
    263  
Thereafter
    601  
     
 
Total lease payments
  $ 2,279  
     
 

          We believe that our available cash and cash flows from operations, together with the proceeds from this offering, will be sufficient to finance our operations and planned growth for the foreseeable future. Our future capital requirements will depend on many factors, including the level of our net sales, the expansion of our sales and marketing activities, the cost of our fulfillment operations and continued market acceptance of our products. We could be required, or could elect, to seek additional funding through a public or private equity or debt financing in the future, and this financing may not be available on terms acceptable to us, or at all.

Impact of Inflation

          The effect of inflation and changing prices on our operations was not significant during the periods presented.

Quantitative and Qualitative Disclosures of Market Risk

          The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest in short-term, high quality, interest bearing securities. Our investments in debt securities are subject to interest rate risk. To minimize our exposure to an adverse shift in interest rates, we invest in short-term securities and maintain an average maturity of one year or less. We do not believe that a 10% change in interest rates would have a significant impact on our interest income.

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BUSINESS

Overview

          We are a leading online retailer of high quality diamonds and fine jewelry. We have built a well respected consumer brand by employing an informative sales process that empowers our customers while offering a broad selection of high quality jewelry at competitive prices. Our web site at www.bluenile.com showcases over 30,000 independently certified diamonds and more than 1,000 styles of fine jewelry, including rings, wedding bands, earrings, necklaces, pendants, bracelets and watches.

          We have developed an efficient online cost structure and a unique supply solution that eliminates traditional layers of diamond wholesalers and brokers, which allows us to purchase most of our product offerings at lower prices by avoiding mark-ups imposed by those intermediaries. Our supply solution enables us to purchase only those diamonds that our customers have ordered. As a result, we are able to minimize the costs associated with carrying diamond inventory and limit our risk of potential mark-downs.

          The significant costs of diamonds and fine jewelry lead consumers to require substantial information and trusted guidance throughout their purchasing process. Our web site and extensively trained customer service representatives improve the traditional purchasing experience by providing education and detailed product information that enable our customers to objectively compare diamonds and fine jewelry products and make informed decisions. Our web site features interactive search functionality that allows our customers to quickly find the products that meet their exact needs from our broad selection of diamonds and fine jewelry.

          Our business has grown considerably since its launch in 1999. For the year ended December 31, 2003, we reported net sales of $128.9 million, an increase of 79% from the prior year, and net income before income taxes of $11.3 million as compared to $1.6 million in the prior year.

Industry Background

The Internet and Online Commerce

          The Internet’s development into a significant global medium for communication, content and commerce has led to substantial growth in online shopping and has provided companies with new opportunities to remove intermediaries from the traditional retail supply chain. According to U.S. eCommerce Overview: 2003 to 2008, Forrester Research, Inc., July 25, 2003, online purchases by U.S. consumers are expected to continue to grow from an estimated $96 billion in 2003 to approximately $230 billion by 2008. This growth is partly a result of the increased awareness of the convenience, selection and product information available through online shopping, continued improvement in network infrastructure and payment security, and growing access to high speed Internet connections that make online shopping increasingly efficient and attractive to consumers.

          The Internet provides a number of distinct advantages to online retailers, including the lower cost of managing and maintaining a web site as opposed to physical storefronts, the ability to efficiently reach and serve a large and geographically dispersed group of customers from a central location, and the potential for personalized low-cost customer interaction. Online retailers can quickly react to changing consumer tastes and preferences by efficiently adjusting their featured selections, editorial content, shopping interfaces, pricing and visual presentations. In addition, online retailers generally do not incur the significant printing and mailing costs of catalog marketing and can more easily compile demographic and behavioral data about their customers that increase opportunities for direct marketing and personalized services.

The Diamond and Jewelry Industry

          According to U.S. Census Bureau statistics, 2001 total U.S. retail jewelry sales were approximately $51 billion. Diamonds and diamond jewelry represent a substantial portion of the U.S. retail jewelry market. According to the Jewelers of America 2003 Cost of Doing Business Survey, diamonds and

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diamond jewelry make up approximately 47% of jewelry sales. Forrester Research estimates that online jewelry and luxury goods sales will grow at a 25% compound annual growth rate from approximately $2 billion in 2003 to $6 billion in 2008.

The Diamond Jewelry Supply Chain

(DIAMOND JEWELRY SUPPLY CHAIN)

          As illustrated above, the production of diamond jewelry begins with diamond mining and involves multiple intermediaries over a period of up to two years before the product is sold to the end consumer. There is significant concentration at the earliest stage of the diamond jewelry supply chain, with a small number of diamond mining firms responsible for a substantial portion of the world’s diamond mining output. At each successive stage in the diamond jewelry supply chain, the chain becomes increasingly fragmented and cost is added to the product.

          The fragmentation of the jewelry supply chain is most pronounced at the retail level. According to U.S. Census Bureau statistics, jewelry was sold at 126,364 physical locations in the United States in 1997, including over 28,000 locations classified as jewelry stores. Approximately 95% of all retail jewelry firms operate only a single store. In order to supply this fragmented market, there are often several layers of wholesaling that increase retail prices, often with little or no added value.

          Consumers frequently view the purchase of diamonds or fine jewelry as a significant event, and often require substantial information and guidance before completing a purchase. Many of these consumers find the traditional retail jewelry purchasing experience stressful for a number of reasons, including:

  •  Emotional Significance. Many purchases of diamonds and fine jewelry are made for presentation during a significant emotional event or occasion such as an engagement, marriage, birthday or anniversary.
 
  •  Significant Cost. The cost of an item of fine jewelry often represents a significant portion of the purchaser’s disposable income.
 
  •  Uncertainty Regarding Pricing. Consumers are frequently skeptical as to whether the listed retail price of a diamond or fine jewelry product is fair, but lack sufficient information to evaluate its fairness or effectively negotiate a better price.
 
  •  Lack of Comparability. Consumers often lack the ability to compare a wide selection of jewelry items, and diamonds in particular, against a set of objective criteria provided by an independent third-party evaluator.
 
  •  Limited Selection. The limited selection of jewelry at a typical retail store requires consumers to visit multiple stores during limited hours or settle for less desired products.
 
  •  High Pressure Environment. Consumers frequently feel pressured towards a purchase by commission-based sales personnel.
 
  •  Limited Ability to Control the Buying Experience. Consumers are frequently limited to the time and information provided to them by in-store sales personnel who may be trying to serve multiple customers simultaneously.

Blue Nile’s Value Proposition

          We have developed an innovative, efficient business model that we believe enables us to achieve higher operating margins and returns on invested capital than many traditional jewelry retailers, while providing our customers with fine jewelry at exceptional values. As an online retailer, we do not incur most

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of the costs associated with operating brick and mortar retail stores. We have also created efficiencies in our supply chain through our supplier relationships, which eliminate multiple intermediaries from the traditional supply chain, including many jewelry manufacturers and several layers of diamond and jewelry wholesalers. This allows us to purchase diamonds at lower prices by eliminating the mark-ups typically imposed by these intermediaries. Our business model also avoiding much of the cost associated with carrying diamond inventory and minimizes the risk of potential inventory mark-downs. Unlike most other diamond retailers, we do not hold the diamonds we offer for sale in inventory until we receive customer orders. With limited exceptions, most of the diamonds we display are owned by our suppliers. Upon receipt of a customer order for a specific diamond, we purchase that diamond from our supplier, who generally ships it to us in one business day.

          We are also capitalizing on a compelling market opportunity by enhancing the retail shopping experience and further establishing our well-known and trusted consumer brand in the diamond and fine jewelry market. We believe that consumers’ increasing comfort with purchasing higher priced goods online, combined with the availability of certified third-party diamond grading based on objective criteria, is making the Internet an attractive channel for the dynamic display of these products. We believe the Internet’s information-rich, interactive nature will attract a growing number of consumers seeking more personalized and informed purchasing experiences for diamonds and fine jewelry.

          This compelling model provides substantial value to both our customers and suppliers, including the following:

 
Value to Customers

  •  Detailed Information. We provide convenient access to extensive and consistent product information through our web site. We use this information to educate our customers on the general characteristics of diamonds and fine jewelry and the specific attributes of the items they are viewing. On average, our customers view over 200 pages of our web site prior to purchasing a diamond engagement ring. This educational process builds our customers’ confidence in their purchases and empowers them to control their online purchasing experiences.
 
  •  Broad Selection. We offer our customers more than 30,000 independently certified high quality diamonds, which can be set in over 100 styles of ring, earring and pendant settings. In addition, we offer more than 1,000 styles of fine jewelry. Our interactive search functionality allows our customers to efficiently sort through this broad selection.
 
  •  Ability to Customize. Our customers can customize their diamond jewelry purchases by selecting individual diamonds to be set in their choice of ring, earring or pendant settings.
 
  •  Lower Pricing. We are able to offer our customers significantly lower prices than traditional jewelry retailers by eliminating numerous intermediaries in the diamond supply chain, establishing an efficient cost structure and creating incentives for our suppliers to provide us with competitive prices.
 
  •  Knowledgeable Customer Support. Our extensively trained customer service staff is available to provide assistance to our customers throughout the purchase process, creating a customer experience that instills trust and helps customers make informed purchasing decisions. Unlike many traditional retailers, we do not compensate our staff on a commission-based system.
 
  •  Free Shipping and 30-day Return Guarantee. We provide free shipping for all of our products. Substantially all diamond engagement rings are delivered by priority overnight delivery. Orders for in-stock, non-customized jewelry that are placed by 3:00 p.m. Eastern time are generally shipped the same day. Deliveries of customized diamond jewelry products are typically made within four business days of receiving orders. For most items, we offer our customers an unconditional 30-day return policy.

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Value to Suppliers

  •  Improved Capital Efficiency. We enable our diamond suppliers to substantially increase their inventory turns and improve their returns on invested capital. By displaying their diamonds on our web site, our suppliers efficiently access a nationwide customer base instead of only relying on traditional jewelry retailers that may have a limited ability to carry inventory due to significant capital and merchandising constraints.
 
  •  Lower Management Costs. We believe we are one of the largest purchasers of certified diamonds in the U.S. By enabling our diamond suppliers to drive significant sales volumes through a single account, we allow our suppliers to substantially reduce the costs associated with their sales operations. In addition, we provide a proprietary interactive inventory management system to our suppliers. This system improves the efficiency of their operations by simplifying the administration related to selling and tracking their inventories.
 
  •  Access to Real-time Market Intelligence. Our interactive inventory management system enables suppliers to receive real-time market feedback on demand for their inventories. This system provides suppliers with the information necessary to quickly react to shifting demand for products and to competitively price their inventories.

The Blue Nile Growth Strategy

          Our objective is to become a leading retailer of diamonds and fine jewelry in the U.S. by offering exceptional value to our customers through supply chain efficiencies, an efficient cost structure and a high quality customer experience. Key elements of our growth strategy include:

 
Increasing Blue Nile Brand Awareness

          We continue to build the Blue Nile brand through our integrated and cohesive marketing strategy. We have established and are continuing to develop a brand based on trust, guidance and value, and we believe our customers view Blue Nile as a trusted authority on diamonds and fine jewelry. Our goal is for consumers to seek out the Blue Nile brand whenever they purchase high quality diamonds and fine jewelry.

 
Focusing on the Customer Experience

          We continue to refine the customer service we provide in every step of the purchase process, from our web site to our customer support and fulfillment operations. The Blue Nile customer experience is designed to empower our customers with knowledge and confidence as they evaluate, select and purchase diamonds and fine jewelry.

 
Increasing Supply Chain Efficiency

          We continue to build mutually beneficial supply relationships designed to further enhance supply chain efficiencies and provide value to both our customers and suppliers. We intend to continue expanding our supplier network to broaden our selection of diamonds and fine jewelry.

 
Continuing to Scale our Business to Enhance Profitability

          We have established and will continue to refine our scaleable, lower cost business model that can continue to grow with less working capital than traditional jewelry retailers. We intend to continue improving our profitability by leveraging our relatively fixed cost technology and fulfillment infrastructure as we seek to increase our net sales.

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Expanding Product Offerings

          We plan to selectively expand our jewelry offerings, in terms of both price points and product mix, through additional customized and non-customized products. The online nature of our business allows us to test new products and efficiently add promising new merchandise to our overall assortment.

Expanding into International Markets

          We intend to selectively pursue opportunities in international markets in which we can leverage our existing infrastructure and compelling value proposition. We plan to prioritize and pursue these opportunities based on each market’s consumer spending on jewelry, adoption rate of online purchasing and competitive landscape, among other factors.

Merchandising

          Blue Nile merchandise consists of high quality diamonds and fine jewelry, with a particular focus on engagement diamonds and settings. Our online business model, combined with the strength of our supplier relationships, enables us to pursue a dynamic merchandising strategy. Our diamond supplier relationships allow us to display suppliers’ diamond inventories on the Blue Nile web site for purchase without holding the diamonds in our inventory until the products are ordered by customers. Our agreements with suppliers are typically multi-year arrangements that provide for certain diamonds to be offered online to consumers only through the Blue Nile web site.

          Diamonds represent the most significant component of our product offerings. While we currently offer over 30,000 independently certified diamonds, we limit our diamond offerings to those possessing characteristics associated with high quality merchandise. Accordingly, we offer diamonds with the following characteristics:

  •  Shape. Round, princess, emerald, oval, heart, pear, radiant, Asscher and marquise.
 
  •  Cut. Ranging from “Ideal” for diamond cuts that fall within strict mathematical proportions to “Fair” for diamond cuts that maximize the weight of the original stone at the expense of optimal light reflection.
 
  •  Color Grades. Ranging from “D” for no detectable color tone to “J” for nearly undetectable traces of color to the untrained eye.
 
  •  Clarity. Ranging from “FL” for flawless clarity to “SI2” for some visible inclusions or flaws.
 
  •  Carat Weight. Generally ranging from approximately 0.25 to 10 carats.

          Customers may purchase customized diamond jewelry by selecting a diamond and then choosing from a variety of ring, earring and pendant settings that are designed to match the shape of each individual diamond. The customized product is then assembled and delivered to the customer, typically within four business days.

          We offer a broad range of fine jewelry products to complement our selection of high quality customized diamond jewelry. Our selection includes diamond, platinum, gold, pearl and sterling silver jewelry and accessories. Our fine jewelry assortment includes rings, wedding bands, earrings, necklaces, pendants, bracelets and watches. We focus on selected classic designs, which we believe are less susceptible to changing consumer tastes and preferences. We currently have relationships with approximately 60 fine jewelry and watch suppliers from which we source our jewelry and watch merchandise. In the case of fine jewelry, unlike diamonds, we typically take products into inventory before they are ordered by our customers.

Marketing

          We have developed an integrated and cohesive marketing strategy designed to increase Blue Nile brand recognition, generate consumer traffic, acquire customers at an increasing rate, build a loyal

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customer base and maximize repeat purchases. Our primary target market is 25 to 45 year-old men, who represent the largest segment of our customer base. We believe these consumers generally seek high quality diamonds and fine jewelry from a trusted source in a non-intimidating environment, where information, guidance, reputation, convenience and value are important characteristics. Our marketing and advertising efforts include online and offline initiatives which primarily consist of the following:

  •  Portal and Targeted Web Site Advertising. A primary vehicle for our online advertising is the placement of banner advertisements and optimized search results on web sites with high traffic volumes. We currently maintain advertising relationships with AOL, Google, MSN, Overture and Yahoo. In addition, we advertise on sites that appeal to our target customer base and networks that distribute our banner advertisements to multiple web sites.
 
  •  Affiliate Program. We also acquire customers by offering an affiliate program that is intended to extend the reach of our brand and draw consumers from a variety of other web sites. By joining our affiliate program, operators of other web sites earn commissions and enhance their web sites by providing their visitors access to our content and information as well as our extensive selection of diamonds and fine jewelry.
 
  •  Direct Marketing. We utilize an electronic direct marketing program to encourage repeat purchases and customer retention, generate referral business and provide access to increasing numbers of prospective customers. Once a customer has completed a purchase, we focus on establishing a continuing relationship with that customer in order to encourage repeat purchases. To acquire new customers, we leverage our relationships with existing customers by encouraging them to refer friends and family to Blue Nile. We also utilize permission based email marketing to non-buying visitors who indicate a desire to continue to hear about Blue Nile’s offerings.

Customer Service and Support

          A key element of our sales strategy is our ability to provide a high level of customer service and support. We augment our online information resources with knowledgeable, highly trained support staff to give customers confidence in their purchases. Our commitment to customers is reflected in both the high service levels provided by our extensively trained customer service associates, as well as in our guarantees and policies.

          Our top priority is to provide, on a timely basis, the personalized customer service that fine jewelry customers require. Our customer service staff answers approximately 85% of all calls to our call center within 10 seconds. They are available to provide assistance via e-mail and telephone seven days a week, from 8:00 a.m. to midnight Eastern time on weekdays and from 9:00 a.m. to 10:00 p.m. Eastern time on weekends. Although this schedule accommodates almost all of our call volume, we monitor after-hours calls to determine if service hours need to be extended. Our customer service associates are trained to provide guidance on all steps in the process of buying diamonds and fine jewelry, including, among other things, the process for selecting an appropriate item, the purchase of that item, financing and payment alternatives and shipping services. We also undertake an ongoing customer feedback process to monitor the performance of our customer service associates and improve our overall service and support.

          We prominently display all of our guarantees and policies on our web site to create an environment that is intended to instill confidence in Blue Nile. These include policies relating to privacy, security, product availability, pricing, shipping, refunds, exchanges and special orders.

Fulfillment Operations

          Our fulfillment operations strategy is designed to enhance value for our customers by fulfilling orders quickly, securely and accurately. Our fulfillment center has restricted access and security controls and has been designed for the prompt receipt, storage and shipment of our products. To further enhance inventory accountability and security, our inventory management system enables us to track our inventory at all stages of the receiving and order fulfillment process and to replenish stock when necessary.

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          When an order for a customized diamond jewelry setting is received, the third-party supplier who holds the diamond in inventory generally ships it to us within one business day. Upon receipt, the merchandise is sent to assembly for setting and sizing, which is performed by our on-site jewelers or independent third-party jewelers with whom we maintain ongoing relationships. We inspect each diamond upon arrival from our suppliers as well as each finished setting or sizing prior to shipment to a customer.

          Prompt and secure delivery of our products is a high priority, and we ship nearly all diamond and fine jewelry products via nationally recognized carriers. Loose diamonds may be shipped by Blue Nile or directly by our suppliers to our customers. All shipments of products for which the cost of goods shipped is over $1,000 are fully insured by a third party in case of loss or theft. We assume the risk of loss or theft on shipments of products for which the cost of goods shipped is less than $1,000. Customer orders are typically delivered within one to six business days, depending on product availability, price point, shipping method and whether the orders require customization.

          For most of our products, we offer an unconditional 30-day return policy, under which customers desiring to return a product receive return authorization by calling our customer service center. Returned products are treated as merchandise receipts and are subject to the same inventory accountability and security steps described above.

Technology and Systems

          We have implemented our inventory, merchandising, order processing and fulfillment, customer interaction and financial reporting systems using a combination of proprietary and licensed technologies. We focus our internal development efforts on creating and enhancing the features and functionality of our web site and order processing and fulfillment systems to deliver a high quality customer experience.

          The Blue Nile web site, and in particular our interactive search functionality and shopping cart, are based on internally developed proprietary technology. Our interactive search functionality allows customers to choose a diamond based on price and characteristics such as shape, cut, color, clarity and carat size. For customers seeking to customize diamond jewelry such as engagement rings, diamond earrings and diamond pendants, our web site provides a step-by-step process for the selection of a diamond followed by a match with a jewelry setting. Our web site uses secure encryption technology to send and receive financial information to prevent unauthorized parties from intercepting such information.

          We have internally developed critical software systems, including our call center systems and vendor extranet. The inventory management systems that we have developed on our vendor extranet include regularly scheduled data communications between us and our key diamond suppliers throughout the day. These communications enable us to accurately track individual diamonds located at our suppliers for efficient delivery.

          We license third-party information technology systems for our financial reporting, inventory, order fulfillment and merchandising. We use redundant Internet carriers to minimize downtime. Our systems are monitored continuously using third-party software and an on-call team is staffed to respond to any emergencies in the technology infrastructure.

Seasonality

          Our business has been highly seasonal, reflecting the retail industry’s general pattern of peak sales in late November and December during the holiday shopping season. The fourth quarter accounted for approximately 35%, 42% and 38% of our net sales in 2001, 2002 and 2003, respectively. In anticipation of increased sales activity during the fourth quarter, we incur significant additional expenses, including customer support and jewelry assembly costs. In addition, we make merchandising and inventory decisions for the holiday season well in advance. We also have experienced relatively higher net sales in February and May relating to Valentine’s Day and Mother’s Day. Due to the seasonality of our sales, our quarterly results will fluctuate, perhaps significantly.

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Competition

          The diamond and fine jewelry retail market is intensely competitive and highly fragmented. Our primary competition comes from online and offline retailers that offer products within the higher value segment of the jewelry market. In the future, we may also compete with other retailers that move into the higher value jewelry segment. Current or potential competitors include the following:

  •  independent jewelry stores;
 
  •  retail jewelry store chains;
 
  •  other online retailers that sell jewelry;
 
  •  department stores, chain stores and mass retailers;
 
  •  online auction sites;
 
  •  catalog and television shopping retailers; and
 
  •  discount superstores and wholesale clubs.

In addition to these competitors, we may face competition from suppliers of our products that decide to sell directly to our customers, either through physical retail outlets or through an online store.

          We believe that the principal competitive factors in our market are product selection and quality, price, customer service and support, brand recognition, reputation, reliability and trust, web site features and functionality, convenience and delivery performance. We believe that we compete favorably in the market for diamonds and fine jewelry by offering detailed product information, broad product selection, the ability to customize jewelry, lower pricing and knowledgeable customer support to our customers.

Intellectual Property

          We rely on general intellectual property law and contractual restrictions and to a limited extent, copyrights and patents to protect our proprietary rights and technology. These contractual restrictions include confidentiality agreements, invention assignment agreements and nondisclosure agreements with employees, contractors, suppliers and strategic partners. Despite the protection of general intellectual property law and our contractual restrictions, it may be possible for a third-party to copy or otherwise obtain and use our intellectual property without our authorization. In addition, we pursue the registration of our trademarks and service marks in the U.S. and certain other countries. However, effective intellectual property protection may not be available in every country in which our products and services are made available in the future. In the United States and certain other countries, we have registered “Blue Nile,” “bluenile.com,” the BN logo and the Blue Nile BN stylized logo as trademarks. We have also registered copyrights with respect to images and information set forth on our web site and the computer code incorporated in our web site and filed a U.S. patent application relating to certain features of our web site.

          We rely on technologies that we license from third parties. These licenses may not continue to be available to us on commercially reasonable terms in the future. As a result, we may be required to obtain substitute technologies of lower quality or at greater cost, which could materially adversely affect our business, results of operations and financial condition.

          Third parties have, and may in the future, assert that our business or the technologies we use infringe upon their rights. We cannot predict whether any such assertions or any claims based on such assertions will harm our business or results of operations. We expect that participants in our market will be increasingly subject to infringement claims as the number of competitors in our industry grows. Any such claim, with or without merit, could be time-consuming, result in costly litigation, cause service upgrade delays or require us to enter into burdensome royalty or licensing agreements.

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Government Regulation

          We are not currently subject to direct federal, state or local regulation other than regulations applicable to businesses generally or directly applicable to retailing or online commerce. However, as the Internet becomes increasingly popular, it is possible that a number of laws and regulations may be adopted with respect to the Internet. These laws may cover issues such as user privacy, freedom of expression, pricing, content and quality of products and services, taxation, advertising, intellectual property rights and information security. Further, the growth of online commerce may prompt calls for more stringent consumer protection laws. Several states have proposed legislation to limit the uses of personal user information gathered online or require online companies to establish privacy policies. The Federal Trade Commission has also initiated action against at least one online company regarding the manner in which personal information is collected from users and provided to third parties. We do not currently provide individual personal information regarding our users to third parties. However, the adoption of additional privacy or consumer protection laws could create uncertainty in Internet usage and reduce the demand for our products and services.

          We are not certain how our business may be affected by the application of existing laws governing issues such as property ownership, copyrights, encryption and other intellectual property issues, taxation, libel, obscenity, qualification to do business and export or import matters. The vast majority of these laws was adopted prior to the advent of the Internet. As a result, they do not contemplate or address the unique issues of the Internet and related technologies. Changes in laws intended to address these issues could create uncertainty for those conducting online commerce. This uncertainty could reduce demand for our products and services or increase the cost of doing business as a result of litigation costs or increased fulfillment costs.

          In addition, because our products and services are available over the Internet in multiple states, certain states may claim that we are required to qualify to do business in such state. Currently, we are qualified to do business only in the State of Washington. Our failure to qualify to do business in a jurisdiction where we are required to do so could subject us to taxes and penalties. It could also hamper our ability to enforce contracts in these jurisdictions. The application of laws or regulations from jurisdictions whose laws do not currently apply to our business could harm our business and results of operations.

Employees

          As of December 31, 2003, we employed 115 full-time and 10 part-time employees. From time to time, we also employ independent contractors to support our operations. Our employees are not party to any collective bargaining agreement, and we have never experienced an organized work stoppage. We believe our relations with our employees are good.

Facilities

          All of our facilities are currently located in Seattle, Washington. Our corporate headquarters consists of approximately 21,000 square feet and is subject to a sub-lease which expires in August 2011. We believe that the facility housing our corporate headquarters is adequate to meet our current requirements and that suitable additional or substitute space will be available as needed. Our fulfillment center consists of approximately 10,000 square feet and is subject to a lease that expires in October 2006. We also have 2,500 square feet of additional space under a lease that expires in October 2004. We may relocate our fulfillment operations into a larger facility and/or rent additional space in 2004. We do not expect any such relocation to result in a disruption to our fulfillment operations.

Legal Proceedings

          From time to time, we may be involved in litigation relating to claims rising out of our ordinary course of business. As of March 1, 2004, we were not a party to any material legal proceedings.

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MANAGEMENT

Executive Officers and Directors

          The following table sets forth certain information with respect to our executive officers and directors as of March 10, 2004.

             
Name Age Position



Mark Vadon
    34     President, Chief Executive Officer and Chairman of the Board
Robert Paquin
    57     Chief Operating Officer and Chief Information Officer
Diane Irvine
    45     Chief Financial Officer and Director
Susan Bell
    46     Vice President of Merchandising
Darrell Cavens
    31     Vice President of Development and Chief Technical Officer
Dwight Gaston
    35     Vice President of Fulfillment
Barbara Rybka
    41     Vice President of Marketing
Joseph Jimenez(1)(2)
    44     Director
Mary Alice Taylor(1)(3)
    54     Director
Joanna Strober(1)(3)
    35     Director
Augustus Tai(2)
    38     Director


(1)  Member of the Audit Committee.
(2)  Member of the Compensation Committee.
(3)  Member of the Nominating and Corporate Governance Committee.

          Mark Vadon co-founded Blue Nile and has served as President, Chief Executive Officer and Chairman of the Board since inception. From December 1992 to March 1999, Mr. Vadon was a consultant for Bain & Company, a management consulting firm. Mr. Vadon holds a B.A. in Social Studies from Harvard University and an M.B.A. from Stanford University.

          Robert Paquin has served as our Chief Operating Officer and Chief Information Officer since September 1999. From May 1994 to September 1999, Mr. Paquin served as Vice President of Information Services and Senior Vice President of Operations and Information Services at L.L. Bean, Inc., a clothing retailer. From 1992 to 1994, Mr. Paquin served as Senior Vice President and Chief Information Officer at Hanover Direct, Inc., a consumer catalog retailer. From 1989 to 1991, Mr. Paquin served as Vice President of Information Service and Operations at Tweeds, Inc., an apparel catalog company. Mr. Paquin holds a B.A. in Business Administration from Southern Oregon State College.

          Diane Irvine has served as our Chief Financial Officer since December 1999 and as a director since May 2001. From February 1994 to May 1999, Ms. Irvine served as Vice President and Chief Financial Officer of Plum Creek Timber Company, Inc., a timberland management and wood products company. From September 1981 to February 1994, Ms. Irvine served in various capacities, most recently as a partner, with Coopers and Lybrand LLP, an accounting firm. Ms. Irvine holds a B.S. in Accounting from Illinois State University and holds an M.S. in Taxation from Golden Gate University.

          Susan Bell has served as our Vice President of Merchandising since May 2003. Ms. Bell served as our Vice President of Marketing from the time she joined Blue Nile in September 2001 until May 2003. From October 2000 to February 2001, Ms. Bell served as Vice President of Merchandising and Marketing for The Body Shop Digital, an e-commerce company. From July 1984 to July 2000, Ms. Bell served in various capacities at Eddie Bauer, Inc., a clothing and merchandise retail company, most recently as Vice President and General Merchandising Manager. Ms. Bell holds a B.A. in Business Administration from San Francisco State University.

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          Darrell Cavens has served as our Vice President of Development since October 2003 and as our Chief Technical Officer since November 2000. From September 1999 to November 2000, Mr. Cavens served as our Director of Technology. From April 1996 to September 1999, Mr. Cavens worked as Staff Engineer within the Advanced Development team at Starwave Corporation, an Internet development company. Mr. Cavens attended the University of Victoria in Canada from 1990 to 1994.

          Dwight Gaston has served as our Vice President of Operations since July 2003. From May 1999 to July 2003, Mr. Gaston served as our Director of Fulfillment Operations. From June 1992 to June 1995 and from August 1997 to May 1999, Mr. Gaston was a consultant with Bain & Company, a management consulting firm. Mr. Gaston holds a B.A. in Economics from Rice University and an M.B.A. from Harvard University.

          Barbara Rybka has served as our Vice President of Marketing since January 2004. From August 2001 to December 2003, Ms. Rybka served as an Engagement Director at Roundarch, Inc., an eCRM consulting firm. From January 2001 to May 2001, Ms. Rybka served as Director, Direct Marketing and Product Planning for BroadBand Office Inc., a communications services company. From May 1992 to January 2001, Ms. Rybka served in various marketing roles, most recently as Head of International Marketing Strategy and Development for the Establishment Services division of American Express Company, a financial services company. Ms. Rybka holds a B.S. in Mathematics from Smith College and an M.B.A. from the International Institute of Management in Switzerland.

          Joseph Jimenez has served as a director since March 2000. Mr. Jimenez has served as Executive Vice President of H.J. Heinz Company, a food products company, since September 2001 and the President and Chief Executive Officer of Heinz Europe since July 2002. From November 1998 to July 2002, Mr. Jimenez served as President and Chief Executive Officer of Heinz North America. Mr. Jimenez holds a B.A. in Economics from Stanford University and an M.B.A. from the University of California, Berkeley. Mr. Jimenez also serves on the board of directors of AstraZeneca PLC, a medicine development company.

          Mary Alice Taylor has served as a director since March 2000. Ms. Taylor is an independent business executive. She held a temporary assignment as Chairman and Chief Executive Officer of Webvan Group, Inc., an e-commerce company, from July 2001 to December 2001. Prior to that, she served as Chairman and Chief Executive Officer of HomeGrocer.com, an e-commerce company, from September 1999 until she completed a sale of the company to Webvan Group, Inc. in October 2000. From January 1997 to September 1999, Ms. Taylor served as Corporate Executive Vice President of Worldwide Operations and Technology for Citigroup, Inc., a financial services organization. Ms. Taylor holds a B.A. in Finance from Mississippi State University. Ms. Taylor also serves on the boards of directors of Exult, Inc., an employee management company, Allstate Corporation, an insurance company, Autodesk Inc., a design software company, and Sabre Holdings, an Internet travel services company.

          Joanna Strober has served as a director since May 1999. Ms. Strober has served as a Managing Director of Symphony Technology Group, an enterprise software investment firm, since January 2002. From April 1996 to December 2002, Ms. Strober held various positions at Bessemer Venture Partners, a private venture capital firm, most recently serving as a General Partner from January 2000 to December 2002. From August 1994 to March 1996, Ms. Strober was an associate at Venture Law Group, a corporate law firm. Ms. Strober holds a B.A. in Political Science from the University of Pennsylvania and a J.D. from the University of California, Los Angeles.

          Augustus Tai has served as a director since January 2003. From May 1996 to present, Mr. Tai has held various positions at Trinity Ventures, a venture capital partnership, most recently serving as a General Partner since September 1998. Mr. Tai holds a B.A. in Applied Mathematics from Harvard University and M.S. degrees from the Massachusetts Institute of Technology’s Department of Materials Science and Engineering and Sloan School of Management.

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Board Composition

          In accordance with the terms of our restated certificate of incorporation, following completion of this offering our board of directors will be divided into three classes as follows:

  •  Class I consists of Ms. Strober and Mr. Vadon, whose terms will expire at our annual stockholders meeting to be held in 2005;
 
  •  Class II consists of Mr. Tai and Ms. Taylor, whose terms will expire at our annual stockholders meeting to be held in 2006; and
 
  •  Class III consists of Ms. Irvine and Mr. Jimenez, whose terms will expire at our annual stockholders meeting to be held in 2007.

          At each annual meeting of stockholders after the initial classes are established, the successors to directors whose terms expire at that meeting will be elected to serve from the time of election and qualification until the third annual meeting following election. In addition, our restated certificate of incorporation provides that the authorized number of directors may be changed only by resolution of the board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the total number of directors. This division of the board of directors into three classes may have the effect of delaying or preventing changes in control or management.

Board Committees

          Our board of directors has the authority to appoint committees to perform certain management and administrative functions. The board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee.

          Our audit committee currently consists of Ms. Taylor, Mr. Jimenez and Ms. Strober, none of whom is a member of our management. The committee oversees our corporate accounting and financial reporting process. Our audit committee:

  •  evaluates the independent auditors’ qualifications, independence and performance;
 
  •  determines the terms of engagement of the independent auditors;
 
  •  approves the retention of the independent auditors to perform any proposed permissible non-audit services;
 
  •  monitors the rotation of partners of the independent auditors on the engagement team as required by law;
 
  •  reviews our financial statements;
 
  •  reviews our critical accounting policies and estimates; and
 
  •  discusses with management and the independent auditors the results of the annual audit and the review of our quarterly financial statements, among other things.

          Our board of directors has designated Ms. Taylor, an independent director, as a “financial expert” as such term is defined under applicable Securities and Exchange Commission rules and regulations and the chairperson of our audit committee.

          Our compensation committee currently consists of Messrs. Tai and Jimenez, neither of whom is a member of our management. Our compensation committee reviews and recommends to our board of directors the compensation and benefits of all our officers, directors and employees, including reviewing and approving corporate goals and objectives relevant to compensation of the Chief Executive Officer and other executive officers, evaluating the performance of these officers in light of those goals and objectives, and setting compensation of these officers based on such evaluations. The compensation committee also

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has power and authority to administer and delegate the administration of the issuance of stock options and other awards under our stock plans.

          Our nominating and corporate governance committee currently consists of Ms. Strober and Ms. Taylor, neither of whom is a member of our management. Our nominating and corporate governance committee oversees all aspects of corporate governance functions, makes recommendations to our board of directors regarding candidates to serve as directors, considers stockholder suggestions for director nominations, makes recommendations to the board of directors regarding candidates for successors to the Chief Executive Officer and makes other recommendations to the board of directors regarding corporate governance.

          Our existing committees meet the applicable composition and functioning requirements under the current requirements of the Sarbanes-Oxley Act of 2002, the Nasdaq National Market and Securities and Exchange Commission rules and regulations. We intend to comply with future requirements to the extent they become applicable to Blue Nile.

Compensation Committee Interlocks and Insider Participation

          None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers who serve on our board of directors or compensation committee. No interlocking relationship exists between our board of directors or compensation committee and the board of directors or compensation committee of any other company, nor has any interlocking relationship existed in the past.

Director Compensation

          Our directors who are also our employees receive no compensation for serving on the board of directors. We have agreed to reimburse our non-employee directors for all reasonable expenses incurred in connection with their duties as directors and provide $10,000 per member in cash consideration annually for serving on our board of directors, an additional $1,000 per member for serving on any committee of our board of directors and an additional $1,000 for serving as chairperson of our audit committee. At the discretion of our board of directors, directors may be permitted to forego all or a portion of their annual $10,000 cash payment for service on the board in exchange for a grant or grants of restricted stock under the 2004 Equity Incentive Plan having a fair market value equal to the amount of foregone cash compensation. Our non-employee directors are also eligible to receive nonstatutory stock option grants under our 2004 Non-Employee Directors’ Stock Option Plan. Under our 2004 Non-Employee Directors’ Stock Option Plan, each non-employee director will receive an initial option grant to purchase 50,000 shares of our common stock upon the effective date of this offering and thereafter any new non-employee director will receive an initial option grant to purchase 50,000 shares of our common stock upon the director’s election or appointment to our board of directors. Each non-employee director will receive an additional option grant to purchase 40,000 shares of our common stock upon full vesting of such initial grant and any such subsequent additional grants. Each non-employee director will receive an annual option grant to purchase 10,000 shares of our common stock on the date following each annual meeting of stockholders, which will be reduced pro rata for each full quarter prior to the grant date during which the director did not serve as a non-employee director. See the “Stock Based Plans — 2004 Non-Employee Directors’ Plan” section below for a further description of our 2004 Non-Employee Directors’ Plan.

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Executive Compensation

          The table below summarizes the compensation awarded or paid to, or earned for, services rendered to us in all capacities during 2003, by our Chief Executive Officer and the other four most highly compensated executive officers whose total annual salary and bonus exceeded $100,000. These executives are referred to as the “named executive officers” elsewhere in this prospectus.

Summary Compensation Table

                                 
Long-Term
Compensation
Awards

Annual Compensation Securities

Underlying All Other
Name and Principal Position Salary Bonus Options Compensation





Mark Vadon
Chief Executive Officer
  $ 249,499     $ 100,000       250,000     $ 5,107 (1)
Robert Paquin
Chief Operating Officer
    282,880       100,000       50,000       4,957 (2)
Diane Irvine
Chief Financial Officer
    249,499       100,000       100,000       5,924 (3)
Susan Bell
Vice President of Merchandising
    193,000             15,000       7,950 (4)
Darrell Cavens
Chief Technical Officer
    142,125             40,000       3,148 (5)


(1)  Of this amount, $4,387 is for matching contributions under our 401(k) plan and $720 is for a transportation allowance.
(2)  Amount paid for matching contributions under our 401(k) plan.
(3)  Of this amount, $5,204 is for matching contributions under our 401(k) plan and $720 is for a transportation allowance.
(4)  Of this amount, $3,872 is for matching contributions under our 401(k) plan, $720 is for a transportation allowance and $3,358 is for medical insurance premiums for dependents.
(5)  Of this amount, $2,848 is for matching contributions under our 401(k) plan and $300 is for a transportation allowance.

Stock Options

          The following table sets forth certain information with respect to stock options granted to each of our named executive officers during 2003, including the potential realizable value, which is the exercise price before taxes associated with exercise, over the entire term of the options assuming options are exercised at the end of their terms, based on assumed annual rates of stock appreciation of 5% and 10%, compounded annually, and based on the fair market value on the date of grant as determined by our board of directors. These assumed rates of appreciation comply with the rules of the Securities and Exchange Commission and do not represent our estimate of future stock prices. Actual gains, if any, on stock option exercises will depend on the future performance of our common stock.

          Options granted in 2003 to the named executive officers were granted under our 1999 Equity Incentive Plan, the material terms of which are further described below. All options granted to the named executive officers are options to purchase common stock. The option grants vest as to 25% of the shares subject to the option one year from the date of grant and one-forty-eighth of the shares subject to the option vest on a monthly basis thereafter. Upon designated change in control events of Blue Nile, if the surviving entity does not agree to assume the options or substitute similar options, this vesting will accelerate as to all shares that are then unvested. In addition, in the event of certain stock sales and other change in control events, all options held by current employees, directors and consultants may be subject to accelerated vesting, either as to an additional eighteen months or in full. This accelerated vesting may

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discourage, delay or prevent a change in control in the ownership of Blue Nile, Inc. Each option expires ten years from the date of grant, subject to earlier termination if the optionee’s service with us ceases. Options granted to certain of the named executive officers are subject to additional acceleration provisions as described in the “Change of Control Provisions” section below.

          The exercise price per share of each option granted was equal to the fair market value of the underlying common stock as determined by our board of directors on the date of the grant.

Option Grants in 2003

                                                 
Individual Grants

Potential Realizable
Number Value at Assumed
of Annual Rates of Stock
Securities Percent of Price Appreciation for
Underlying Total Options Exercise Option Term
Options Granted Price Expiration
Name Granted in 2003 Per Share Date 5% 10%







Mark Vadon
    250,000       26.4 %   $ 3.50       10/9/2013     $ 550,283     $ 1,394,525  
Robert Paquin
    50,000       5.3       3.50       10/9/2013       110,057       278,905  
Diane Irvine
    100,000       10.6       3.50       10/9/2013       220,113       557,810  
Susan Bell
    15,000       1.6       3.50       10/9/2013       33,017       83,671  
Darrell Cavens
    40,000       4.2       3.50       10/9/2013       88,045       223,124  

          The following table sets forth option exercises during 2003 and the number of shares of our common stock subject to vested and unvested stock options held by each of our named executive officers as of December 31, 2003.

Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

                                                 
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options
Shares at December 31, 2003 at December 31, 2003
Acquired Value

Name on Exercise Realized(1) Exercisable Unexercisable Exercisable(1) Unexercisable







Mark Vadon
    275,000     $         75,000       500,000     $       $    
Robert Paquin
    750,000               422,500       162,500                  
Diane Irvine
    667,360               109,723       222,917                  
Susan Bell
    137,812               47,708       169,480                  
Darrell Cavens
    60,000               149,228       69,772                  


(1)  There was no public trading market for our common stock as of December 31, 2003. Accordingly, as permitted by the rules of the Securities and Exchange Commission, these values have been calculated based on an assumed initial public offering price of $         per share, minus the exercise price, multiplied by the number of shares issued upon the exercise of the option.

Employment Agreements

          Each of our named executive officers, except for Mr. Vadon, have signed offer letters. These offer letters provide that the officer is an at-will employee. These offer letters also provide for salary and stock option grants, as well as other customary benefits and terms. Mr. Paquin’s offer letter provides that if his employment is terminated without cause, he will continue to receive his then base salary for six months following the termination date.

Change of Control Provisions

          Options to purchase 315,000 shares of our common stock granted to Ms. Bell in 2001, options to purchase an aggregate of 425,000 shares of our common stock granted to Mr. Paquin in 2002 and 2003,

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options to purchase an aggregate of 500,000 shares of our common stock granted to Ms. Irvine in 2002 and 2003, and options to purchase an aggregate of 850,000 shares of our common stock granted to Mr. Vadon in 2002 and 2003 are subject to accelerated vesting, if, within 12 months following a change of control, the employee:

  •  is terminated without cause;
 
  •  voluntarily terminates continuous service following a material reduction in such employee’s responsibilities and duties without cause; or
 
  •  voluntarily terminates continuous service following a relocation of the principal place where such employee’s responsibilities and duties are performed outside of a specified radius.

          All options to purchase common stock issued to our named executive officers are also subject to accelerated vesting upon a change of control as described in the “Stock Based Plans — 1999 Equity Incentive Plan” section below.

Stock Based Plans

1999 Equity Incentive Plan

          We initially adopted, and our stockholders initially approved, our 1999 Equity Incentive Plan (the 1999 plan) on April 17, 1999. The 1999 plan was last amended and restated by our board of directors on July 23, 2002, and our stockholders approved the amendment and restatement on August 23, 2002. Upon the effective date of this offering, no further option grants will be made under the 1999 plan. The 1999 plan provides for the grant of incentive stock options, nonstatutory stock options, stock bonuses and restricted stock awards, which may be granted to employees, including officers, non-employee directors and consultants, except that incentive stock options may be granted only to employees.

          Share Reserve. An aggregate of 8,276,000 shares of common stock are reserved for issuance under the 1999 plan. As of December 31, 2003, outstanding options to purchase a total of 3,506,497 shares of our common stock were held by participants under the 1999 plan, and 660,076 shares remain available for grant. No additional awards will be granted under the 1999 plan after the effective date of this offering.

          Shares issued under the 1999 plan may be previously unissued shares or reacquired shares bought on the market or otherwise.

          Administration. The board of directors administers the 1999 plan. The board of directors may delegate authority to administer the 1999 plan to a committee. Subject to the terms of the 1999 plan, the plan administrator (our board of directors or its authorized committee) determines recipients, grant dates, the numbers and types of equity awards to be granted and the terms and conditions of the equity awards, including the period of their exercisability and vesting. Subject to the limitations set forth below, the plan administrator will also determine the exercise price of options granted and the purchase price for rights to purchase restricted stock.

          Incentive Stock Options. Incentive stock options are intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code. Incentive stock options are granted pursuant to incentive stock option agreements. The plan administrator determines the exercise price for an incentive stock option, which may not be less than 100% of the fair market value of the stock underlying the option determined on the date of grant. Notwithstanding the foregoing, incentive stock options granted to employees who own, or are deemed to own, more than 10% of our voting stock, must have an exercise price not less than 110% of the fair market value of the stock underlying the option determined on the date of grant.

          Nonstatutory Stock Options. Nonstatutory stock options are granted pursuant to nonstatutory stock option agreements. The plan administrator determines the exercise price for a nonstatutory stock option, which may not be less than 85% of the fair market value of the stock underlying the option determined on the date of grant.

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          Incentive and Nonstatutory Stock Options. Options granted under the 1999 plan vest at the rate specified in the stock option agreement.

          The plan administrator generally determines the term of options granted under the 1999 plan. Incentive stock options have a maximum term of 10 years provided that incentive stock options granted to stockholders possessing 10% or more of the total combined voting power of the company have a maximum term of five years. Unless the terms of an optionee’s stock option agreement provide otherwise, if an optionee’s service relationship with us, or any of our affiliates, ceases due to disability or death or the optionee dies within a specified period after the termination of service, the optionee, or his or her beneficiary, may exercise any vested options for a period of 12 months in the event of disability or 18 months in the event of death, after the date such service relationship ends or after death, as applicable. If an optionee’s relationship with us, or any of our affiliates, ceases for any reason other than disability or death, the optionee may exercise any vested options for a period of three months from cessation of service, unless the terms of the stock option agreement provide for earlier or later termination. However, in no event may an option be exercised after the expiration of its term, as set forth in the stock option agreement.

          Acceptable consideration for the purchase of common stock issued upon the exercise of an option includes cash, and if is determined by the plan administrator, may also include common stock previously owned by the optionee, a deferred payment arrangement or other legal consideration approved by the plan administrator.

          Incentive stock options are not transferable other than by will or the laws of descent and distribution. A nonstatutory stock option generally is not transferable other than by will or the laws of descent and distribution unless the nonstatutory stock option agreement provides otherwise. However, an optionee may designate a beneficiary who may exercise an incentive or nonstatutory option following the optionee’s death.

          Stock Bonuses and Restricted Stock Awards. Stock bonuses and restricted stock awards are granted pursuant to stock bonus agreements and restricted stock purchase agreements, respectively. Stock bonus awards are generally granted in consideration for the awardholder’s past services. The purchase price for restricted stock awards must not be less than 85% of the fair market value of the stock on the date the award is made or at the time of purchase. The purchase price for a restricted stock award may be payable in cash, according to a deferred payment arrangement at the discretion of the plan administrator, or any form of legal consideration approved by the plan administrator. Rights to acquire shares under a stock bonus or restricted stock award may be transferable only to the extent provided in the stock bonus or restricted stock purchase agreement.

          Changes to Capital Structure. In the event that there is a certain type of change in the capital structure of the company, such as a stock split, the number of shares reserved under the plan and the number of shares and exercise price or strike price, if applicable, of all outstanding awards will be appropriately adjusted.

          Effect of a Change in Control. In the event of certain corporate transactions, all outstanding stock awards under the 1999 plan may be assumed or substituted for by any surviving or acquiring entity. If the surviving or acquiring corporation does not assume or substitute for such awards, then, for awardholders who are then providing services to us or our affiliates, the vesting and exercisability of the awards will accelerate fully, and the awards will terminate immediately prior to the occurrence of the corporate transaction. The vesting and exercisability of awards held by awardholders who are no longer providing services to us or one of our affiliates will not accelerate and will terminate immediately prior to the occurrence of the corporate transaction.

          In the event that any surviving or acquiring entity either assumes all outstanding stock awards under the incentive plan or substitutes other awards for the outstanding stock awards, the vesting of such

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assumed or substituted awards for those awardholders whose continuous service has not terminated prior to the closing of such corporate transaction generally shall accelerate as follows:

  •  any portion of the stock award not subject to monthly vesting, but subject to vesting based on the expiration of a one year period (“cliff vesting”) will be treated as if the award had vested ratably on a monthly basis from the vesting commencement date; and
 
  •  the lesser of twelve and 12.5% of all shares subject to such stock awards, or an amount equal to the remaining unvested shares will vest upon the closing of such corporate transaction.

          If, after this offering is completed, any person or entity, or group thereof acting together, acquires shares representing at least 50% of the voting power entitled to vote in the election of our directors, other than in certain corporate transactions, the vesting and exercisability of the awards will accelerate in full for awardholders who are then providing services to us or our affiliates.

          Accelerated vesting of awards under the 1999 plan may discourage, delay or prevent a change in control of Blue Nile.

2004 Equity Incentive Plan

          Our board of directors adopted our 2004 Equity Incentive Plan, the incentive plan, in March 2004 and our stockholders approved it in                     2004. The incentive plan will become effective upon the effective date of this offering. Unless sooner terminated by the board of directors, the incentive plan will terminate on the day before the tenth anniversary of the date the incentive plan is adopted by the board of directors or approved by our stockholders, whichever is earlier. The incentive plan provides for the grant of nonstatutory stock options, restricted stock awards, stock appreciation rights, restricted stock units and other forms of equity compensation, which may be granted to employees, including officers, non-employee directors and consultants.

          Share Reserve. The aggregate number of shares of common stock that may be issued pursuant to awards granted under the incentive plan is 6,400,000 shares, which amount will be increased annually on January 1st of each year, from 2005 until 2014, by five percent of the number of shares of common stock outstanding on such date. However, the board of directors has the authority to designate a smaller number of shares by which the authorized number of shares of common stock will be increased. As of the date hereof, no shares of common stock have been issued under the incentive plan.

          The following types of shares issued under the incentive plan may again become available for the grant of new awards under the incentive plan: restricted stock issued under the incentive plan or the 1999 plan that is forfeited or repurchased prior to it becoming fully vested; shares withheld for taxes; shares used to pay the exercise price of an option in a net exercise; shares tendered to us to pay the exercise price of an option; and shares subject to awards issued under the incentive plan or the 1999 plan that have expired or otherwise terminated without having been exercised in full. Shares issued under the incentive plan may be previously unissued shares or reacquired shares bought on the market or otherwise.

          Administration. The board of directors will administer the incentive plan. The board of directors may delegate authority to administer the incentive plan to a committee. Subject to the terms of the incentive plan, the plan administrator (our board of directors or its authorized committee) determines recipients, grant dates, the numbers and types of equity awards to be granted and the terms and conditions of the equity awards, including the period of their exercisability and vesting. Subject to the limitations set forth below, the plan administrator will also determine the exercise price of options granted, the purchase price for rights to purchase restricted stock and, if applicable, phantom stock and the strike price for stock appreciation rights.

          Nonstatutory Stock Options. Nonstatutory stock options are granted pursuant to nonstatutory stock option agreements. The plan administrator determines the exercise price for a nonstatutory stock option, which may not be less than 50% of the fair market value of the stock underlying the option determined on the date of grant. Options granted under the incentive plan vest at the rate determined by the board of directors and specified in the stock option agreement.

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          The plan administrator determines the term of nonstatutory stock options granted under the incentive plan. Unless the terms of an optionee’s nonstatutory stock option agreement provide otherwise, if an optionee’s service relationship with us, or any of our affiliates, ceases due to disability or death or the optionee dies within a specified period after termination of service, the optionee, or his or her beneficiary, may exercise any vested options for a period of 12 months in the event of disability or 18 months in the event of death, after the date such service relationship ends or after death, as applicable. If an optionee’s relationship with us, or any of our affiliates, ceases for any reason other than disability or death, the optionee may exercise any vested options for a period of three months from cessation of service, unless the terms of the stock option agreement provide for earlier or later termination. However, in no event may an option be exercised after the expiration of its term, as set forth in the stock option agreement.

          Acceptable consideration for the purchase of common stock issued upon the exercise of a nonstatutory stock option will either be cash or determined by the plan administrator and may also include common stock previously owned by the optionee, a deferred payment arrangement, a broker assisted exercise, the net exercise of the option or other legal consideration approved by the plan administrator.

          Generally, an optionee may not transfer a nonstatutory stock option other than by will or the laws of descent and distribution unless the nonstatutory stock option agreement provides otherwise. However, an optionee may designate a beneficiary who may exercise the option following the optionee’s death.

          Restricted Stock Awards. Restricted stock awards are granted pursuant to restricted stock award agreements. The purchase price for restricted stock awards must be at least equal to the par value of the common stock. The purchase price for a restricted stock award may be payable in cash, by the recipient’s services performed or to be performed for us, according to a deferred payment arrangement at the discretion of the plan administrator or any other form of legal consideration approved by the plan administrator. Restricted Stock Awards may be subject to a repurchase right in accordance with a vesting schedule determined by the board of directors. Rights to acquire shares under a restricted stock award may be transferable only to the extent provided in a restricted stock award agreement.

          Stock Appreciation Rights. Stock appreciation rights are granted pursuant to stock appreciation right agreements. The plan administrator determines the strike price for a stock appreciation right. A stock appreciation right granted under the incentive plan vests at the rate specified in the stock appreciation right agreement.

          The plan administrator determines the term of stock appreciation rights granted under the incentive plan. If an awardholder’s relationship with us, or any of our affiliates, ceases for any reason, any unvested stock appreciation rights will be forfeited and any vested stock appreciation rights will be automatically redeemed.

          Restricted Stock Units. Restricted stock units are granted pursuant to phantom stock award agreements. A restricted stock unit may require the payment of at least par value of the common stock. Payment of any purchase price may be made in cash or shares of common stock, or in any combination of cash and shares. Dividend equivalents may be credited in respect of restricted stock units, as determined by the plan administrator. Such dividend equivalents may be converted into additional restricted stock units based on the fair market value of the common stock on the payment date of such dividend. As determined by the plan administrator, the vesting of restricted stock units may be subject to certain restrictions or conditions and the plan administrator may impose certain restrictions or conditions that may delay delivery of the shares or their cash equivalent after vesting. If an awardholder’s relationship with us or any of our affiliates ceases for any reason, any unvested phantom stock awards will be forfeited.

          Other Equity Awards. The plan administrator may grant other awards based in whole or in part by reference to our common stock. The plan administrator will determine the number of shares under the award, the purchase price, if any, the timing of exercise and vesting and any repurchase rights associated with such awards.

          Changes to Capital Structure. In the event that there is a certain type of change in the capital structure of the company, such as a stock split, the number of shares reserved under the plan and the

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number of shares and exercise price or strike price, if applicable, of all outstanding awards will be appropriately adjusted.

          Changes in Control. In the event of certain corporate transactions, all outstanding options and other awards under the incentive plan may be assumed, continued or substituted for by any surviving or acquiring entity. If the surviving or acquiring entity elects not to assume, continue or substitute for such awards, the vesting of such awards held by awardholders whose service with us or any of our affiliates has not terminated will be accelerated and such awards will be terminated if not exercised prior to the effective date of the corporate transaction. Restricted stock awards may have their repurchase or forfeiture rights assigned to the surviving or acquiring entity. If such repurchase or forfeiture rights are not assigned, then such awards held by awardholders whose service with us or any of our affiliates has not terminated will become fully vested. All other awards will terminate if not exercised prior to such corporate transaction. In the event of certain changes in control, the vesting and exercisability of certain awards may be accelerated if the awardholder’s award agreement so specifies.

2004 Non-Employee Directors’ Stock Option Plan

          Our board of directors adopted our 2004 Non-Employee Directors’ Stock Option Plan, the directors’ plan, in March 2004 and our stockholders approved it in                     2004. The directors’ plan will become effective upon the effective date of this offering. The directors’ plan will provide for the automatic grant of nonstatutory stock options to purchase shares of common stock to our non-employee directors.

          Share Reserve. The aggregate number of shares of common stock that may be issued pursuant to options granted under the directors’ plan is 1,000,000 shares, which amount will be increased annually on January 1st of each year, from 2005 and until 2014, by the number of shares of common stock subject to options granted during the prior calendar year. However, the board of directors has the authority to designate a smaller number of shares by which the authorized number of shares of common stock will be increased. As of the date hereof, no shares of common stock have been issued under the directors’ plan.

          Administration. The board of directors will administer the directors’ plan. The exercise price of the options granted under the directors’ plan will be equal to the fair market value of the underlying common stock on the date of grant. No option granted under the directors’ plan may be exercised after the expiration of ten years from the date it was granted. Options granted under the directors’ plan generally are not transferable other than by will or by the laws of descent and distribution and are exercisable during the life of the optionee only by the optionee. However, an option may be transferred for no consideration upon written consent of the board of directors if (i) a Form S-8 registration statement is available at the time of transfer for the issuance of shares upon exercise of the transferred option or (ii) the transfer is to the optionee’s employer or its affiliate at the time of transfer. In addition, an optionee may designate a beneficiary who may exercise the option following the optionee’s death. An optionee whose service relationship with us or any of our affiliates (whether as a non-employee director of the company or subsequently as an employee, director or consultant of either the company or an affiliate) ceases for any reason may exercise vested options for the term provided in the option agreement, three months generally, 12 months in the event of disability and 18 months in the event of death. However, in no event may an option be exercised after the expiration of its term, as set forth in the stock option agreement.

          Automatic Grants. Pursuant to the terms of the directors’ plan, on the effective date of this offering, each non-employee director will automatically be granted an initial grant to purchase 50,000 shares of common stock. The initial grant will vest monthly with respect to 1/30th of the shares subject to the grant for the first 12 months following the date of grant and 1/60th of the shares subject to the grant for the subsequent 36 months. Any individual who becomes a non-employee director after this offering will automatically be granted an initial grant to purchase the same number of shares with the same vesting schedule upon being elected or appointed to the board of directors. Upon full vesting (other than upon a corporate transaction or change of control) of each non-employee director’s initial grant, such director will be granted an additional grant to purchase 40,000 shares of common stock that will vest in equal monthly installments over four years. Each non-employee director who receives any such additional grant will be

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granted a subsequent additional grant upon full vesting (other than upon a corporate transaction or change of control) of any previous additional grant. Any person who is a non-employee director on the date after an annual meetings of our stockholders automatically will be granted an annual grant to purchase 10,000 shares of common stock on such date; provided, however, that each non-employee director who has been a non-employee director for less than 12 months at the time of the annual meeting of our stockholders will receive an annual grant that has been reduced pro rata for each full quarter prior to the date of grant during which such person did not serve as a non-employee director. Annual grants will vest in equal monthly installments over the 12 months following the date of grant.

          Changes to Capital Structure. In the event that there is a certain type of change in the capital structure of the company, such as a stock split, the number of shares reserved under the plan and the number of shares and exercise price of all outstanding nonstatutory stock options will be appropriately adjusted.

          Changes in Control. In the event of certain corporate transactions, all outstanding options under the directors’ plan may be either assumed, continued or substituted for by any surviving entity. If the surviving or acquiring entity elects not to assume, continue or substitute for such options, the vesting and exercisability of options held by optionees whose service with us or any of our affiliates has not terminated will be accelerated in full and such options will be terminated if not exercised prior to the effective date of such corporate transaction. All other options will terminate if not exercised prior to such corporate transaction. In the event of certain changes of control, the vesting and exercisability of outstanding options under the directors’ plan shall be accelerated in full.

2004 Employee Stock Purchase Plan

          Our board of directors adopted our 2004 Employee Stock Purchase Plan, the purchase plan, in March 2004 and our stockholders adopted it in                     2004. The purchase plan will become effective after this offering as determined by our board of directors.

          Share Reserve. The purchase plan authorizes the issuance of 2,500,000 shares of common stock pursuant to purchase rights granted to our employees or to employees of any of our affiliates that we designate as being eligible to participate, which amount will be increased on January 1st of each year following the year in which we commence our first offering under the purchase plan and for 20 years by the lesser of 800,000 shares or one and one half percent of the number of shares of common stock outstanding on each such date. However, the board of directors has the authority to designate a smaller number of shares by which the authorized number of shares of common stock will be increased on such date. The purchase plan is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Code. As of the date hereof, no shares of common stock have been purchased under the purchase plan.

          Administration. The board of directors will administer the purchase plan, but such administration may be delegated to a committee of the board of directors. The purchase plan provides a means by which employees may purchase our common stock. The purchase plan is implemented by offerings of rights to eligible employees. Under the purchase plan, we may specify offerings with a duration of not more than 27 months, and may specify shorter purchase periods within each offering. The first offering under the purchase plan will begin after the effective date of this offering, as determined by the board of directors. Unless otherwise determined by the board of directors, common stock is purchased for accounts of employees participating in the purchase plan at a price per share equal to the lower of (i) 85% of the fair market value of a share of our common stock on the date of commencement of the offering or (ii) 85% of the fair market value of a share of our common stock on the date of purchase. Generally, all regular employees, including executive officers, who are customarily employed by us or by any of our designated affiliates for more than 20 hours per week and more than five months per calendar year may participate in the purchase plan and may contribute (normally through payroll deductions) up to 10% of their earnings for the purchase of common stock under the purchase plan, as determined by the board of directors.

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          Limitations. Eligible employees may be granted rights only if the rights, together with any other rights granted under other employee stock purchase plans do not permit such employee’s rights to purchase our stock to accrue at a rate which exceeds $25,000 of the fair market value of such stock for each calendar year in which such rights are outstanding. No employee shall be eligible for the grant of any rights under the purchase plan if immediately after such rights are granted, such employee owns stock possessing five percent or more of our outstanding capital stock measured by vote or value.

          Changes to Capital Structure. In the event that there is a certain type of change in the capital structure of the company, such as a stock split, the number of shares reserved under the plan and the number of shares and purchase price of all outstanding purchase rights will be appropriately adjusted.

          Changes in Control. In the event of certain corporate transactions, all outstanding rights to purchase our stock under the purchase plan will be assumed, continued or substituted for by the surviving or acquiring entity. If the surviving or acquiring entity elects not to assume, continue or substitute rights, then the participants’ accumulated contributions will be used to purchase shares of our common stock within five days prior to such corporate transaction and such purchase rights will terminate immediately thereafter.

401(k) Plan

          We maintain a deferred savings retirement plan for our U.S. employees. The deferred savings retirement plan is intended to qualify as a tax-qualified plan under Section 401 of the Internal Revenue Code. Contributions to the deferred savings retirement plan are not taxable to employees until withdrawn from the plan. The deferred savings retirement plan provides that each participant may contribute up to 15% of his or her pre-tax compensation (up to a statutory limit, which is $13,000 in 2004). Under the plan, each employee is fully vested in his or her deferred salary contributions. Employee contributions are held and invested by the plan’s trustee. The retirement and deferred savings plan also permits us to make discretionary contributions (including matching contributions), subject to established limits and a vesting schedule.

Limitations on Directors’ and Executive Officers’ Liability and Indemnification

          Our restated certificate of incorporation and amended and restated bylaws provide that we shall indemnify our directors and executive officers to the fullest extent permitted by Delaware law, except with respect to some specific proceedings initiated by such persons. We are also empowered under our amended and restated bylaws to enter into indemnification contracts with our directors and executive officers. We are similarly authorized to purchase insurance on behalf of any person it is required or permitted to indemnify.

          The restated certificate of incorporation also provides that, after its approval by our stockholders, if the Delaware General Corporation Law is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of our directors shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. The provision does not affect a director’s responsibilities under any other law, such as the federal securities laws or state or federal environmental laws.

          In addition to the indemnification provided for in our restated certificate of incorporation and amended and restated bylaws, we have entered into agreements to indemnify our directors and executive officers. These agreements, among other things, indemnify our directors and executive officers for expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by any director or executive officer in any action or proceeding, including any action by us arising out of services as one of our directors or executive officers, any of our subsidiaries or any other company or enterprise to which the director or executive officer provides services at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. We also intend to maintain liability insurance for our officers and directors.

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          The limitation of liability and indemnification provisions in our restated certificate of incorporation and amended and restated bylaws may discourage a stockholder from bringing a lawsuit against directors for breach of their fiduciary duties. They may also reduce the likelihood of derivative litigation against directors and officers, even though an action, if successful, might benefit us and our stockholders. A stockholder’s investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions.

CERTAIN TRANSACTIONS

Stock Sales

          Since January 1, 2001, the following executive officers, directors and holders of more than five percent of our voting securities purchased securities in the amounts as of the dates set forth below.

                                 
Series E
Convertible
Common Preferred Price Per Date of
Name Stock Stock Share Purchase





Directors and Executive Officers
                               
Mark Vadon
    275,000             $0.11       07/01/03  
Robert Paquin
    750,000             0.10       07/01/03  
Diane Irvine
    667,360             0.10       07/01/03  
Darrell Cavens
    60,000             0.10       07/08/03  
Dwight Gaston
    25,000             0.10       01/07/03  
Dwight Gaston
    20,000             0.20       08/05/03  
Dwight Gaston
    12,000             0.10       01/05/04  
Susan Bell
    137,812             0.10       07/01/03  
Susan Bell
    11,836             0.10       02/06/04  
5% Stockholders
                               
Entities affiliated with Trinity Ventures
          2,423,052       0.76       06/29/01  
Entities affiliated with Bessemer Venture Partners
          2,423,052       0.76       06/29/01  
KPCP Holdings, Inc. 
          1,838,900       0.76       06/29/01  
Funds managed by Lightspeed Venture Partners
          785,855       0.76       06/29/01  
Entities affiliated with Integral Capital Partners
          581,533       0.76       06/29/01  
Vulcan Ventures Incorporated
          654,879       0.76       06/29/01  

          Blue Nile sold the Series E convertible preferred stock to the above referenced stockholders and their affiliated entities pursuant to a preferred stock purchase agreement and an investors’ rights agreement on substantially the same terms as the other purchasers of Series E convertible preferred stock, which included registration rights, information rights, and right of first refusal, among other provisions standard in venture capital financings. The information rights and right of first refusal terminate upon the closing of this offering.

          Mr. Tai, one of our directors, is a General Partner of Trinity Ventures and may be deemed to beneficially own the shares held by entities associated with Trinity Ventures.

Director and Officer Indemnification

          Our restated certificate of incorporation contains provisions limiting the liability of directors. In addition, we have entered into agreements to indemnify our directors and executive officers to the fullest extent permitted under Delaware law. See “Limitations on Directors’ and Executive Officers’ Liability and Indemnification.”

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PRINCIPAL AND SELLING STOCKHOLDERS

          The following table sets forth information regarding the beneficial ownership of our common stock as of December 31, 2003, by the following individuals, entities or groups:

  •  each person or entity who we know beneficially owns more than five percent of our outstanding common stock;
 
  •  each of the named executive officers;
 
  •  each of the selling stockholders;
 
  •  each of our directors; and
 
  •  all directors and executive officers as a group.

          Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting or investment power with respect to the shares. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options or warrants held by that person that are currently exercisable or will become exercisable within 60 days after December 31, 2003, are deemed outstanding, while the shares are not deemed outstanding for purposes of computing percentage ownership of any other person. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock held by them.

          Applicable percentage ownership in the following table is based on 38,260,639 shares of common stock outstanding as of December 31, 2003 and                      shares of common stock outstanding immediately following the completion of this offering, as adjusted to reflect the conversion of all outstanding shares of convertible preferred stock into shares of common stock upon the closing of this offering and the cash exercise of warrants to purchase 15,000 shares of common stock that terminate if not exercised prior to the completion of this offering. The numbers shown in the table below assume no exercise by the underwriters of their overallotment option. Unless otherwise indicated, the address for each of the stockholders in the table below is c/o Blue Nile, Inc., 705 Fifth Avenue S, Suite 900, Seattle, WA 98104.

Principal and Selling Stockholders Table

                                 
Percentage of
Number of Number of Shares Outstanding
Shares Shares to be
Beneficially Sold in the Before After
Name Owned Offering Offering Offering





5% Stockholders(1)
                               
Entities associated with Bessemer Ventures(2)
    7,145,310               18.7 %       %
KPCB Holdings, Inc. 
    5,423,270               14.2          
Funds managed by Trinity Ventures(3)
    7,145,311               18.7          
Entities associated with Lightspeed Venture Partners (4)
    2,763,609               7.2          
Vulcan Ventures Incorporated
    2,418,268               6.3          
Douglas B. Williams(5)
    2,356,493               6.2          
 
Selling Stockholders
                               
          (6)
                               

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Percentage of
Number of Number of Shares Outstanding
Shares Shares to be
Beneficially Sold in the Before After
Name Owned Offering Offering Offering





Directors and Executive Officers
                               
Mark Vadon(7)
    4,317,320               11.3 %       %
Diane Irvine(8)
    793,750               2.1          
Susan Bell(9)
    199,687               *          
Robert Paquin(10)
    1,188,125               3.1          
Darrell Cavens(11)
    220,854               *          
Joanna Strober(12)
                           
Augustus Tai(13)
    7,145,311               18.7          
Joseph Jimenez(14)
    45,833               *          
Mary Alice Taylor(15)
    45,833               *          
All directors and officers as a group (10 persons) (16)
    14,133,608               35.9          


  * Less than 1% of the outstanding shares of common stock.

  (1)  Messrs. Vadon and Tai are also holders of greater than five percent of our outstanding shares of common stock.
 
  (2)  Includes 2,858,124 shares held by Bessec Ventures IV L.P. and 4,287,186 shares held by Bessemer Venture Partners IV L.P. (“BVP IV”). William T. Burgin, David J. Cowan, Christopher F. O. Gabrieli and G. Felda Hardymon are the managing members of Deer IV & Co. LLC, the general partner of these funds and have shared voting and investment authority over these shares. However, William T. Burgin, David J. Cowan, Christopher F. O. Gabrieli and G. Felda Hardymon disclaim beneficial ownership of these shares except to the extent of their pecuniary interest arising therein. The address for the entities affiliated with Bessemer Ventures is 535 Middlefield Road, Suite 245, Menlo Park, CA 94025.
 
  (3)  Includes 6,816,864 shares held by Trinity Ventures VI, L.P. and 328,447 shares held by Trinity VI Side-By-Side Fund, L.P. Noel J. Fenton, Tod H. Francis, Lawrence K. Orr, James G. Shennan, Augustus O. Tai and Fred Wang are the managing members of these funds and have shared voting and investment authority over these shares. However, Noel J. Fenton, Tod H. Francis, Lawrence K. Orr, James G. Shennan, Augustus O. Tai and Fred Wang disclaim beneficial ownership of these shares except to the extent of their pecuniary interest arising therein. The address for the entities affiliated with Trinity Ventures is 3000 Sand Hill Road, Building 4, Suite 160, Menlo Park, CA 94025.
 
  (4)  Includes 2,210,889 shares held by Weiss, Peck & Greer Venture Associates V, L.L.C., 18,515 shares held by Weiss, Peck & Greer Venture Associates V-A, L.L.C., 49,744 shares held by WPG Information Sciences Entrepreneur Fund II, L.L.C., 30,676 shares held by WPG Information Sciences Entrepreneur Fund II-A, L.L.C. and 453,785 shares held by Weiss, Peck & Greer Venture Associates V Cayman, L.P. In October 2000, Weiss, Peck & Greer changed its name to Lightspeed Venture Partners. Lightspeed Venture Partners has informed us that Philip Greer and Gill Cogan have voting and dispositive control of these shares and each of those individuals disclaim beneficial ownership of these shares except to the extent of their pecuniary interest arising therein. The address for the funds managed by Lightspeed Venture Partners is 2200 Sand Hill Road, Menlo Park, CA 94025.
 
  (5)  Includes 353,635 shares held by Douglas B. Williams and 2,002,858 shares held by Douglas B. Williams and Lori Williams as joint tenants with right of survivorship. The address for Mr. Williams and Ms. Williams is 1226 SW 296, Federal Way, WA 98023.
 
  (6)  If the underwriters’ overallotment option is exercised in full, the total shares sold would be                   .
 
  (7)  Includes 100,000 shares of common stock issuable upon the exercise of options that are exercisable within 60 days after December 31, 2003.
 
  (8)  Includes 126,390 shares of common stock issuable upon the exercise of options that are exercisable within 60 days after December 31, 2003.
 
  (9)  Includes 61,875 shares of common stock issuable upon the exercise of options that are exercisable within 60 days after December 31, 2003.

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(10)  Includes 438,125 shares of common stock issuable upon the exercise of options that are exercisable within 60 days after December 31, 2003.
 
(11)  Includes 152,854 shares of common stock issuable upon the exercise of options that are exercisable within 60 days after December 31, 2003.
 
(12)  Ms. Strober has a pecuniary interest in a limited partner of BVP IV and is the managing member of BVP IV and Bessec Ventures IV L.P. Ms. Strober does not have voting or dispositive power over the shares held by BVP IV or Bessec Ventures IV L.P.
 
(13)  Includes 7,145,311 shares held by entities associated with Trinity Ventures. Mr. Tai is a general partner of Trinity Ventures. As such, Mr. Tai may be deemed to have voting and dispositive power over the shares held by Trinity Ventures. However, Mr. Tai disclaims beneficial ownership of these shares except for his pecuniary interest therein. Mr. Tai’s address is c/o Trinity Ventures.
 
(14)  Includes 45,833 shares of common stock issuable upon the exercise of options that are exercisable within 60 days after December 31, 2003.
 
(15)  Includes 45,833 shares of common stock issuable upon the exercise of options that are exercisable within 60 days after December 31, 2003.
 
(16)  Includes shares held by Mr. Vadon, Ms. Irvine, Ms. Bell, Mr. Paquin and Mr. Cavens, the shares described in notes (13) through (15) above, 57,000 shares held by our executive officers who are not named executive officers, and 119,895 shares issuable pursuant to options held by executive officers who are not named executive officers that are exercisable within 60 days of December 31, 2003.

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DESCRIPTION OF CAPITAL STOCK

General

          We are authorized to issue 300,000,000 shares of common stock, $0.001 par value per share, and 5,000,000 shares of undesignated preferred stock, $0.001 par value per share. The following description of our capital stock does not purport to be complete and is subject to and qualified in its entirety by our restated certificate of incorporation and amended and restated bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part, and by the provisions of applicable Delaware law.

Common Stock

          As of December 31, 2003, there were 38,260,639 shares of common stock outstanding which were held of record by approximately 167 stockholders after giving effect to the conversion of all outstanding convertible preferred stock into common stock immediately upon the closing of this offering and the cash exercise of warrants to purchase 15,000 shares of common stock that terminate if not exercised prior to the completion of this offering.

          The holders of our common stock are entitled to one vote per share on all matters to be voted on by the stockholders. Subject to preferences that may be applicable to any outstanding shares of preferred stock, holders of common stock are entitled to receive ratably such dividends as may be declared by the board of directors out of funds legally available therefore. In the event we liquidate, dissolve or wind up, holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any outstanding shares of preferred stock. Holders of common stock have no preemptive, conversion, or subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are, and all shares of common stock to be outstanding upon completion of this offering will be, fully paid and nonassessable.

Options

          As of December 31, 2003, options to purchase a total of 3,506,497 shares of common stock were outstanding and 660,076 additional shares of common stock were available for future grant under our 1999 Equity Incentive Plan. There were no options outstanding under our 2004 Equity Incentive Plan, Employee Stock Purchase Plan and Non Employee Directors’ Equity Incentive Plan. See “Management — Stock Based Plans.”

Preferred Stock

          Under our restated certificate of incorporation, the board of directors has the authority, without further action by the stockholders, to issue up to 5,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges, qualifications and restrictions granted to or imposed upon such preferred stock, including dividend rights, conversion rights, voting rights, rights and terms of redemption, liquidation preference and sinking fund terms, any or all of which may be greater than the rights of the common stock. The issuance of preferred stock could adversely affect the voting power of holders of common stock and reduce the likelihood that such holders will receive dividend payments and payments upon liquidation. Such issuance could have the effect of decreasing the market price of the common stock. The issuance of preferred stock or even the ability to issue preferred stock could also have the effect of delaying, deterring or preventing a change in control. We have no present plans to issue any shares of preferred stock.

Warrants

          In August 1999, in connection with the execution of a master equipment lease, we issued a warrant to purchase 36,765 shares of Series B convertible preferred stock at an exercise price of $1.36 per share. Upon completion of this offering, the warrant will be exercisable for 41,230 shares of our common

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stock. The warrant will expire upon the earlier of three years after the completion of this offering or, subject to certain conditions, a change of control.

          In December 1999, in connection with an amendment to the master equipment lease, we issued a warrant to purchase 7,485 shares of Series C convertible preferred stock at an exercise price of $6.68 per share. Upon completion of this offering, the warrant will be exercisable for 9,580 shares of our common stock. The warrant will expire upon the earlier of three years after the completion of this offering or, subject to certain conditions, a change of control.

          In January 2000, we issued warrants to purchase an aggregate of 20,000 shares of our common stock at an exercise price of $2.50 per share. These warrants became exercisable at different times. Warrants to purchase an aggregate of 15,000 shares of our common stock will expire upon the completion of this offering. A warrant to purchase 5,000 shares of our common stock will terminate upon the earlier of (i) the later of November 10, 2004 or the completion of this offering, or (ii) subject to certain conditions, a change of control.

Registration Rights

          The holders of an aggregate of 26,946,872 shares of our common stock, or their permitted transferees, are entitled to rights with respect to the registration of these shares under the Securities Act. These rights are provided under the terms of an amended and restated investor rights agreement between us and the holders of these shares. Under the terms of the amended and restated investor rights agreement, we will be required, upon the written request from holders of either a majority of these shares or the holders of any number of these shares having a proposed aggregate offering price of at least $10 million, to use our best efforts to register these shares for public resale. We are required to effect only two registrations pursuant to this provision of the investor rights agreement, and we are not required to comply with this form of demand registration prior to 180 days after the closing of this offering.

          These holders also have the right, upon written request from holders of at least 15% of these shares, to have such shares registered by us on a Form S-3 registration statement at our expense provided that such requested registration has an anticipated aggregate offering price to the public of at least $2 million and we have not already effected one registration on Form S-3 in any preceding 12-month period after we are eligible to use Form S-3. If we register any of our common stock either for our own account or for the account of other security holders, other than with respect to this offering, the holders of these shares are entitled to include their shares in the registration. A holder’s right to include shares in an underwritten registration is subject to the ability of the underwriters to limit the number of shares included in the underwritten offering. All fees, costs and expenses of underwritten registrations will be borne by us and all selling expenses, including underwriting discounts and selling commissions will be borne by the holders of the shares being registered. The rights granted to each holder under the investor rights agreement will terminate upon the earlier of (i) when such holder owns less than one percent of our common stock and is able to sell all its shares pursuant to Rule 144 under the Securities Act in any 90 day period or (ii) the third anniversary of this offering.

Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions

          Delaware Takeover Statute. Blue Nile is subject to the provisions of Section 203 of the Delaware General Corporation Law, which regulates acquisitions of some Delaware corporations. Section 203 prohibits, with some exceptions, a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A “business combination” includes mergers, asset sale or other transactions resulting in a financial benefit to the stockholder. An “interested stockholder” is a person who, together with affiliates and associates, owns (or within three years, did own) 15% or more of a corporation’s voting stock. The statute could have the effect of delaying, deferring or preventing a change in control of Blue Nile.

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          Restated Certificate of Incorporation and Amended and Restated Bylaws. Our restated certificate of incorporation specifies that our board of directors will be classified into three classes of directors and each of the directors may be removed from the board of directors during their tenure only for cause. In addition, the restated certificate of incorporation specifies that the authorized number of directors may be changed only by resolution of the board of directors and does not include a provision for cumulative voting for directors, which may make it difficult for stockholders owning less than a majority of our stock to elect directors. Our restated certificate of incorporation also provides that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing. In addition, our amended and restated bylaws provide that special meetings of our stockholders may be called only by the Chairman of the board of directors, the Chief Executive Officer or the board of directors pursuant to a resolution adopted by a majority of the total number of authorized directors. The provisions within our restated certificate of incorporation relating to the corporate actions described in this paragraph may only be amended with the approval of 66 2/3% of our outstanding voting stock, and our amended and restated bylaws may be amended either by the majority of the authorized number of the board of directors or by the approval of 66 2/3% of our outstanding voting stock. Furthermore, our restated certificate of incorporation requires the advance notice of stockholders’ nominations for the election of directors and business brought before a meeting of stockholders. These provisions contained in our restated certificate of incorporation and our amended and restated bylaws could delay or discourage certain types of transactions involving an actual or potential change in control of Blue Nile or our management.

Transfer Agent and Registrar

          The transfer agent and registrar for the common stock is                     .

Nasdaq National Market Listing

          We have applied for quotation of our common stock on the Nasdaq National Market under the trading symbol “NILE.”

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SHARES ELIGIBLE FOR FUTURE SALE

          Before this offering, there has been no public market for our common stock. If our stockholders sell substantial amounts of our common stock in the public market following this offering, the prevailing market price of our common stock could decline. While all currently outstanding shares are subject to contractual and legal restrictions on resale for 180 days after the date of this prospectus, as described below, sales of substantial amounts of our common stock in the public market after these restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future.

          Upon the closing of this offering, we will have outstanding an aggregate of                    shares of our common stock, based upon the number of shares outstanding as of December 31, 2003 and assuming automatic conversion of all of our outstanding convertible preferred stock, no exercise of the underwriters’ overallotment option, no exercise of outstanding options and warrants other than the cash exercise of warrants to purchase up to 15,000 shares of common stock that will terminate if not exercised prior to the closing of this offering, and no grant of additional options or warrants. All shares sold in this offering will be freely tradable without restriction or the requirement of further registration under the Securities Act, unless they are purchased by our “affiliates,” as that term is defined in Rule 144 under the Securities Act. The remaining shares are “restricted shares,” as that term is defined in Rule 144 under the Securities Act, and will be eligible for sale in the public market as follows:

          Lock-up Agreements. All of our directors, officers, warrant holders and holders of all but                      shares of our outstanding common stock are subject to lock-up agreements under which they have agreed not to transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock for 180 days after the date of this prospectus. Merrill Lynch may, in its sole discretion, at any time and without prior notice or announcement, release all or any portion of shares subject to the lock-up agreements.

          Rule 144. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year, including the holding period of prior owners other than affiliates, is entitled to sell within any three-month period a number of shares that does not exceed the greater of (a) 1% of the number of shares of our common stock then outstanding, which will equal approximately                    shares immediately after the offering, or (b) the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to that sale. Sales under Rule 144 are also subject to manner-of-sale provisions, notice requirements and the availability of current public information about us. Based upon the number of shares outstanding as of December 31, 2003, an aggregate of approximately                     million shares of our common stock will be eligible to be sold pursuant to Rule 144, subject to the volume restrictions described in the previous sentence, beginning 90 days after the date of this prospectus. However, all but                     of such shares are subject to the lock-up agreements described above and will only become eligible for sale upon the expiration or termination of such agreements.

          Rule 144(k). Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the three months preceding a sale and who has beneficially owned shares for at least two years, including the holding period of certain prior owners other than affiliates, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Based upon the number of shares outstanding as of December 31, 2003, an aggregate of approximately shares of our common stock will be eligible to be sold pursuant to Rule 144(k) after the date of the prospectus. However, all but                     of such shares are subject to the lock-up agreements described above and will only become eligible for sale upon the expiration or termination of such agreements.

          Rule 701. In general, under Rule 701 of the Securities Act as currently in effect, shares of our common stock acquired upon the exercise of currently outstanding options or pursuant to other rights

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granted under our stock plans may be resold, beginning 90 days after the date of this prospectus, to the extent not subject to lock-up agreements, by:

  •  persons other than affiliates, subject only to the manner-of-sale provisions of Rule 144; and
 
  •  our affiliates, subject to the manner-of-sale, current public information and filing requirements of Rule 144, in each case, without compliance with the one-year holding requirements of Rule 144.

          An aggregate of approximately                    shares of our common stock that were outstanding as of December 31, 2003 and approximately                    shares of our common stock that may be acquired upon the exercise of options outstanding as of December 31, 2003, will be eligible to be sold pursuant to Rule 701 beginning 90 days after the date of the prospectus, subject to the vesting provisions that may be contained in individual option agreements. However, all but                     of such shares are subject to the lock-up agreements described above and will only become eligible for sale upon the expiration or termination of such agreements.

          Registration Rights. Beginning 180 days after this offering, holders of approximately                     shares of our common stock are entitled to have their shares registered by us under the Securities Act. See “Description of Capital Stock — Registration Rights.” After any registration of these shares, such shares, except for shares purchased by affiliates, will be freely tradable without restriction under the Securities Act.

          Stock Plans. We intend to file one or more registration statements on Form S-8 under the Securities Act following this offering to register the shares of our common stock that are issuable pursuant to our 1999 Equity Incentive Plan, 2004 Equity Incentive Plan, 2004 Non-Employee Directors’ Stock Option Plan, 2004 Employee Stock Purchase Plan and shares issuable pursuant to options granted outside of any plans. These registration statements are expected to become effective upon filing. Shares covered by these registration statements will then be eligible for sale in the public markets, subject to any applicable lock-up agreements and to Rule 144 limitations applicable to affiliates.

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MATERIAL UNITED STATES FEDERAL TAX
CONSIDERATIONS FOR NON-UNITED STATES HOLDERS

          The following is a general discussion of certain material U.S. federal income and estate tax considerations of the ownership and disposition of our common stock by a beneficial owner thereof that is a “Non-U.S. Holder.” A “Non-U.S. Holder” is a person or entity that, for U.S. federal income tax purposes, is a non-resident alien individual, a foreign corporation or a foreign estate or trust. The test for whether an individual is a resident of the U.S. for federal estate tax purposes differs from the test used for federal income tax purposes. Some individuals, therefore, may be “Non-U.S. Holders” for purposes of the federal income tax discussion below, but not for purposes of the federal estate tax discussion, and vice versa.

          This discussion is based on the U.S. Internal Revenue Code of 1986, as amended, judicial decisions and administrative regulations and interpretations in effect as of the date of this prospectus, all of which are subject to change, including changes with retroactive effect. This discussion does not address all aspects of U.S. federal income and estate taxation that may be relevant to Non-U.S. Holders in light of their particular circumstances (including, without limitation, Non-U.S. Holders who are pass-through entities or who hold their common stock through pass-through entities) and does not address any tax consequences arising under the laws of any state, local or non-U.S. jurisdiction. Prospective holders should consult their own tax advisors with respect to the federal income and estate tax consequences of holding and disposing of our common stock in light of their particular situations and any consequences to them arising under the laws of any state, local or non-U.S. jurisdiction.

Dividends

          Subject to the discussion below, distributions, if any, made to a Non-U.S. Holder of our common stock out of our current or accumulated earnings and profits generally will constitute dividends for U.S. tax purposes and will be subject to withholding tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. To obtain a reduced rate of withholding under a treaty, a Non-U.S. Holder generally will be required to provide us with a properly-executed IRS Form W-8BEN certifying the Non-U.S. Holder’s entitlement to benefits under that treaty. Treasury Regulations provide special rules to determine whether, for purposes of determining the applicability of a tax treaty, dividends paid to a Non-U.S. Holder that is an entity should be treated as paid to the entity or to those holding an interest in that entity. To the extent such distributions exceed our current and accumulated earnings and profits for U.S. tax purposes, they will constitute a return of capital and will first reduce your basis in our common stock, but not below zero, and then will be treated as gain from the sale of stock.

          There will be no withholding tax on dividends paid to a Non-U.S. Holder that are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States if a properly-executed IRS Form W-8ECI, stating that the dividends are so connected, is provided to us. Instead, the effectively connected dividends will be subject to regular U.S. income tax, generally in the same manner as if the Non-U.S. Holder were a U.S. citizen or resident alien or a domestic corporation, as the case may be, unless a specific treaty exemption applies. A corporate Non-U.S. Holder receiving effectively connected dividends may also be subject to an additional “branch profits tax”, which is imposed, under certain circumstances, at a rate of 30% (or such lower rate as may be specified by an applicable treaty) of the corporate Non-U.S. Holder’s effectively connected earnings and profits, subject to certain adjustments. If you are eligible for a reduced rate of withholding tax pursuant to a tax treaty, you may obtain a refund of any excess amounts currently withheld if you file an appropriate claim for refund with the U.S. Internal Revenue Service.

Gain on Disposition of Common Stock

          A Non-U.S. Holder generally will not be subject to U.S. federal income tax with respect to gain realized on a sale or other disposition of our common stock unless: (i) the gain is effectively connected with a trade or business of such holder in the United States and a specific treaty exemption does not apply

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to eliminate the tax;(ii) if a tax treaty would otherwise apply to eliminate the tax, the gain is attributable to a permanent establishment of the Non-U.S. Holder in the U.S.; (iii) in the case of Non-U.S. Holders who are nonresident alien individuals and hold our common stock as a capital asset, such individuals are present in the United States for 183 or more days in the taxable year of the disposition and certain other conditions are met; (iv) the Non-U.S. Holder is subject to tax pursuant to the provisions of the Code regarding the taxation of U.S. expatriates; or (v) we are or have been a “United States real property holding corporation” within the meaning of Code Section 897(c)(2) at any time within the shorter of the five-year period preceding such disposition or such holder’s holding period. We believe that we are not, and do not anticipate becoming, a United States real property holding corporation. Even if we are treated as a United States real property holding corporation, gain realized by a Non-U.S. Holder on a disposition of our common stock will not be subject to U.S. federal income tax so long as: (a) the Non-U.S. Holder owned directly or indirectly, no more than five percent of our common stock at all times within the shorter of (x) the five year period preceding the disposition or (y) the holder’s holding period; and (b) our common stock is regularly traded on an established securities market. There can be no assurance that our common stock will continue to qualify as being regularly traded on an established securities market.

          If you are a Non-U.S. Holder described in (i) or (ii) above, you will be required to pay tax on the net gain derived from the sale at regular graduated U.S. federal income tax rates, and corporate Non-U.S. Holders described in (i) or (ii) above may be subject to the branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. If you are an individual Non-U.S. Holder described in (iii) above, you will be required to pay a flat 30% tax on the gain derived from the sale, which tax may be offset by U.S. source capital losses (even though you are not considered a resident of the United States).

Information Reporting Requirements and Backup Withholding

          Generally, we must report to the U.S. Internal Revenue Service the amount of dividends paid, the name and address of the recipient, and the amount, if any, of tax withheld. A similar report is sent to the holder. Pursuant to tax treaties or certain other agreements, the U.S. Internal Revenue Service may make its reports available to tax authorities in the recipient’s country of residence.

          Backup withholding will generally not apply to payments of dividends made by us or our paying agents to a Non-U.S. Holder if the holder has provided its federal taxpayer identification number, if any, or the required certification that it is not a U.S. person (which is generally provided by furnishing a properly-executed IRS Form W-8BEN), unless the payor otherwise has knowledge or reason to know that the payee is a U.S. person.

          Under current U.S. federal income tax law, information reporting and backup withholding will apply to the proceeds of a disposition of our common stock effected by or through a U.S. office of a broker unless the disposing holder certifies as to its non-U.S. status or otherwise establishes an exemption. Generally, U.S. information reporting and backup withholding will not apply to a payment of disposition proceeds where the transaction is effected outside the United States through a non-U.S. office of a non-U.S. broker. However, U.S. information reporting requirements (but not backup withholding) will apply to a payment of disposition proceeds where the transaction is effected outside the United States by or through an office outside the United States of a broker that fails to maintain documentary evidence that the holder is a Non-U.S. Holder and that certain conditions are met, or that the holder otherwise is entitled to an exemption, and the broker is (i) a U.S. person, (ii) a foreign person which derived 50% or more of its gross income for certain periods from the conduct of a trade or business in the United States, (iii) a “controlled foreign corporation” for U.S. federal income tax purposes, or (iv) a foreign partnership (a) at least 50% of the capital or profits interest in which is owned by U.S. persons, or (b) that is engaged in a U.S. trade or business. Backup withholding will apply to a payment of disposition proceeds if the broker has actual knowledge that the holder is a U.S. person.

          Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of

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taxes, a refund may be obtained, provided that the required information is furnished to the U.S. Internal Revenue Service.

Federal Estate Tax

          The estates of nonresident alien individuals are subject to U.S. federal estate tax on property with a U.S. situs. Because we are a U.S. corporation, our common stock will be the U.S. situs property and therefore will be included in the taxable estate of a nonresident alien decedent. This U.S. federal estate tax liability of the estate of a nonresident alien may be affected by a tax treaty between the United States and the decedent’s country of residence.

          THE PRECEDING DISCUSSION OF U.S. FEDERAL TAX CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY. IT IS NOT TAX ADVICE. EACH PROSPECTIVE HOLDER SHOULD CONSULT ITS OWN TAX ADVISOR REGARDING THE PARTICULAR U.S. FEDERAL, STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF OUR COMMON STOCK.

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UNDERWRITING

          Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co. Inc. and Thomas Weisel Partners LLC are acting as representatives of each of the underwriters named below. Subject to the terms and conditions set forth in a purchase agreement among us, the selling stockholders and the underwriters, we and the selling stockholders have agreed to sell to the underwriters, and each of the underwriters has agreed, severally and not jointly, to purchase from us and the selling stockholders, the number of shares of common stock set forth opposite its name below.

           
Number
Underwriter of Shares


Merrill Lynch, Pierce, Fenner & Smith
Incorporated
       
Bear, Stearns & Co. Inc. 
       
Thomas Weisel Partners LLC
       
     
 
 
Total
       
     
 

          Subject to the terms and conditions set forth in the purchase agreement, the underwriters have agreed, severally and not jointly, to purchase all of the shares sold under the purchase agreement if any of these shares are purchased. If an underwriter defaults, the purchase agreement provides that the purchase commitments of the nondefaulting underwriters may be increased or the purchase agreement may be terminated.

          We and the selling stockholders have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities.

          The underwriters are offering the shares, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, including the validity of the shares, and other conditions contained in the purchase agreement, such as the receipt by the underwriters of officer’s certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.

Commissions and Discounts

          The representatives have advised us that they propose initially to offer the shares to the public at the initial public offering price set forth on the cover page of this prospectus and to dealers at that price less a concession not in excess of $           per share. The underwriters may allow, and the dealers may reallow, a discount not in excess of $           per share to other dealers. After the initial public offering, the public offering price, concession and discount may be changed.

          The following table shows the public offering price, underwriting discount and proceeds before expenses to us and the selling stockholders. The information assumes either no exercise or full exercise by the underwriters and selling stockholders of their overallotment option.

                         
Per Share Without Option With Option



Public offering price
    $       $       $  
Underwriting discount
    $       $       $  
Proceeds, before expenses, to Blue Nile, Inc. 
    $       $       $  
Proceeds, before expenses, to the selling stockholders
    $       $       $  

          The total expenses of the offering, not including the underwriting discount, are estimated at $                    and are payable by us.

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Overallotment Option

          We and the selling stockholders have granted an option to the underwriters to purchase up to                     additional shares at the public offering price, less the underwriting discount. The underwriters may exercise this option for 30 days from the date of this prospectus solely to cover any overallotments. If the underwriters exercise this option, each will be obligated, subject to conditions contained in the purchase agreement, to purchase a number of additional shares proportionate to that underwriter’s initial amount reflected in the above table.

Reserved Shares

          At our request, the underwriters have reserved for sale, at the initial public offering price, up to                    shares for sale to some of our directors, officers, employees, distributors, dealers, business associates and related persons. If these persons purchase reserved shares, this will reduce the number of shares available for sale to the general public. Any reserved shares that are not orally confirmed for purchase within one day of the pricing of this offering will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus.

No Sales of Similar Securities

          We and the selling stockholders, our executive officers and directors and our other existing security holders have agreed not to sell or transfer any common stock or securities convertible into, exchangeable for, exercisable for, or repayable with common stock, for 180 days after the date of this prospectus without first obtaining the written consent of Merrill Lynch. Specifically, we and these other persons have agreed, with certain limited exceptions, not to directly or indirectly:

  •  offer, pledge, sell or contract to sell any common stock;
 
  •  sell any option or contract to purchase any common stock;
 
  •  purchase any option or contract to sell any common stock;
 
  •  lend or otherwise dispose of or transfer any common stock; or
 
  •  enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of any common stock whether any such swap or transaction is to be settled by delivery of shares or other securities, in cash or otherwise.

          This lock-up provision applies to common stock and to securities convertible into or exchangeable or exercisable for or repayable with common stock. It also applies to common stock owned now or acquired later by the person executing the agreement or for which the person executing the agreement later acquires the power of disposition.

Quotation on the Nasdaq National Market

          We have applied to list our common stock for quotation on the Nasdaq National Market under the symbol “NILE.”

          Before this offering, there has been no public market for our common stock. The public offering price will be determined through negotiations among us, the selling stockholders and the representatives. In addition to prevailing market conditions, the factors to be considered in determining the initial public offering price are:

  •  the valuation multiples of publicly traded companies that the representatives believe to be comparable to us;
 
  •  our financial information;
 
  •  the history of, and the prospects for, our past and present operations, and the prospects for, and timing of, our future revenues;

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  •  an assessment of our management, our past and present operations, and the prospects for, and timing of, our future revenues;
 
  •  the present state of our development; and
 
  •  the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours.

          An active trading market for the shares may not develop. It is also possible that after the offering the shares will not trade in the public market at or above the initial public offering price. The underwriters do not expect to sell more than five percent of the shares being offered in this offering to accounts over which they exercise discretionary authority.

Price Stabilization, Short Positions and Penalty Bids

          Until the distribution of the shares is completed, Securities and Exchange Commission rules may limit the underwriters and selling group members from bidding for and purchasing our common stock. However, the representatives may engage in transactions that stabilize the price of the common stock, such as bids or purchases to peg, fix or maintain that price.

          The underwriters may purchase and sell our common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. “Covered” short sales are sales made in an amount not greater than the underwriters’ option to purchase additional shares from the issuer in the offering. The underwriters may close out any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the overallotment option. “Naked” short sales are any sales in excess of such option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common shares in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of shares of common stock made by the underwriters in the open market prior to the completion of the offering.

          The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.

          Similar to other purchase transactions, the underwriters’ purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market.

          Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor any of the representatives make any representation that the representatives will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.

Electronic Offer, Sale and Distribution of Shares

          Merrill Lynch will be facilitating Internet distribution for this offering to certain of its Internet subscription customers. Merrill Lynch intends to allocate a limited number of shares for sale to its online brokerage customers. An electronic prospectus is available on the Internet web site maintained by Merrill

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Lynch. Other than the prospectus in electronic format, the information on the Merrill Lynch web site is not part of this prospectus.

LEGAL MATTERS

          The validity of the common stock offered hereby will be passed upon for us by Cooley Godward LLP, Palo Alto, California. Cooley Godward LLP owns an aggregate of 31,201 shares of our common stock. Certain legal matters will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Kirkland, Washington.

EXPERTS

          The consolidated financial statements of Blue Nile, Inc. as of December 31, 2003 and 2002 and for each of the three years in the period ended December 31, 2003 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting.

          On October 9, 2003, with the approval of the audit committee of our board of directors, we dismissed our outside accounting firm KPMG LLP. On November 1, 2003, with the approval of the audit committee of our board of directors, we retained PricewaterhouseCoopers LLP. KPMG LLP’s report on our 2002 consolidated financial statements contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principles. In addition, during the period from November 26, 2002 thru October 9, 2003, there were no disagreements with KPMG LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG LLP, would have caused it to make a reference to the subject matter of the disagreements in connection with its report for such year and there were no reportable events as defined in regulation S-K Item 304(a)(1)(v). We did not consult PricewaterhouseCoopers LLP on any financial or accounting reporting matters in the period before their appointment.

          On November 26, 2002, with the approval of our board of directors, we dismissed our outside accounting firm Arthur Andersen LLP and retained KPMG LLP. Arthur Andersen LLP’s reports on our 1999, 2000 and 2001 consolidated financial statements contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. In addition, during 1999, 2000 and 2001, and through the date we dismissed Arthur Andersen LLP, there were no disagreements with Arthur Andersen LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Arthur Andersen LLP, would have caused it to make a reference to the subject matter of the disagreements in connection with its reports for such years, and there were no reportable events as defined in regulation S-K Item 304(a)(1)(v). We did not consult KPMG LLP on any financial or accounting reporting matters in the period before their appointment. We have requested but were unable to obtain confirmation from Arthur Andersen LLP on the above statements.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

          We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act that registers the shares of common stock to be sold in the offering. As permitted by the rules and regulations of the Securities and Exchange Commission, this prospectus, which is a part of the registration statement, omits certain information, exhibits, schedules and undertakings set forth in the registration statement. For further information about us and our common stock, you should refer to the registration statement and the exhibits and schedules filed with the registration statement. Statements contained in this prospectus as to the contents or provisions of any contract or other document referred to herein are not necessarily complete, and in each instance reference is made to the copy of such

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contract or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference. You may read and copy any of this information at the Security and Exchange Commission’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission also maintains an Internet web site that contains reports, proxy statements and other information about issuers, like us, that file electronically with the Securities and Exchange Commission. The address of that site is www.sec.gov.

          Upon completion of this offering, we will become subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, and, in accordance therewith, will file periodic reports, proxy statements and other information with the Securities and Exchange Commission. Such periodic reports, proxy statements and other information will be available for inspection and copying at the public reference room and web site of the Securities and Exchange Commission referred to above. We maintain a web site at www.bluenile.com. You may access our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission free of charge at our web site as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. The reference to our web address does not constitute incorporation by reference of the information contained at this site.

          We intend to provide our stockholders with annual reports containing consolidated financial statements audited by an independent accounting firm and to file with the Securities and Exchange Commission quarterly reports containing unaudited consolidated financial data for the first three quarters of each year.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

           
Page

Blue Nile, Inc.
       
 
Report of Independent Auditors
    F-2  
 
Consolidated Balance Sheets
    F-3  
 
Consolidated Statements of Operations
    F-4  
 
Consolidated Statements of Changes in Stockholders’ Deficit
    F-5  
 
Consolidated Statements of Cash Flows
    F-6  
 
Notes to Consolidated Financial Statements
    F-8  

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REPORT OF INDEPENDENT AUDITORS

To the Board of Directors of Blue Nile, Inc.:

          In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders’ deficit and of cash flows present fairly, in all material respects, the financial position of Blue Nile, Inc. and its subsidiary at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Seattle, Washington

March 9, 2004

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BLUE NILE, INC.

CONSOLIDATED BALANCE SHEETS

                             
December 31, Pro Forma

December 31,
2002 2003 2003



(Unaudited)
(In thousands, except par value)
ASSETS
Current assets:
                       
 
Cash and cash equivalents
    $22,597       $30,383       $30,421  
 
Restricted cash
    400       400       400  
 
Accounts receivable
    402       843       843  
 
Inventories
    5,181       10,204       10,204  
 
Deferred income taxes
          5,300       5,300  
 
Prepaids and other current assets
    383       465       465  
     
     
     
 
   
Total current assets
    28,963       47,595       47,633  
 
Property and equipment, net
    1,861       3,979       3,979  
 
Deferred income taxes
          10,654       10,654  
 
Other assets
    90       77       77  
     
     
     
 
   
Total assets
    $30,914       $62,305       $62,343  
     
     
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
                       
 
Accounts payable
    $15,791       $26,288       $26,288  
 
Accrued liabilities
    3,434       5,770       5,770  
 
Current portion of note payable to related party
    520              
 
Current portion of subordinated notes payable
    6,566              
 
Current portion of capital lease obligations
    873              
     
     
     
 
   
Total current liabilities
    27,184       32,058       32,058  
Note payable to related party, less current portion
    890              
Capital lease obligations, less current portion
    185              
Commitments and contingencies
                       
Mandatorily redeemable convertible preferred stock, $0.001 par value; 25,856 shares authorized; 24,646 and 25,000 issued and outstanding at December 31, 2002 and 2003, respectively; aggregate liquidation preference of $77,584 and $78,664, respectively
    57,215       57,485        
Stockholders’ equity (deficit):
                       
 
Common stock, $0.001 par value; 48,000 shares authorized; 10,346 and 12,819 issued and outstanding as of December 31, 2002 and 2003, respectively
    10       13       40  
 
Additional paid-in capital
    2,546       3,541       61,037  
 
Deferred compensation
            (698 )     (698 )
 
Accumulated deficit
    (56,488 )     (29,458 )     (29,458 )
 
Treasury stock, at cost; 1,869 shares and 1,874 shares outstanding as of December 31, 2002 and 2003, respectively
    (628 )     (636 )     (636 )
     
     
     
 
   
Total stockholders’ equity (deficit)
    (54,560 )     (27,238 )     30,285  
     
     
     
 
   
Total liabilities and stockholders’ equity (deficit)
    $30,914       $62,305       $62,343  
     
     
     
 

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

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BLUE NILE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

                           
Year Ended December 31,

2001 2002 2003



(In thousands, except per share data)
Net sales
    $48,674       $72,120       $128,894  
Cost of sales
    37,551       53,967       99,474  
     
     
     
 
Gross profit
    11,123       18,153       29,420  
Operating expenses:
                       
 
Selling, general and administrative
    15,421       14,126       18,165  
 
Restructuring charges
    1,017       400       (87 )
     
     
     
 
      16,438       14,526       18,078  
     
     
     
 
Operating income (loss)
    (5,315 )     3,627       11,342  
Other income (expense):
                       
 
Interest income
    399       215       109  
 
Interest expense
    (2,485 )     (2,327 )     (209 )
 
Other income (expense), net
    41       112       88  
     
     
     
 
      (2,045 )     (2,000 )     (12 )
     
     
     
 
Income (loss) before income taxes
    (7,360 )     1,627       11,330  
Income tax expense (benefit)
                (15,700 )
     
     
     
 
Net income (loss)
    $(7,360 )     $1,627       $27,030  
     
     
     
 
Basic net income (loss) per share
    $(0.98 )     $0.20       $2.80  
     
     
     
 
Diluted net income (loss) per share
    $(0.98 )     $0.05       $0.66  
     
     
     
 
Pro forma basic net income per share (unaudited)
                    $0.73  
                     
 
Pro forma diluted net income per share (unaudited)
                    $0.66  
                     
 

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

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BLUE NILE, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

Years Ended December 31, 2001, 2002 and 2003

                                                                   
Common stock Additional Stockholder Deferred Total

paid-in notes stock Accumulated Treasury stockholders’
Shares Amount capital receivable compensation deficit stock deficit








(In thousands)
Balance, December 31, 2000
    10,260       $10       $2,628       $(454 )           $(50,755 )     $(152 )     $(48,723 )
 
Issuance of warrants
                89                               89  
 
Repurchase of restricted stock
                      454                   (476 )     (22 )
 
Exercise of common stock options
    29             16                               16  
 
Stock option compensation expense (benefit)
                (199 )                             (199 )
 
Net loss
                                  (7,360 )           (7,360 )
     
     
     
     
     
     
     
     
 
Balance, December 31, 2001
    10,289       10       2,534                   (58,115 )     (628 )     (56,199 )
 
Exercise of warrants
    35             4                               4  
 
Exercise of common stock options
    22             8                               8  
 
Net income
                                  1,627             1,627  
     
     
     
     
     
     
     
     
 
Balance, December 31, 2002
    10,346       10       2,546                   (56,488 )     (628 )     (54,560 )
 
Exercise of common stock options
    2,473       3       251                               254  
 
Repurchase of stock
                                        (8 )     (8 )
 
Deferred stock compensation
                744             $(744 )                  
 
Amortization of deferred stock compensation
                            46                   46  
 
Net income
                                  27,030             27,030  
     
     
     
     
     
     
     
     
 
Balance, December 31, 2003
    12,819       $13       $3,541       $—       $(698 )     $(29,458 )     $(636 )     $(27,238 )
     
     
     
     
     
     
     
     
 

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

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BLUE NILE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

                             
Years Ended December 31,

2001 2002 2003



(In thousands)
Operating activities:
                       
Net income (loss)
    $(7,360 )     $1,627       $27,030  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                       
 
Depreciation and amortization
    1,920       1,757       1,293  
 
Loss on asset retirements
                14  
 
Stock-based compensation
    (199 )           46  
 
Warrant-based interest expense
    510       597       87  
 
Restructuring charges
    1,017       400       (87 )
 
Deferred income taxes
                (15,700 )
 
Changes in assets and liabilities:
                       
   
Receivables, net
    528       (331 )     (441 )
   
Inventories
    7,430       1,438       (5,023 )
   
Prepaid expenses and other assets
    666       (82 )     (235 )
   
Accounts payable
    1,168       10,538       10,497  
   
Accrued liabilities
    (1,220 )     786       2,335  
     
     
     
 
Net cash provided by operating activities
    4,460       16,730       19,816  
     
     
     
 
Investing activities:
                       
Purchases of property and equipment
    (1,184 )     (991 )     (3,506 )
Proceeds from sales of property and equipment
                3  
Sale of marketable securities
    2,292              
     
     
     
 
Net cash provided by (used in) investing activities
    1,108       (991 )     (3,503 )
     
     
     
 
Financing activities:
                       
Proceeds from sale of mandatorily redeemable convertible preferred stock, net of issuance costs
    6,645              
Repurchase of restricted and common stock
    (22 )           (8 )
Transfers to restricted cash
    (350 )     (50 )      
Net repayments on line of credit
    (6,738 )            
Payments on subordinated notes payable
          (8,362 )     (6,638 )
Payments on capital lease obligations
    (643 )     (790 )     (995 )
Payments on note payable to related party
    (250 )     (250 )     (1,140 )
Payment on notes payable
    (70 )            
Proceeds from warrant and stock option exercises
    16       12       254  
     
     
     
 
Net cash used in financing activities
    (1,412 )     (9,440 )     (8,527 )
     
     
     
 
Net increase in cash and cash equivalents
    4,156       6,299       7,786  
Cash and cash equivalents, beginning of period
    12,142       16,298       22,597  
     
     
     
 
Cash and cash equivalents, end of period
    $16,298       $22,597       $30,383  
     
     
     
 

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

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BLUE NILE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

                           
Years Ended December 31,

2001 2002 2003



(In thousands)
Supplemental disclosure of cash flow information:
                       
 
Cash paid for interest
    $1,964       $1,682       $154  
Non-cash investing and financing activities:
                       
 
Assets acquired under capital leases
    31              
 
Warrants issued in connection with amended subordinated notes payable
    89              
 
Repurchase of common stock through forgiveness of stockholder notes receivable
    454              
Conversion of related party note payable to Series E mandatorily redeemable convertible preferred stock
                270  

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

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BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
Note 1. Description of the Company and Summary of Significant Accounting Policies

The Company

          Blue Nile, Inc. (the “Company”) is a leading online retailer of high quality diamonds and fine jewelry. In addition to sales of diamonds, fine jewelry and watches, the Company provides guidance and support to enable customers to more effectively learn about and purchase diamonds as well as classically styled fine jewelry. The Company, a Delaware corporation, based in Seattle, Washington, was formed in March 1999. The Company maintains its primary web site at www.bluenile.com.

Change in Fiscal Year

          Beginning January 1, 2004, the Company’s fiscal year end will change from December 31 to the Sunday closest to December 31. Each fiscal year will consist of four 13-week quarters, with an extra week added onto the fourth quarter every five to six years. This fiscal calendar is widely used in the retail industry.

Basis of Presentation

          The consolidated financial statements include the balances of Blue Nile, Inc. and its subsidiary for the entire fiscal year. All significant intercompany transactions and balances are eliminated in consolidation.

Unaudited Pro Forma Information

          Upon closing of the planned initial public offering, each of the outstanding shares of mandatorily redeemable convertible preferred stock will convert into shares of common stock. The pro forma balance sheet and the pro forma basic and diluted net income (loss) per share reflect the conversion of all of the outstanding shares of mandatorily redeemable convertible preferred stock into shares of common stock and the issuance of 15,000 shares of common stock upon the exercise of outstanding warrants that will expire if not exercised prior to the closing of the planned offering. The pro forma balance sheet does not give effect to the offering proceeds.

Use of Estimates

          The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the more significant estimates include the allowance for sales returns, the reserve for estimated fraud losses and the deferred tax valuation reserve. Actual results could differ from those estimates.

Concentration of Risk

          The Company maintains its cash and cash equivalents in accounts with two major financial institutions in the United States of America, in the form of demand deposits, certificates of deposits and money market accounts. Deposits in these banks may exceed the amounts of insurance provided on such deposits. The Company has not experienced any losses on its deposits of cash and cash equivalents. The Company’s accounts receivable are derived from credit card purchases from customers and are typically settled within one to two days.

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BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

          The Company’s ability to acquire diamonds and fine jewelry is dependent on its relationships with various suppliers from whom it purchases diamonds and fine jewelry. The Company has reached agreements with certain suppliers to provide access to their inventories of diamonds for its customers, but the terms of these agreements are limited and do not govern the purchase of diamonds for its inventory. The Company’s inability to maintain these and other future diamond and fine jewelry supply relationships on commercially reasonable terms would cause its business to suffer and its revenues to decline. Purchase concentration by major supply vendor is as follows:

                         
2001 2002 2003
Payments Payments Payments



Vendor A
    11%       21%       15%  
Vendor B
    23%       15%       12%  
Vendor C
    10%              

Cash and Cash Equivalents

          The Company considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents.

Restricted Cash

          Restricted cash consists primarily of cash pledged as collateral to a credit card processing bank.

Marketable Securities

          The Company’s marketable securities consist of highly liquid short-term fixed income securities (commercial paper) with maturities at purchase of less than one year. Marketable securities are classified as available for sale and are reported at fair value, which approximates cost. The Company did not hold any marketable securities at December 31, 2002 or December 31, 2003.

Inventories

          The Company’s diamond, fine jewelry and watch inventories are classified at the lower of cost or market, using the specific identification method for diamonds and weighted average cost method for fine jewelry and watches. The Company also lists loose diamonds on its web site that are not included in inventory until the Company receives a customer order for those diamonds. Upon receipt of a customer order, the Company purchases a specific diamond and records it in inventory until it is delivered to the customer, at which time the revenue from the sale is recognized and inventory is relieved.

Property and Equipment

          Property and equipment are stated at cost less accumulated depreciation. Maintenance and repairs are expensed as incurred. Assets purchased under capital leases are recorded at cost based on the present value of future minimum lease payments discounted at the contractual interest rates. Depreciation is calculated on a straight-line basis over the estimated useful lives of the related assets. The cost and related accumulated depreciation or amortization of assets sold or otherwise disposed of is removed from the

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Table of Contents

BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

accounts and the related gain or loss is reported in the statement of operation. Estimated useful lives by major asset category are as follows:

         
Asset Life (in years)


Computers and equipment
    3  
Software and web site development
    2-3  
Leasehold improvements
    Shorter of life of lease or asset life  
Furniture and fixtures
    7  

Capitalized Software

          The Company capitalizes internally developed software costs and web site development costs in accordance with the provisions of Statement of Position 98-1, Accounting for Costs of Computer Software Developed or Obtained for Internal Use and Emerging Issues Task Force No. 00-2, Accounting for Website Development Costs. Capitalized costs are amortized on a straight-line basis over the estimated useful life of the software once it is available for use.

Long-Lived Assets

          The Company reviews the carrying value of its long-lived assets, including property and equipment, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. To the extent the estimated future cash inflows attributable to the assets, less estimated future cash outflows, are less than the carrying amount, an impairment loss would be recognized.

Intangible Assets, Including Goodwill

          Intangible assets represent the consideration paid for non-compete agreements. Goodwill represents the excess of costs over fair value of assets of a business acquired. As of December 31, 2001 goodwill and intangible assets were fully amortized. Amortization expense recorded for the year ended December 31, 2001 was $239,000.

Fair Value of Financial Instruments

          The carrying amounts for the Company’s cash, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short maturities. The fair value of notes payable and related party note payable approximate fair value primarily because the debt interest rates are comparable to market rates for debt instruments with similar maturities and terms.

Treasury Stock

          Treasury stock is recorded at cost and primarily consists of the repurchase of restricted common stock and stock issued in connection with early exercises of stock options.

Income Taxes

          Deferred tax assets and liabilities are determined based on the differences between financial reporting and tax bases of assets and liabilities and are measured using the tax rates that will be in effect when the differences are expected to reverse. Future tax benefits, such as net operating loss carryforwards, are recognized to the extent that realization of such benefits is considered to be more likely than not.

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Table of Contents

BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Revenue Recognition

          Net sales consist of products sold via the Internet and shipping revenue, net of estimated returns and promotional discounts. The Company recognizes revenues when all of the following have occurred: persuasive evidence of an agreement with the customer exists, products are shipped and the customer takes delivery and assumes the risk of loss; the selling price is fixed or determinable and collectibility of the selling price is reasonably assured. The Company evaluates the criteria outlined in Emerging Issues Task Force Issue 99-19, “Reporting Revenue Gross as a Principal Versus net as an Agent”, in determining whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned.

          The Company requires payment at the point of sale. Amounts received prior to delivery of goods to customers are recorded as a deposit. The Company offers a return policy of generally 30 days and provides an allowance for sales returns during the period in which the sales are made. The Company generally does not extend credit to customers, except through third-party credit cards. The majority of sales are through credit cards, and accounts receivable are composed primarily of amounts due from financial institutions related to credit card sales. The Company typically receives payment one or two business days after a sale is completed.

Cost of Sales

          Cost of sales consists of the cost of merchandise sold to customers, inbound and outbound shipping costs, insurance on shipments and assembly costs.

Selling, General and Administrative Expense

          Selling, general and administrative expenses consist primarily of marketing and sales expenses, fulfillment costs, which are those costs incurred in operating and staffing the fulfillment center and customer service center costs. Credit card fees, insurance and other personnel costs are also included in selling, general and administrative expenses.

Advertising

          Advertising production costs are expensed as incurred. Costs of advertising associated with television, radio, print and other media are expensed when such services are used. Costs associated with web portal advertising contracts are amortized over the period such advertising is expected to be used. Advertising expense for the years ended December 31, 2001, 2002 and 2003 was approximately $4.8 million, $3.2 million and $4.5 million, respectively.

Stock Compensation

          The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations including Financial Accounting Standards Board (“FASB”) Interpretation No. 44, “Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25” (“FIN 44”), which is described more fully in Note 7. The Company has elected to apply the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation” (“SFAS No. 123”). Had compensation cost for the Company’s stock options been determined based on the fair value of the options at the date of

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Table of Contents

BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

grant, the Company’s pro forma net income (loss) would have been as shown below (in thousands, except per share data).

                           
Year Ended December 31,

2001 2002 2003



Net income (loss), as reported
    $(7,360 )     $1,627       $27,030  
Add: Stock-based compensation expense (benefit), as reported
    (199 )           46  
Deduct: Stock-based employee compensation expense determined under fair-value-based method, net of tax
    (249 )     (279 )     (307 )
     
     
     
 
Pro forma net income (loss)
    $(7,808 )     $1,348       $26,769  
     
     
     
 
Income (loss) per share:
                       
 
Basic — as reported
    $(0.98 )     $0.20       $2.80  
     
     
     
 
 
Basic — pro forma
    $(1.04 )     $0.16       $2.77  
     
     
     
 
 
Diluted — as reported
    $(0.98 )     $0.05       $0.66  
     
     
     
 
 
Diluted — pro forma
    $(1.04 )     $0.04       $0.66  
     
     
     
 

          See Note 7 for the assumptions used to compute the pro forma amounts.

Segments

          The Company has one operating segment, online retail jewelry. No foreign country or geographic area accounted for more than 10% of net sales in any of the periods presented and the Company does not have any long-lived assets located in foreign countries.

Recent Accounting Pronouncements

          In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which addresses consolidation by business enterprises of variable interest entities that either: (1) do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) the company will hold a significant variable interest in, or have significant involvement with, an existing variable interest entity. FIN 46 is effective as of the first interim period beginning after June 15, 2003. However, an October 2003 FASB Staff Position deferred the effective date for applying the provisions of FIN 46 for interests held by public entities in variable interest entities or potential variable interest entities created before February 1, 2003 and non-registered investment companies. The Company has no interests in variable interest entities and FIN 46 is not expected to impact the results of operations or the financial position of the Company.

Note 2.     Inventories

          Inventories consists of the following (in thousands):

                 
December 31,

2002 2003


Loose diamonds
    $757       $124  
Fine jewelry, watches and other
    4,424       10,080  
     
     
 
      $5,181       $10,204  
     
     
 

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Table of Contents

BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 3.     Property and Equipment

          Property and equipment consists of the following (in thousands):

                 
December 31,

2002 2003


Computers and equipment
    $2,214       $3,204  
Software and web site development
    3,129       3,892  
Leasehold improvements
    909       2,310  
Furniture and fixtures
    357       537  
     
     
 
      6,609       9,943  
Less: accumulated depreciation
    (4,748 )     (5,964 )
     
     
 
      $1,861       $3,979  
     
     
 

          The total cost of leased equipment capitalized at December 31, 2002 was $2.6 million with related accumulated depreciation of $2.2 million. The capital leases were paid off in April 2003.

          Capitalized software costs include external direct costs and internal direct labor and related employee benefits costs. Amortization begins in the period in which the software is ready for its intended use. The Company had $629,000 and $815,000 of unamortized internally developed computer software and web site development costs at December 31, 2002 and 2003, respectively. Depreciation expense was $1.2 million, $1.3 million and $962,000 in 2001, 2002 and 2003 respectively. Amortization of capitalized software development costs was $479,000, $490,000 and $331,000 in 2001, 2002 and 2003 respectively.

Note 4.     Long-Term Debt

Line of Credit

          During 2002, the Company had a line of credit agreement with a financing company that allowed the Company to borrow up to the lesser of $15 million or 60% of the eligible inventory less a $1,000,000 reserve. The credit advances were charged interest at a floating rate equal to the 30-day commercial paper rate plus three and one half percent (3.5%). The line of credit contained various operating and financial covenants including maintenance of specific levels of liquidity and cumulative earnings, and limitations on capital expenditures. In November 2002, the Company terminated the line of credit and has no further obligations under this agreement.

Subordinated Notes Payable

          In February 2000, the Company entered into a subordinated debt agreement with a financing company to borrow up to $15 million. The notes were subordinated to the line of credit. On March 17, 2000, the Company borrowed $10.0 million at an interest rate of 8.75%, due in March 2003, and on August 7, 2000, the Company borrowed the remaining $5.0 million at an interest rate of 9.5%, due in August 2003. In June 2001, the subordinated debt agreement was amended to extend the maturity date of all borrowings to September 1, 2003 with interest only payments from March 2000 until March 2002 and principal payments beginning April 1, 2002. In addition, the principal payments were reduced by fifty percent for the first six months of payments (April 1, 2002 through September 1, 2002) followed by amortization of the remaining principal amount until September 1, 2003.

          In January 2003, the Company repaid the entire outstanding principal of the subordinated notes payable in the amount of $6,638,000 and fully expensed the unamortized debt discount of $72,000. The Company has no further obligations under this agreement.

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Table of Contents

BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

          In connection with the original agreement, the Company granted warrants to the lender to purchase 315,789 shares of Series C mandatorily redeemable convertible preferred stock at $9.50 per share. The fair value of the warrants, $959,000 as determined using the Black-Scholes option pricing model, was recorded as debt discount and was amortized as interest expense over the life of the debt. In connection with the loan amendment, the warrants to purchase 315,789 shares of Series C mandatorily redeemable convertible preferred stock at $9.50 were canceled and replaced with warrants to purchase 315,789 shares of Series E mandatorily redeemable convertible preferred stock at $0.7635 per share. The additional fair value of the replacement warrants, $89,000 as determined using the Black-Scholes option-pricing model, was also recorded as debt discount and was amortized as interest expense over the life of the debt. The warrants expired unexercised on October 15, 2003.

Note Payable to Related Party

          In May 1999, the Company acquired certain assets and liabilities of Williams & Son, Inc., a retail jewelry business. Concurrent with the purchase agreement the Company also entered into a non-compete agreement with the founder of Williams & Son, Inc. The non-compete agreement provided future payments of $955,000 in each of May 2001 and 2002, and was contingent upon Williams continued employment with the Company. The payments were charged to general and administrative expenses as the services were performed. In October 2000, the employment contingency was removed and Williams left the Company. The remaining portion of the payments due was then fully expensed. On June 25, 2001, the agreement was amended to state that $250,000 was to be paid on or before June 10, 2001, $1,390,000 would be paid on May 21, 2002 and the remaining $270,000 would be converted to 353,635 shares of Series E mandatorily redeemable preferred stock on May 21, 2002. These payment obligations were non-interest bearing.

          On May 21, 2002, the payment terms were amended again such that $250,000 was to be paid on or before May 21, 2003, $890,000 was to be paid on or before May 21, 2004 and the 353,635 shares of Series E mandatorily redeemable convertible preferred stock would be issued on or before May 21, 2004. The note accrues interest at the rate of 12% per annum through May 21, 2003 and 14% per annum thereafter.

          In April 2003, the Company repaid the entire outstanding balance under this note and issued the Series E mandatorily redeemable convertible preferred stock.

Note 5.     Commitments and Contingencies

Leases

          The Company leases its office facilities and fulfillment center under noncancelable operating lease agreements that expire through 2008. Future minimum lease payments as of December 31, 2003 are as follows (in thousands):

         
Operating
Leases

2004
    $412  
2005
    373  
2006
    361  
2007
    269  
2008
    263  
Thereafter
    601  
     
 
Total minimum lease payments
    $2,279  
     
 

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Table of Contents

BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

          Rent expense under operating leases for the years ended December 31, 2001, 2002 and 2003 was approximately $601,000, $501,000 and $406,000, respectively.

Litigation

          From time to time, the Company is subject to contingencies resulting from legal proceedings and claims in the ordinary course of business. Management currently believes, after considering a number of factors and the nature of the contingencies to which the Company is subject, that the ultimate disposition of these contingencies either cannot be determined at the present time or will not have, individually or in the aggregate, a material adverse effect on its financial position or results of operations.

Note 6.     Mandatorily Redeemable Convertible Preferred Stock

          The Company has authorized 25,856,000 shares of mandatorily redeemable convertible preferred stock. Shares of mandatorily redeemable convertible preferred stock may be issued from time to time in one or more series, with designations, preferences, and limitations established by the Company’s board of directors.

          The Company has designated the following series of mandatorily redeemable convertible preferred stock. All series of mandatorily redeemable convertible preferred stock are at $0.001 par value. Amounts at December 31, 2002 are as follows (in thousands):

                                         
December 31, 2002

Shares issuable
Authorized Shares upon Liquidation
shares outstanding conversion Amount preference





Series A mandatorily redeemable convertible preferred stock
    6,667       6,667       6,926       $5,989       $6,000  
Series B mandatorily redeemable convertible preferred stock
    3,353       3,316       3,719       4,508       4,510  
Series C mandatorily redeemable convertible preferred stock
    3,906       3,899       4,990       26,023       26,045  
Series D mandatorily redeemable convertible preferred stock
    1,930       1,930       2,478       14,050       14,050  
Series E mandatorily redeemable convertible preferred stock
    10,000       8,834       8,834       6,645       26,979  
     
     
     
     
     
 
      25,856       24,646       26,947       $57,215       $77,584  
     
     
     
     
     
 

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Table of Contents

BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

          Amounts at December 31, 2003 are as follows (in thousands):

                                         
December 31, 2003

Shares issuable
Authorized Shares upon Liquidation
shares outstanding conversion Amount preference





Series A mandatorily redeemable convertible preferred stock
    6,667       6,667       6,926       $5,989       $6,000  
Series B mandatorily redeemable convertible preferred stock
    3,353       3,316       3,719       4,508       4,510  
Series C mandatorily redeemable convertible preferred stock
    3,906       3,899       4,990       26,023       26,045  
Series D mandatorily redeemable convertible preferred stock
    1,930       1,930       2,478       14,050       14,050  
Series E mandatorily redeemable convertible preferred stock
    10,000       9,188       9,188       6,915       28,059  
     
     
     
     
     
 
      25,856       25,000       27,301       $57,485       $78,664  
     
     
     
     
     
 

          Series A through E mandatorily redeemable convertible preferred stock is convertible into common stock at the option of the holder, subject to antidilution provisions. In the event of an effective registration statement where the total proceeds are at least $25.0 million and at a minimum price per share, the Series A through E mandatorily redeemable convertible preferred stock is automatically converted into common stock.

          In the event of liquidation, Series E shareholders receive the first distributions up to the amount shown in the above table plus any declared and unpaid dividends. After the Series E liquidation preference has been met, Series A through D shareholders receive distributions pro rata based on their respective liquidation preferences in the above table, plus any declared and unpaid dividends until their liquidation preferences have been met.

          The sale of all of the Company’s assets, a consolidation or merger with another company, or a transfer of voting control in excess of fifty percent (50%) of the Company’s voting power are all events which are deemed to be a liquidation and would trigger the payment of liquidation preferences under the preferred stock agreements. All such events require board approval. However, a forced action by creditors or court ordered sale of all of the Company’s assets are also events that could be deemed a liquidation. These liquidation characteristics require classification of the mandatorily redeemable convertible preferred stock outside of the stockholders’ equity section as certain of these factors are outside the control of the Company. The mandatorily redeemable convertible preferred stock is not redeemable under any other circumstances.

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Table of Contents

BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

          The following table summarizes information about mandatorily redeemable convertible preferred stock for the years ended December 31, 2001, 2002 and 2003 (in thousands);

                                                                                   
Series A Series B Series C Series D Series E





Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount










Balance, December 31, 2000
    6,667       $5,989       3,316       $4,508       3,899       $26,023       1,930       $14,050             $—  
 
Issuance of Series E mandatorily redeemable convertible preferred stock, net
                                                    8,834       6,645  
     
     
     
     
     
     
     
     
     
     
 
Balance, December 31, 2001
    6,667       5,989       3,316       4,508       3,899       26,023       1,930       14,050       8,834       6,645  
     
     
     
     
     
     
     
     
     
     
 
Balance, December 31, 2002
    6,667       5,989       3,316       4,508       3,899       26,023       1,930       14,050       8,834       6,645  
 
Conversion of debt to mandatorily redeemable convertible preferred stock
                                                    354       270  
     
     
     
     
     
     
     
     
     
     
 
Balance, December 31, 2003
    6,667       $5,989       3,316       $4,508       3,899       $26,023       1,930       $14,050       9,188       $6,915  
     
     
     
     
     
     
     
     
     
     
 

Preferred Stock Warrants

          In connection with certain capital leases entered into during 1999, the Company issued warrants to purchase 36,765 shares of Series B mandatorily redeemable convertible preferred stock at $1.36 per share (Series B warrants) and warrants to purchase 7,485 shares of Series C mandatorily redeemable convertible preferred stock at $6.68 per share (Series C warrants) to a financial institution. The Series B warrants are exercisable immediately and expire in August 2006 or three years from the effective date of an Initial Public Offering, whichever is longer. The Series C warrants are exercisable immediately and expire in December 2004 or three years from the effective date of an Initial Public Offering, whichever is longer. The fair value of the warrants, $71,000 as determined using the Black-Scholes option-pricing model, was recognized as interest expense over the term of the lease.

          As discussed in Note 4, the Company also issued warrants in connection with its subordinated debt. As consideration for the extension of the maturity date, the Company canceled the original warrant grant for 315,789 shares of Series C mandatorily redeemable convertible preferred stock at $9.50 and issued warrants to purchase 315,789 shares of Series E mandatorily redeemable convertible preferred stock at $0.7635. These warrants expired unexercised on October 15, 2003. The fair value of the original and amended warrants, approximately $959,000 as determined using the Black-Scholes option-pricing model, was recognized as interest expense over the term of the subordinated notes payable.

          The fair value of the warrants is estimated using a dividend rate of 0%, expected volatility of 80%, risk-free interest rates ranging from 4.4% to 6.6% and contract lives of 2.3 years to 7.0 years.

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Table of Contents

BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Shares Reserved for Issuance

          The following shares of common stock were reserved at December 31, 2003 (in thousands):

         
Mandatorily redeemable convertible preferred stock (Series A through E)
    27,301  
Stock options and warrants
    4,222  
     
 
      31,523  
     
 

Note 7.     Stock-Based Compensation

Stock Option Plan

          In 1999, the Company adopted a combined incentive and nonqualified equity incentive plan (the “Plan”) to provide incentive to employees, directors, consultants and advisors. The Company has reserved 8,276,000 shares of common stock for issuance under the Plan.

          Options granted under the Plan generally provide for 25% vesting on the first anniversary from the date of grant with the remainder vesting monthly over three years and expire 10 years from the date of grant. Options granted under the Plan are generally granted at fair value on the date of the grant. For options granted prior to February 2001, the options included an early exercise provision that allows early exercise of unvested stock options subject to a repurchase right at original cost on unvested shares.

          As mentioned in Note 1, the Company accounts for stock-based employee compensation arrangements in accordance with APB 25 and FIN 44. Under APB 25, compensation expense is recognized for the difference between the fair value of the Company’s stock on the date of grant and the exercise price. In 2001, the Company recorded $199,000 for stock-based compensation benefit resulting from the variable accounting treatment of certain stock options early exercised with non-recourse notes. There were no such expenses or benefits in 2002. During 2003 the Company issued options to certain employees under the Plan with exercise prices below the deemed fair market value of the Company’s common stock at the date of grant. In accordance with the requirements of APB 25, the Company has recorded deferred stock-based compensation for the difference between the exercise price of the stock option and the deemed fair market value of the Company’s stock at the grant date. In 2003, the Company recorded deferred stock-based compensation of $744,000 related to these options. This amount is being amortized over the vesting period of the awards, generally four years. During 2003, the Company recorded compensation expense of $46,000 related to the amortization of deferred compensation.

          The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” (“EITF 96-18”). EITF 96-18 requires such equity instruments be recorded at their fair value on the measurement date.

          In August 2001, the Company offered a voluntary stock option cancellation and re-grant program to its employees. The plan allowed employees, at their election, to cancel a portion or all of their unexercised stock options effective August 15, 2001, provided that, should an employee participate, any option granted to that employee during the period February 15, 2001 to August 15, 2001 would be automatically canceled and the Company would grant no options to the participants from August 15, 2001 through February 18, 2002. In exchange, in February 2002, the employee would be granted new options at the then fair value of the underlying common stock to purchase a number of shares equal to the number of shares underlying the canceled options provided they were still employed by the Company at that time. Options to purchase approximately 2,654,000 shares of the Company’s common stock were canceled, and new options to purchase approximately 2,402,000 shares of the Company’s common stock were granted.

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Table of Contents

BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

          A summary of activity related to the Plan is as follows (in thousands, except exercise price):

                                                 
Year Ended December 31,

2001 2002 2003



Weighted Weighted Weighted
average average average
exercise exercise exercise
Options price Options price Options price






Balance, beginning of year
    3,040       $1.28       517       $0.19       5,194       $0.11  
Granted
    402       0.22       4,765       0.10       947       3.39  
Exercised
    (29 )     0.55       (22 )     0.31       (2,473 )     0.10  
Canceled
    (2,896 )     1.33       (66 )     0.12       (162 )     0.36  
     
             
             
         
Balance, end of year
    517       $0.19       5,194       $0.11       3,506       $0.99  
     
             
             
         
Exercisable at end of year
    105       $0.36       2,915       $0.11       1,626       $0.12  

          The following table summarizes information about stock options outstanding at December 31, 2003:

                                         
Outstanding Exercisable


Weighted Average

Remaining Weighted
Options contractual Exercise Options average
(in thousands) life price (in thousands) exercise price
Range of Exercise Price




$0.10
    2,120       8       $0.10       1,418       $0.10  
$0.11-$1.50
    468       7       0.19       208       0.26  
$2.50
    56       10       2.50              
$3.50
    820       10       3.50              
$3.75
    42       10       3.75              
     
                     
         
      3,506       8       $0.99       1,626       $0.12  
     
                     
         

          The weighted-average fair value at grant date of options granted during 2001, 2002 and 2003 was $0.04, $0.02 and $1.28, respectively. The exercise price of all options granted in 2001 and 2002 was equal to the fair value on the grant date. The exercise price of all options granted in 2003 was less than the fair value of the stock on the grant date. The fair value for each option grant is estimated on the date of grant using the minimum value method and the following assumptions:

                         
Year Ended December 31,

2001 2002 2003



Expected dividend rate
    0%       0%       0%  
Expected volatility
    0%       0%       0%  
Expected lives (years)
    5       5       5  
Risk-free interest rate
    3.9%-4.9%       2.9%-4.8%       2.6%-3.6%  

          See Note 1 for the pro forma effect of accounting for stock options using the fair value method.

Note 8.     Common Stock

Common Stock Warrants

          At December 31, 2003, the Company had warrants outstanding to purchase a total of 20,000 shares of common stock issued to a vendor at an exercise price of $2.50 per share. One of these warrants

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BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

to purchase 5,000 shares expires on November 10, 2004 and the remaining warrants expire upon the closing of an initial public offering. The fair value of the warrants was determined using the Black-Scholes option-pricing model.

Restricted Stock

          In 1999, the Company issued 6,388,910 shares of common stock to the founders of the Company at $0.001 per share, which represents the fair value on the date of issuance. The shares vested 25% upon the closing of the Series A mandatorily redeemable convertible preferred stock offering in May 1999, and the remainder vested monthly over 36 months beginning in June of 1999 until May of 2002. If employment was terminated the Company could repurchase unvested shares at cost. During 2001, the Company repurchased 536,843 unvested shares of restricted common stock for approximately $1,000 from a founder in connection with his termination.

          As of December 31, 2002 and 2003, all 5,852,067 shares were fully vested.

Change in Control

          During 2001, the Board of Directors approved a Management Change of Control Incentive Plan whereby under certain circumstances key employees would receive up to a total of 10% of the net proceeds received upon an asset transfer or acquisition, reduced by amounts received for common stock interests. The Management Change of Control Incentive Plan terminates upon the closing of this offering.

Note 9.     Employee Benefit Plan

          The Company has a defined contribution plan pursuant to Section 401(k) of the Internal Revenue Code covering all eligible officers and employees. The Company provides a matching contribution of $0.50 for every $1.00 contributed by the employee up to 2% of each employee’s salary. Such contributions were approximately $62,000, $67,000 and $97,000 for the years ended December 31, 2001, 2002 and 2003, respectively.

Note 10.     Income Taxes

          The (benefit) provision for income taxes consists of the following (in thousands):

                           
Year Ended December 31,

2001 2002 2003



Current income tax expense
    $—       $—       $254  
Deferred income tax benefit:
                       
 
U.S. Federal benefit
                    (690 )
 
Benefit of net operating loss carryforwards
                    4,438  
 
Adjustment to beginning of year valuation allowance
                (19,702 )
     
     
     
 
Total income tax expense (benefit)
    $—       $—       $(15,700 )
     
     
     
 

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BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

          A reconciliation of the statutory Federal income tax rate to the effective tax rate is as follows:

                         
Year Ended December 31,

2001 2002 2003



Statutory federal income tax rate
    35.0 %     35.0 %     35.0 %
Change in valuation allowance
    (35.9 )     (35.2 )     (173.8 )
Other
    0.9       0.2       0.2  
     
     
     
 
Effective tax rate
    %     %     (138.6 )%
     
     
     
 

          Deferred income taxes reflect the net tax effect of temporary differences between amounts recorded for financial reporting purposes and amounts used for tax purposes. The major components of deferred tax assets are as follows (in thousands):

                     
December 31,

2002 2003


Deferred tax assets:
               
 
Current:
               
   
Net operating loss carryforwards
    $4,438       $4,500  
   
Deferred rent
    7       456  
   
Reserves and allowances
    262       344  
 
Noncurrent:
               
   
Net operating loss carryforwards
    13,182       8,682  
   
Excess of book over tax depreciation
    1,393       1,363  
   
Other
    420       609  
     
     
 
Gross deferred tax assets
    19,702       15,954  
Valuation allowance
    (19,702 )      
     
     
 
Net deferred tax assets
    $—       $15,954  
     
     
 

          During 2003, the Company recorded a reduction in the valuation allowance of $19.7 million, primarily due to the Company realizing net income in 2002 and 2003. The Company believes that it is more likely than not that it will generate sufficient taxable income to utilize its deferred tax assets, including net operating loss carryforwards, within any applicable carryover periods.

          At December 31, 2003 the Company had net operating loss carryforwards for federal income tax purposes of $37.7 million that expire between 2019 and 2021. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating losses may be limited in certain circumstances.

      The valuation allowance activity is as follows:

                                 
Beginning Ending
balance Additions Deductions balance




Year Ended December 31, 2001
  $ 17,632     $ 2,644           $ 20,276  
     
     
     
     
 
Year Ended December 31, 2002
  $ 20,276           $ (574 )   $ 19,702  
     
     
     
     
 
Year Ended December 31, 2003
  $ 19,702           $ (19,702 )      
     
     
     
     
 

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BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 11.     Income (Loss) Per Share

          Basic net income (loss) per share is based on the weighted average number of common shares outstanding. Diluted net income (loss) per share is based on the weighted average number of common shares and equivalents outstanding. Common share equivalents included in the computation represent shares issuable upon assumed exercise of outstanding stock options, warrants and mandatorily redeemable convertible preferred stock except when the effect of their inclusion would be antidilutive.

          The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share data):

                         
Year Ended December 31,

2001 2002 2003



Net income (loss)
    $(7,360 )     $1,627       $27,030  
     
     
     
 
Weighted average common shares outstanding
    7,538       8,341       9,669  
     
     
     
 
Basic net income (loss) per share
    $(0.98 )     $0.20       $2.80  
     
     
     
 
Dilutive effect of stock options and warrants
          114       3,962  
Dilutive effect of mandatorily redeemable convertible preferred stock
          26,947       27,213  
     
     
     
 
Common stock and common stock equivalents
    7,538       35,402       40,844  
     
     
     
 
Diluted net income (loss) per share
    $(0.98 )     $0.05       $0.66  
     
     
     
 

          The following is a summary of the securities outstanding during the respective periods that have been excluded from the calculations because the effect on net income (loss) per share would have been antidilutive (in thousands):

                         
Year Ended December 31,

2001 2002 2003



Unvested common stock
    1,441              
Mandatorily redeemable convertible preferred stock
    21,450              
Options
    1,338       1,916       215  
Preferred stock warrants
    367       367       7  
Common stock warrants
    17       25        
     
     
     
 
      24,613       2,308       222  
     
     
     
 

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BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

          The shares used in calculating the pro forma net income per share assume the conversion of the following mandatorily redeemable convertible preferred shares and warrants outstanding (in thousands, except per share data):

           
Year Ended
December 31, 2003

(Unaudited)
Net income
    $27,030  
     
 
Weighted average common shares outstanding
    9,669  
Plus conversion of mandatorily redeemable convertible preferred stock
    27,301  
Plus common shares from warrants exercised
    15  
     
 
Total weighted average shares outstanding used in computing pro forma net income per share
    36,985  
     
 
Dilutive effect of stock options, warrants
    3,960  
     
 
 
Total common stock and common stock equivalents
    40,945  
Pro forma basic net income per share
    $0.73  
Pro forma diluted net income per share
    $0.66  

Note 12.     Restructuring Costs

          In 2001, the Company recorded a restructuring charge of $1,017,000 related to the loss on facilities we no longer occupied and the write-off of leasehold improvements at these facilities. In 2002, the Company recorded an additional restructuring charge of $400,000 reflecting a decrease in estimated sublease income at one of these facilities. During 2003, the Company negotiated the termination of one the leases and reversed $87,000 of the restructuring charge previously recorded. A summary of activity related to the restructuring charge for December 31, 2001, 2002 and 2003 is as follows (in thousands):

                         
Lease Asset
obligations write-offs Total



Initial restructuring charge
    $831       $186       $1,017  
Cash paid
    (244 )           (244 )
Non-cash charges
          (186 )     (186 )
     
     
     
 
Restructuring accrual at December 31, 2001
    587             587  
Changes in estimates
    400             400  
Cash paid
    (395 )           (395 )
     
     
     
 
Restructuring accrual at December 31, 2002
    592             592  
Changes in estimates
    (87 )             (87 )
Cash paid
    (472 )           (472 )
     
     
     
 
Restructuring accrual at December 31, 2003
    $33       $—       $33  
     
     
     
 

          The remaining liability at December 31, 2003 is due in 2004.

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BLUE NILE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 13.     Subsequent Events

          On March 9, 2004, the Company’s Board of Directors passed the following resolutions:

  •  To authorize the officers of the Company to undertake a firm commitment underwritten public offering of shares of the Company’s common stock;
 
  •  To adopt the 2004 Equity Incentive Plan and reserve 6,400,000 shares thereunder, subject to stockholder approval;
 
  •  To adopt the 2004 Non-Officer Stock Option Plan and reserve 1,000,000 shares thereunder, subject to stockholder approval;
 
  •  To adopt the 2004 Employee Stock Purchase Plan and reserve 2,500,000 shares thereunder, subject to stockholder approval;
 
  •  To terminate the 1999 Equity Incentive Plan upon the effective date of the Company’s initial public offering; and
 
  •  To amend and restate the Company’s certificate of incorporation to authorize 300,000,000 shares of common stock and 5,000,000 shares of undesignated preferred stock, subject to stockholder approval.

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[Inside back cover artwork: picture of diamond ring and “Blue Nile” and

Blue Nile logo on bottom of page]
 


Table of Contents



               Through and including                     , 2004 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as an underwriter and with respect to their unsold allotments or subscriptions.

Shares

LOGO

Common Stock


PROSPECTUS

Merrill Lynch & Co.

Bear, Stearns & Co. Inc.

Thomas Weisel Partners LLC

          , 2004




Table of Contents

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13.     Other Expenses of Issuance and Distribution

          The following table sets forth all expenses payable by us in connection with the sale of the common stock being registered. All of the amounts shown are estimates, except for the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq National Market application fee.

           
Amount to be
Paid

Registration fee
    $9,503  
NASD filing fee
    $8,000  
Nasdaq Stock Market Listing Application fee
    $  
Blue sky qualification fees and expenses
    $  
Printing and engraving expenses
       
Legal fees and expenses
    $  
Accounting fees and expenses
       
Transfer agent and registrar fees
    $  
Miscellaneous
       
 
Total
    $  

Item 14.     Indemnification of Officers and Directors

          Under Section 145 of the Delaware General Corporation Law, we have broad powers to indemnify its directors and officers against liabilities they may incur in such capacities, including liabilities under the Securities Act.

          Our restated certificate of incorporation and amended and restated bylaws include provisions to (i) eliminate the personal liability of our directors for monetary damages resulting from breaches of their fiduciary duty to the extent permitted by Section 102(b)(7) of the General Corporation Law of Delaware and (ii) require the registrant to indemnify its directors and officers to the fullest extent permitted by Section 145 of the Delaware Law, including circumstances in which indemnification is otherwise discretionary. Pursuant to Section 145 of the Delaware Law, a corporation generally has the power to indemnify its present and former directors, officers, employees and agents against expenses incurred by them in connection with any suit to which they are, or are threatened to be made, a party by reason of their serving in such positions so long as they acted in good faith and in a manner they reasonably believed to be in or not opposed to, the best interests of the corporation and with respect to any criminal action, they had no reasonable cause to believe their conduct was unlawful. We believe that these provisions are necessary to attract and retain qualified persons as directors and officers. These provisions do not eliminate the directors’ duty of care, and, in appropriate circumstances, equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware Law. In addition, each director will continue to be subject to liability for breach of the director’s duty of loyalty to the registrant, for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for acts or omissions that the director believes to be contrary to the best interests of the registrant or its stockholders, for any transaction from which the director derived an improper personal benefit, for acts or omissions involving a reckless disregard for the director’s duty to the registrant or its stockholders when the director was aware or should have been aware of a risk of serious injury to the registrant or its stockholders, for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director’s duty to the registrant or its stockholders, for improper transactions between the director and the registrant and for improper distributions to stockholders and loans to directors and officers. The provision

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also does not affect a director’s responsibilities under any other law, such as the federal securities law or state or federal environmental laws.

          At present, there is no pending litigation or proceeding involving any of our directors or officers as to which indemnification is being sought nor are we aware of any threatened litigation that may result in claims for indemnification by any officer or director.

          We have an insurance policy covering our officers and directors with respect to certain liabilities, including liabilities arising under the Securities Act or otherwise.

Item 15.     Recent Sales of Unregistered Securities

          Since January 1, 2001, we have issued and sold the following unregistered securities:

        (1) We granted stock options to employees, consultants and directors under its 1999 Equity Incentive Plan covering an aggregate of 6,255,276 shares of our common stock, at a weighted average exercise price of $0.71 per share. Of these, options covering an aggregate of 275,440 were canceled without being exercised. During the same period, we sold an aggregate of 2,562,512 shares of our common stock to employees, consultants and directors for cash consideration in the aggregate amount of $281,966.35 upon the exercise of stock options granted under the 1999 plan.
 
        (2) In June and July 2001, we sold an aggregate of 8,834,013 shares of Series E convertible preferred stock, convertible into the same number of shares of common stock, at $0.7635 per share for an aggregate sale price of $6,744,769 to 14 investors.
 
        (3) In June 2001, in connection with a loan agreement, we issued a purchase option, which has since expired, allowing for the purchase of 315,789 shares of Series E convertible preferred stock to an accredited investor. The purchase option had an exercise price of $0.7635 per share and expired unexercised in September 2003.
 
        (4) In January 2002, in connection with a supplier agreement, we issued a warrant exercisable into 35,000 shares of common stock to an vendor. The warrant, which had an exercise price of $0.10 per share, was exercised in April 2002. We issued 35,000 shares of common stock to a vendor upon the exercise of the warrant.
 
        (5) In April 2003, in connection with an amended noncompetition agreement, we issued 353,635 shares of Series E convertible preferred stock to one of our affiliates. The shares were issued in consideration for cash payments that were due under the original noncompetition agreement.

          The issuances described in paragraph (1) above in this Item 15 were deemed exempt from registration under the Securities Act in reliance on either (1) Rule 701 promulgated under the Securities Act as offers and sale of securities pursuant to certain compensatory benefit plans and contracts relating to compensation in compliance with Rule 701 or (2) Section 4(2) of the Securities Act as transactions by an issuer not involving any public offering.

          We claimed exemption from registration under the Securities Act for the sale and issuance of securities in the transactions described in paragraphs (2), (3), (4) and (5) by virtue of Section 4(2) and/or Regulation D promulgated thereunder as transactions not involving any public offering.

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Item 16. Exhibits and Financial Statement Schedules

          (A) Exhibits:

             
Exhibit
Number Description of Document


  1.1*       Form of Underwriting Agreement.
  3.1       Amended and Restated Certificate of Incorporation to be filed on closing of the offering made hereby.
  3.2       Amended and Restated Bylaws to be filed on closing of the offering made hereby.
  4.1       Reference is made to Exhibits 3.1 and 3.2.
  4.2*       Specimen Stock Certificate.
  4.3       Amended and Restated Investor Rights Agreement dated June 29, 2001 by and between the registrant and certain holders of the registrant’s preferred stock.
  5.1*       Opinion of Cooley Godward LLP.
  10.1.1       Blue Nile, Inc. Amended and Restated 1999 Equity Incentive Plan.
  10.1.2       Form of Stock Option Agreement pursuant to the Blue Nile, Inc. 1999 Equity Incentive Plan.
  10.2.1       Blue Nile, Inc. 2004 Non-Employee Directors’ Stock Purchase Plan.
  10.2.2       Form of Stock Option Agreement pursuant to the Blue Nile, Inc. 2004 Non-Employee Directors’ Stock Purchase Plan.
  10.3       Blue Nile, Inc. 2004 Employee Stock Purchase Plan.
  10.4.1       Blue Nile, Inc. 2004 Equity Incentive Plan.
  10.4.2       Form of Stock Option Agreement pursuant to 2004 Equity Incentive Plan.
  10.5.1*       Sublease Agreement, dated May 22, 2003, between Amazon.com Holdings, Inc. and the registrant.
  10.5.2*       First Amendment to Sublease Agreement, dated July 3, 2003, between Amazon.com Holdings, Inc. and the registrant.
  10.6.1*       Lease, dated June 28, 2001, between Gull Industries, Inc. and the registrant.
  10.6.2*       First Amendment to Lease, dated December 11, 2002 between Gull Industries, Inc. and the registrant
  10.6.3*       Second Amendment to Lease, dated November 15, 2003, between Gull Industries, Inc. and the registrant.
  10.7       Offer Letter with Diane M. Irvine, dated December 1, 1999.
  10.8       Offer Letter with Robert L. Paquin, dated September 7, 1999.
  10.9       Offer Letter with Dwight Gaston, dated May 14, 1999.
  10.10       Offer Letter with Susan S. Bell, dated August 22, 2001.
  10.11       Offer Letter with Darrell Cavens, dated July 30, 1999.
  10.12       Offer Letter with Barbara Rybka, dated January 20, 2004.
  16.1       Letter from KPMG LLP
  21.1       Subsidiaries of the Registrant.
  23.1       Consent of PricewaterhouseCoopers LLC.
  23.2       Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
  24.1       Power of Attorney. Reference is made to the signature page.


* To be filed by amendment.

 
Item 17. Undertakings

          The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

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          Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions described in Item 14 or otherwise, the registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

          The undersigned registrant hereby undertakes that:

  (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
 
  (2) For purposes of determining any liability under the Securities Act each, post-effective amendment that contains a form prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

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SIGNATURES

          Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Seattle, State of Washington, on March 11, 2004.

  By:  /s/ MARK C. VADON
 
  Mark C. Vadon
  President and Chief Executive Officer

POWER OF ATTORNEY

          KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Mark C. Vadon and Diane M. Irvine and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments, exhibits thereto and other documents in connection therewith) to this Registration Statement and any subsequent registration statement filed by the registrant pursuant to Rule 462(b) of the Securities Act of 1933, as amended, which relates to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

          Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

             
Signature Title Date



 
/s/ MARK C. VADON

Mark C. Vadon
  President, Chief Executive Officer, and Director (Principal Executive Officer)   March 11, 2004
 
/s/ DIANE M. IRVINE

Diane M. Irvine
  Chief Financial Officer, (Principal Financial and Accounting Officer)   March 11, 2004
 
/s/ JOSEPH JIMENEZ

Joseph Jimenez
  Director   March 11, 2004
 
/s/ JOANNA A. STROBER

Joanna A. Strober
  Director   March 11, 2004
 
/s/ AUGUSTUS O. TAI

Augustus O. Tai
  Director   March 11, 2004
 
/s/ MARY ALICE TAYLOR

Mary Alice Taylor
  Director   March 11, 2004

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EXHIBIT INDEX

             
Exhibit
Number Description of Document


  1 .1*     Form of Underwriting Agreement.
  3 .1     Amended and Restated Certificate of Incorporation to be filed on closing of the offering made hereby.
  3 .2     Amended and Restated Bylaws to be filed on closing of the offering made hereby.
  4 .1     Reference is made to Exhibits 3.1 and 3.2.
  4 .2*     Specimen Stock Certificate.
  4 .3     Amended and Restated Investor Rights Agreement dated June 29, 2001 by and between the registrant and certain holders of the registrant’s preferred stock.
  5 .1*     Opinion of Cooley Godward LLP.
  10 .1.1     Blue Nile, Inc. Amended and Restated 1999 Equity Incentive Plan.
  10 .1.2     Form of Stock Option Agreement pursuant to the Blue Nile, Inc. 1999 Equity Incentive Plan.
  10 .2.1     Blue Nile, Inc. 2004 Non-Employee Directors’ Stock Purchase Plan.
  10 .2.2     Form of Stock Option Agreement pursuant to the Blue Nile, Inc. 2004 Non-Employee Directors’ Stock Purchase Plan.
  10 .3     Blue Nile, Inc. 2004 Employee Stock Purchase Plan.
  10 .4.1     Blue Nile, Inc. 2004 Equity Incentive Plan.
  10 .4.2     Form of Stock Option Agreement pursuant to 2004 Equity Incentive Plan.
  10 .5.1*     Sublease Agreement, dated May 22, 2003, between Amazon.com Holdings, Inc. and the registrant.
  10 .5.2*     First Amendment to Sublease Agreement, dated July 3, 2003, between Amazon.com Holdings, Inc. and the registrant.
  10 .6.1*     Lease, dated June 28, 2001, between Gull Industries, Inc. and the registrant.
  10 .6.2*     First Amendment to Lease, dated December 11, 2002 between Gull Industries, Inc. and the registrant
  10 .6.3*     Second Amendment to Lease, dated November 15, 2003, between Gull Industries, Inc. and the registrant.
  10 .7     Offer Letter with Diane M. Irvine, dated December 1, 1999.
  10 .8     Offer Letter with Robert L. Paquin, dated September 7, 1999.
  10 .9     Offer Letter with Dwight Gaston, dated May 14, 1999.
  10 .10     Offer Letter with Susan S. Bell, dated August 22, 2001.
  10 .11     Offer Letter with Darrell Cavens, dated July 30, 1999.
  10 .12     Offer Letter with Barbara Rybka, dated January 20, 2004.
  16 .1     Letter from KPMG LLP
  21 .1     Subsidiaries of the Registrant.
  23 .1     Consent of PricewaterhouseCoopers LLC.
  23 .2     Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
  24 .1     Power of Attorney. Reference is made to the signature page.

* To be filed by amendment.
EX-3.1 3 v97093orexv3w1.txt EXHIBIT 3.1 Exhibit 3.1 FIFTH RESTATED CERTIFICATE OF INCORPORATION OF BLUE NILE, INC. Mark C. Vadon hereby certifies that: FIRST: The original name of this corporation was RockShop.com, Inc. and the date of filing the original Certificate of Incorporation of this corporation with the Secretary of State of the State of Delaware was March 18, 1999. The Company changed its name to Internet Diamonds, Inc. on June 1, 1999 and subsequently changed its name to Blue Nile, Inc. on November 4, 1999. SECOND: He is the duly elected and acting Chief Executive Officer of Blue Nile, Inc., a Delaware corporation. THIRD: The Certificate of Incorporation of this corporation is hereby amended and restated to read as follows: I. The name of the corporation is BLUE NILE, INC. (the "CORPORATION" or the "COMPANY"). II. The address of the registered office of the Corporation in the State of Delaware is: Corporation Service Company 1013 Centre Road Wilmington, Delaware New Castle County The name of the Corporation's registered agent at said address is Corporation Service Company. III. The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the Delaware General Corporation Law ("DGCL"). IV. A. This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is three hundred five million (305,000,000) shares. Three hundred million (300,000,000) shares shall be Common Stock, each having a par value of one-tenth of one cent ($.001). Five million (5,000,000) shares shall be Preferred Stock, each having a par value of one-tenth of one cent ($.001). 1. B. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby expressly authorized to provide for the issue of all or any of the shares of the Preferred Stock in one or more series, and to fix the number of shares and to determine or alter for each such series, such voting powers, full or limited, or no voting powers, and such designation, preferences, and relative, participating, optional, or other rights and such qualifications, limitations, or restrictions thereof, as shall be stated and expressed in the resolution or resolutions adopted by the Board of Directors providing for the issuance of such shares and as may be permitted by the DGCL. The Board of Directors is also expressly authorized to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. C. Each outstanding share of Common Stock shall entitle the holder thereof to one vote on each matter properly submitted to the stockholders of the Corporation for their vote; provided, however, that, except as otherwise required by law, holders of Common Stock shall not be entitled to vote on any amendment to this Certificate of Incorporation (including any certificate of designation filed with respect to any series of Preferred Stock) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together as a class with the holders of one or more other such series, to vote thereon by law or pursuant to this Certificate of Incorporation (including any certificate of designation filed with respect to any series of Preferred Stock). V. For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation and regulation of the powers of the corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that: A. 1. MANAGEMENT OF BUSINESS. The management of the business and the conduct of the affairs of the corporation shall be vested in its Board of Directors. The number of directors which shall constitute the Board of Directors shall be fixed exclusively by resolutions adopted by a majority of the authorized number of directors constituting the Board of Directors. 2. BOARD OF DIRECTORS Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, following the closing of the initial public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "1933 Act"), covering the offer and sale of Common Stock to the public (the "Initial Public Offering"), the directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. At the first annual meeting of stockholders following the 2. closing of the Initial Public Offering, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Notwithstanding the foregoing provisions of this section, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 3. REMOVAL OF DIRECTORS A. Subject to the rights of any series of Preferred Stock to elect additional directors under specified circumstances, following the closing of the Initial Public Offering, neither the Board of Directors nor any individual director may be removed without cause. B. Subject to any limitation imposed by law, any individual director or directors may be removed with cause by the affirmative vote of the holders of a majority of the voting power of all then-outstanding shares of capital stock of the corporation entitled to vote generally at an election of directors. 4. VACANCIES A. Subject to the rights of the holders of any series of Preferred Stock, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors, shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by the stockholders, except as otherwise provided by law, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors, and not by the stockholders. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been elected and qualified. B. 1. BYLAW AMENDMENTS. The Board of Directors is expressly empowered to adopt, amend or repeal the Bylaws of the corporation. The stockholders shall also have power to adopt, amend or repeal the Bylaws of the corporation; provided, however, that, in addition to any vote of the holders of any class or series of stock of the corporation required by law or by this Certificate of 3. Incorporation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of all of the then-outstanding shares of the capital stock of the corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to adopt, amend or repeal any provision of the Bylaws of the corporation. 2. BALLOTS. The directors of the corporation need not be elected by written ballot unless the Bylaws so provide. 3. ACTION BY STOCKHOLDERS. No action shall be taken by the stockholders of the corporation except at an annual or special meeting of stockholders called in accordance with the Bylaws or by written consent or electronic transmission of stockholders in accordance with the Bylaws prior to the closing of the Initial Public Offering and following the closing of the Initial Public Offering no action shall be taken by the stockholders by written consent or electronic transmission. 4. ADVANCE NOTICE. Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the corporation shall be given in the manner provided in the Bylaws of the corporation. VI. A. The liability of the directors for monetary damages shall be eliminated to the fullest extent under applicable law. If the DGCL is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated to the fullest extent permitted by the DGCL, as so amended. B. Any repeal or modification of this Article VI shall be prospective and shall not affect the rights under this Article VI in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification. VII. A. The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, except as provided in paragraph B. of this Article VII, and all rights conferred upon the stockholders herein are granted subject to this reservation. B. Notwithstanding any other provisions of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the corporation required by law or by this Certificate of Incorporation or any certificate of designation filed with respect to a series of Preferred Stock, the affirmative vote of the holders of at least sixty-six and two-thirds 4. percent (66-2/3%) of the voting power of all of the then-outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, amend or repeal Articles V, VI and VII. 5. IN WITNESS WHEREOF, Blue Nile, Inc. has caused this Certificate of Incorporation to be signed by its Chief Executive Officer this __________ day of __________, 2004. BLUE NILE, INC. __________________________________ MARK C. VADON Chief Executive Officer EX-3.2 4 v97093orexv3w2.txt EXHIBIT 3.2 Exhibit 3.2 BYLAWS OF BLUE NILE, INC. (A DELAWARE CORPORATION) TABLE OF CONTENTS
PAGE ARTICLE I Offices.................................................... 1 Section 1. Registered Office....................................... 1 Section 2. Other Offices........................................... 1 ARTICLE II Corporate Seal............................................. 1 Section 3. Corporate Seal.......................................... 1 ARTICLE III Stockholders' Meetings..................................... 1 Section 4. Place Of Meetings....................................... 1 Section 5. Annual Meetings......................................... 1 Section 6. Special Meetings........................................ 3 Section 7. Notice Of Meetings...................................... 4 Section 8. Quorum.................................................. 5 Section 9. Adjournment And Notice Of Adjourned Meetings............ 5 Section 10. Voting Rights........................................... 5 Section 11. Joint Owners Of Stock................................... 6 Section 12. List Of Stockholders.................................... 6 Section 13. Action Without Meeting.................................. 6 Section 14. Organization............................................ 8 ARTICLE IV Directors.................................................. 8 Section 15. Number And Term Of Office............................... 8 Section 16. Powers.................................................. 8 Section 17. Classes of Directors.................................... 8 Section 18. Vacancies............................................... 9 Section 19. Resignation............................................. 9 Section 20. Removal................................................. 9 Section 21. Meetings................................................ 10 Section 22. Quorum And Voting....................................... 11 Section 23. Action Without Meeting.................................. 11 Section 24. Fees And Compensation................................... 11 Section 25. Committees.............................................. 11 Section 26. Organization............................................ 12
i. TABLE OF CONTENTS (CONTINUED)
PAGE ARTICLE V Officers................................................... 13 Section 27. Officers Designated..................................... 13 Section 28. Tenure And Duties Of Officers........................... 13 Section 29. Delegation Of Authority................................. 14 Section 30. Resignations............................................ 14 Section 31. Removal................................................. 14 ARTICLE VI Execution Of Corporate Instruments And Voting Of Securities Owned By The Corporation........................ 15 Section 32. Execution Of Corporate Instruments...................... 15 Section 33. Voting Of Securities Owned By The Corporation........... 15 ARTICLE VII Shares Of Stock............................................ 15 Section 34. Form And Execution Of Certificates...................... 15 Section 35. Lost Certificates....................................... 16 Section 36. Transfers............................................... 16 Section 37. Fixing Record Dates..................................... 16 Section 38. Registered Stockholders................................. 17 ARTICLE VIII Other Securities Of The Corporation........................ 17 Section 39. Execution Of Other Securities........................... 17 ARTICLE IX Dividends.................................................. 18 Section 40. Declaration Of Dividends................................ 18 Section 41. Dividend Reserve........................................ 18 ARTICLE X Fiscal Year................................................ 18 Section 42. Fiscal Year............................................. 18 ARTICLE XI Indemnification............................................ 19 Section 43. Indemnification Of Directors, Executive Officers, Other Officers, Employees And Other Agents.............. 19 ARTICLE XII Notices.................................................... 22 Section 44. Notices................................................. 22 ARTICLE XIII Amendments................................................. 23 Section 45. The Board of Directors is expressly empowered to adopt, amend or repeal the Bylaws of the corporation............................................. 23
ii. TABLE OF CONTENTS (CONTINUED)
PAGE ARTICLE XIV Loans To Officers.......................................... 23 Section 46. Loans To Officers....................................... 23
iii. BYLAWS OF BLUE NILE, INC. (A DELAWARE CORPORATION) ARTICLE I OFFICES SECTION 1. REGISTERED OFFICE. The registered office of the corporation in the State of Delaware shall be in the City of Washington, County of New Castle. SECTION 2. OTHER OFFICES. The corporation shall also have and maintain an office or principal place of business at such place as may be fixed by the Board of Directors, and may also have offices at such other places, both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II CORPORATE SEAL SECTION 3. CORPORATE SEAL. The Board of Directors may adopt a corporate seal. The corporate seal shall consist of a die bearing the name of the corporation and the inscription, "Corporate Seal-Delaware." Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE III STOCKHOLDERS' MEETINGS SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders of the corporation may be held at such place, either within or without the State of Delaware, as may be determined from time to time by the Board of Directors. The Board of Directors may, in its sole discretion, determine that the meeting shall not be held at any place, but may instead be held solely by means of remote communication as provided under the Delaware General Corporation Law ("DGCL"). SECTION 5. ANNUAL MEETINGS. (A) The annual meeting of the stockholders of the corporation, for the purpose of election of directors and for such other business as may lawfully come before it, shall be held on such date and at such time as may be designated from time to time by the Board of Directors. Nominations of persons for election to the Board of Directors of the corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of 1. stockholders: (i) pursuant to the corporation's notice of meeting of stockholders; (ii) by or at the direction of the Board of Directors; or (iii) by any stockholder of the corporation who was a stockholder of record at the time of giving the stockholder's notice provided for in the following paragraph, who is entitled to vote at the meeting and who complied with the notice procedures set forth in Section 5. (B) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of Section 5(a) of these Bylaws, (i) the stockholder must have given timely notice thereof in writing to the Secretary of the corporation, (ii) such other business must be a proper matter for stockholder action under DGCL, (iii) if the stockholder, or the beneficial owner on whose behalf any such proposal or nomination is made, has provided the corporation with a Solicitation Notice (as defined in clause (iii) of the last sentence of this Section 5(b)), such stockholder or beneficial owner must, in the case of a proposal, have delivered a proxy statement and form of proxy to holders of at least the percentage of the corporation's voting shares required under applicable law to carry any such proposal, or, in the case of a nomination or nominations, have delivered a proxy statement and form of proxy to holders of a percentage of the corporation's voting shares reasonably believed by such stockholder or beneficial owner to be sufficient to elect the nominee or nominees proposed to be nominated by such stockholder, and must, in either case, have included in such materials the Solicitation Notice, and (iv) if no Solicitation Notice relating thereto has been timely provided pursuant to this section, the stockholder or beneficial owner proposing such business or nomination must not have solicited a number of proxies sufficient to have required the delivery of such a Solicitation Notice under this Section 5. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the ninetieth (90th) day nor earlier than the close of business on the one hundred twentieth (120th) day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced more than thirty (30) days prior to or delayed by more than thirty (30) days after the anniversary of the preceding year's annual meeting, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the one hundred twentieth (120th) day prior to such annual meeting and not later than the close of business on the later of the ninetieth (90th) day prior to such annual meeting or the tenth (10th) day following the day on which public announcement of the date of such meeting is first made. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth: (A) as to each person whom the stockholder proposed to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934 Act") and Rule 14a-4(d) thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (B) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (C) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) 2. the name and address of such stockholder, as they appear on the corporation's books, and of such beneficial owner, (ii) the class and number of shares of the corporation which are owned beneficially and of record by such stockholder and such beneficial owner, and (iii) whether either such stockholder or beneficial owner intends to deliver a proxy statement and form of proxy to holders of, in the case of the proposal, at least the percentage of the corporation's voting shares required under applicable law to carry the proposal or, in the case of a nomination or nominations, a sufficient number of holders of the corporation's voting shares to elect such nominee or nominees (an affirmative statement of such intent, a "Solicitation Notice"). (C) Notwithstanding anything in the third sentence of Section 5(b) of these Bylaws to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the corporation at least one hundred (100) days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Section 5 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the corporation not later than the close of business on the tenth (10th) day following the day on which such public announcement is first made by the corporation. (D) Only such persons who are nominated in accordance with the procedures set forth in this Section 5 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 5. Except as otherwise provided by law, the Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made, or proposed, as the case may be, in accordance with the procedures set forth in these Bylaws and, if any proposed nomination or business is not in compliance with these Bylaws, to declare that such defective proposal or nomination shall not be presented for stockholder action at the meeting and shall be disregarded. (E) Notwithstanding the foregoing provisions of this Section 5, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholders' meeting, stockholders must provide notice as required by the regulations promulgated under the 1934 Act. Nothing in these Bylaws shall be deemed to affect any rights of stockholders to request inclusion of proposals in the corporation proxy statement pursuant to Rule 14a-8 under the 1934 Act. (F) For purposes of this Section 5, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the 1934 Act. SECTION 6. SPECIAL MEETINGS. (A) Special meetings of the stockholders of the corporation may be called, for any purpose or purposes, by (i) the Chairman of the Board of Directors, (ii) the Chief Executive Officer, or (iii) the Board of Directors pursuant to a resolution adopted by a majority of the total 3. number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption). (B) If a special meeting is properly called by any person or persons other than the Board of Directors, the request shall be in writing, specifying the general nature of the business proposed to be transacted, and shall be delivered personally or sent by certified or registered mail, return receipt requested, to the Chairman of the Board of Directors, the Chief Executive Officer, or the Secretary of the corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The Board of Directors shall determine the time and place of such special meeting, which shall be held not less than thirty-five (35) nor more than one hundred twenty (120) days after the date of the receipt of the request. Upon determination of the time and place of the meeting, the officer receiving the request shall cause notice to be given to the stockholders entitled to vote, in accordance with the provisions of Section 7 of these Bylaws. Nothing contained in this paragraph (b) shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the Board of Directors may be held. (C) Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the corporation's notice of meeting (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the corporation who is a stockholder of record at the time of giving notice provided for in these Bylaws who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 6(c). In the event the corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the corporation's notice of meeting, if the stockholder's notice required by Section 5(b) of these Bylaws shall be delivered to the Secretary at the principal executive offices of the corporation not earlier than the close of business on the one hundred twentieth (120th) day prior to such special meeting and not later than the close of business on the later of the ninetieth (90th) day prior to such meeting or the tenth (10th) day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. SECTION 7. NOTICE OF MEETINGS. Except as otherwise provided by law, notice, given in writing or by electronic transmission, of each meeting of stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting, such notice to specify the place, if any, date and hour, in the case of special meetings, the purpose or purposes of the meeting, and the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at any such meeting. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder's address as it appears on the records of the corporation. Notice of the time, place, if any, and purpose of any meeting of stockholders may be waived in writing, signed by the person entitled to notice thereof, or by electronic transmission by such person, either before or after such meeting, and will be waived by any stockholder by his attendance thereat in person, by remote 4. communication, if applicable, or by proxy, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given. SECTION 8. QUORUM. At all meetings of stockholders, except where otherwise provided by statute or by the Certificate of Incorporation, or by these Bylaws, the presence, in person, by remote communication, if applicable, or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. In the absence of a quorum, any meeting of stockholders may be adjourned, from time to time, either by the chairman of the meeting or by vote of the holders of a majority of the shares represented thereat, but no other business shall be transacted at such meeting. The stockholders present at a duly called or convened meeting, at which a quorum is present, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Except as otherwise provided by statute or by applicable stock exchange or Nasdaq rules, or by the Certificate of Incorporation or these Bylaws, in all matters other than the election of directors, the affirmative vote of the majority of shares present in person, by remote communication, if applicable, or represented by proxy at the meeting and entitled to vote generally on the subject matter shall be the act of the stockholders. Except as otherwise provided by statute, the Certificate of Incorporation or these Bylaws, directors shall be elected by a plurality of the votes of the shares present in person, by remote communication, if applicable, or represented by proxy at the meeting and entitled to vote generally on the election of directors. Where a separate vote by a class or classes or series is required, except where otherwise provided by the statute or by the Certificate of Incorporation or these Bylaws, a majority of the outstanding shares of such class or classes or series, present in person, by remote communication, if applicable, or represented by proxy duly authorized, shall constitute a quorum entitled to take action with respect to that vote on that matter. Except where otherwise provided by statute or by the Certificate of Incorporation or these Bylaws, the affirmative vote of the majority (plurality, in the case of the election of directors) of shares of such class or classes or series present in person, by remote communication, if applicable, or represented by proxy at the meeting shall be the act of such class or classes or series. SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of stockholders, whether annual or special, may be adjourned from time to time either by the chairman of the meeting or by the vote of a majority of the shares present in person, by remote communication, if applicable, or represented by proxy at the meeting. When a meeting is adjourned to another time or place, if any, notice need not be given of the adjourned meeting if the time and place, if any, thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. SECTION 10. VOTING RIGHTS. For the purpose of determining those stockholders entitled to vote at any meeting of the stockholders, except as otherwise provided by law, only persons in whose names shares stand on the stock records of the corporation on the record date, 5. as provided in Section 12 of these Bylaws, shall be entitled to vote at any meeting of stockholders. Every person entitled to vote shall have the right to do so either in person, by remote communication, if applicable, or by an agent or agents authorized by a proxy granted in accordance with Delaware law. An agent so appointed need not be a stockholder. No proxy shall be voted after three (3) years from its date of creation unless the proxy provides for a longer period. SECTION 11. JOINT OWNERS OF STOCK. If shares or other securities having voting power stand of record in the names of two (2) or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety, or otherwise, or if two (2) or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (a) if only one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the majority so voting binds all; (c) if more than one (1) votes, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionally, or may apply to the Delaware Court of Chancery for relief as provided in the DGCL, Section 217(b). If the instrument filed with the Secretary shows that any such tenancy is held in unequal interests, a majority or even-split for the purpose of subsection (c) shall be a majority or even-split in interest. SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, (a) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting, or (b) during ordinary business hours, at the principal place of business of the corporation. In the event that the corporation determines to make the list available on an electronic network, the corporation may take reasonable steps to ensure that such information is available only to stockholders of the corporation. The list shall be open to examination of any stockholder during the time of the meeting as provided by law. SECTION 13. ACTION WITHOUT MEETING. (A) Unless otherwise provided in the Certificate of Incorporation, any action required by statute to be taken at any annual or special meeting of the stockholders, or any action which may be taken at any annual or special meeting of the stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, or by electronic transmission setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. (B) Every written consent or electronic transmission shall bear the date of signature of each stockholder who signs the consent, and no written consent or electronic transmission shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the earliest dated consent delivered to the corporation in the manner herein required, 6. written consents or electronic transmissions signed by a sufficient number of stockholders to take action are delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. (C) Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing or by electronic transmission and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for such meeting had been the date that written consents signed by a sufficient number of stockholders to take action were delivered to the corporation as provided in Section 228 (c) of the DGCL. If the action which is consented to is such as would have required the filing of a certificate under any section of the DGCL if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written consent has been given in accordance with Section 228 of the DGCL. (D) A telegram, cablegram or other electronic transmission consent to an action to be taken and transmitted by a stockholder or proxyholder, or by a person or persons authorized to act for a stockholder or proxyholder, shall be deemed to be written, signed and dated for the purposes of this section, provided that any such telegram, cablegram or other electronic transmission sets forth or is delivered with information from which the corporation can determine (i) that the telegram, cablegram or other electronic transmission was transmitted by the stockholder or proxyholder or by a person or persons authorized to act for the stockholder or proxyholder and (ii) the date on which such stockholder or proxyholder or authorized person or persons transmitted such telegram, cablegram or electronic transmission. The date on which such telegram, cablegram or electronic transmission is transmitted shall be deemed to be the date on which such consent was signed. No consent given by telegram, cablegram or other electronic transmission shall be deemed to have been delivered until such consent is reproduced in paper form and until such paper form shall be delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be made by hand or by certified or registered mail, return receipt requested. Notwithstanding the foregoing limitations on delivery, consents given by telegram, cablegram or other electronic transmission may be otherwise delivered to the principal place of business of the corporation or to an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded if, to the extent and in the manner provided by resolution of the board of directors of the corporation. Any copy, facsimile or other reliable reproduction of a consent in writing may be substituted or used in lieu of the original writing for any and all purposes for which the original writing could be used, provided that such copy, facsimile or other reproduction shall be a complete reproduction of the entire original in writing. (E) Notwithstanding the foregoing, no such action by written consent or by electronic transmission may be taken following the closing of the initial public offering pursuant 7. to an effective registration statement under the Securities Act of 1933, as amended (the "1933 Act"), covering the offer and sale of Common Stock of the corporation to the public (the "Initial Public Offering"). SECTION 14. ORGANIZATION. (A) At every meeting of stockholders, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President, or, if the President is absent, a chairman of the meeting chosen by a majority in interest of the stockholders entitled to vote, present in person or by proxy, shall act as chairman. The Secretary, or, in his absence, an Assistant Secretary directed to do so by the President, shall act as secretary of the meeting. (B) The Board of Directors of the corporation shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of Directors, if any, the chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to stockholders of record of the corporation and their duly authorized and constituted proxies and such other persons as the chairman shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting on matters which are to be voted on by ballot. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure. ARTICLE IV DIRECTORS SECTION 15. NUMBER AND TERM OF OFFICE. The authorized number of directors of the corporation shall be fixed in accordance with the Certificate of Incorporation. Directors need not be stockholders unless so required by the Certificate of Incorporation. If for any cause, the directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these Bylaws. SECTION 16. POWERS. The powers of the corporation shall be exercised, its business conducted and its property controlled by the Board of Directors, except as may be otherwise provided by statute, the Certificate of Incorporation or these Bylaws. SECTION 17. CLASSES OF DIRECTORS. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, following the closing 8. of the Initial Public Offering, the directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. At the first annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Notwithstanding the foregoing provisions of this section, each director shall serve until his successor is duly elected and qualified or until his earlier death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. SECTION 18. VACANCIES. Unless otherwise provided in the Certificate of Incorporation and subject to the rights of the holders of any series of Preferred Stock, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by stockholders, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been elected and qualified. A vacancy in the Board of Directors shall be deemed to exist under this Section 18 in the case of the death, removal or resignation of any director. SECTION 19. RESIGNATION. Any director may resign at any time by delivering his or her notice in writing or by electronic transmission to the Secretary, such resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of Directors. If no such specification is made, it shall be deemed effective at the pleasure of the Board of Directors. When one or more directors shall resign from the Board of Directors, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each Director so chosen shall hold office for the unexpired portion of the term of the Director whose place shall be vacated and until his successor shall have been duly elected and qualified. SECTION 20. REMOVAL. (A) Subject to the rights of any series of Preferred Stock to elect additional directors under specified circumstances, following the closing of the Initial Public 9. Offering, neither the Board of Directors nor any individual director may be removed without cause. (B) Subject to any limitation imposed by law, any individual director or directors may be removed with cause by the affirmative vote of the holders of a majority of the voting power of all then outstanding shares of capital stock of the corporation entitled to vote generally at an election of directors. SECTION 21. MEETINGS. (A) REGULAR MEETINGS. Unless otherwise restricted by the Certificate of Incorporation, regular meetings of the Board of Directors may be held at any time or date and at any place within or without the State of Delaware which has been designated by the Board of Directors and publicized among all directors, either orally or in writing, by telephone, including a voice-messaging system or other system designed to record and communicate messages, facsimile, telegraph or telex, or by electronic mail or other electronic means. No further notice shall be required for regular meetings of the Board of Directors. (B) SPECIAL MEETINGS. Unless otherwise restricted by the Certificate of Incorporation, special meetings of the Board of Directors may be held at any time and place within or without the State of Delaware whenever called by the Chairman of the Board, the President or a majority of the authorized number of directors. (C) MEETINGS BY ELECTRONIC COMMUNICATIONS EQUIPMENT. Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting. (D) NOTICE OF SPECIAL MEETINGS. Notice of the time and place of all special meetings of the Board of Directors shall be orally or in writing, by telephone, including a voice messaging system or other system or technology designed to record and communicate messages, facsimile, telegraph or telex, or by electronic mail or other electronic means, during normal business hours, at least twenty-four (24) hours before the date and time of the meeting. If notice is sent by US mail, it shall be sent by first class mail, charges prepaid, at least three (3) days before the date of the meeting. Notice of any meeting may be waived in writing, or by electronic transmission, at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. (E) WAIVER OF NOTICE. The transaction of all business at any meeting of the Board of Directors, or any committee thereof, however called or noticed, or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present and if, either before or after the meeting, each of the directors not present who did not receive notice shall sign a written waiver of notice or shall waive notice by electronic 10. transmission. All such waivers shall be filed with the corporate records or made a part of the minutes of the meeting. SECTION 22. QUORUM AND VOTING. (A) Unless the Certificate of Incorporation requires a greater number, a quorum of the Board of Directors shall consist of a majority of the exact number of directors fixed from time to time by the Board of Directors in accordance with the Certificate of Incorporation; provided, however, at any meeting whether a quorum be present or otherwise, a majority of the directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board of Directors, without notice other than by announcement at the meeting. (B) At each meeting of the Board of Directors at which a quorum is present, all questions and business shall be determined by the affirmative vote of a majority of the directors present, unless a different vote be required by law, the Certificate of Incorporation or these Bylaws. SECTION 23. ACTION WITHOUT MEETING. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent thereto in writing or by electronic transmission, and such writing or writings or transmission or transmissions are filed with the minutes of proceedings of the Board of Directors or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form. SECTION 24. FEES AND COMPENSATION. Directors shall be entitled to such compensation for their services as may be approved by the Board of Directors, including, if so approved, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, for attendance at each regular or special meeting of the Board of Directors and at any meeting of a committee of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise and receiving compensation therefor. SECTION 25. COMMITTEES. (A) EXECUTIVE COMMITTEE. The Board of Directors may appoint an Executive Committee to consist of one (1) or more members of the Board of Directors. The Executive Committee, to the extent permitted by law and provided in the resolution of the Board of Directors shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by the DGCL to be submitted to stockholders for approval, or (ii) adopting, amending or repealing any bylaw of the corporation. 11. (B) OTHER COMMITTEES. The Board of Directors may, from time to time, appoint such other committees as may be permitted by law. Such other committees appointed by the Board of Directors shall consist of one (1) or more members of the Board of Directors and shall have such powers and perform such duties as may be prescribed by the resolution or resolutions creating such committees, but in no event shall any such committee have the powers denied to the Executive Committee in these Bylaws. (C) TERM. The Board of Directors, subject to any requirements of any outstanding series of Preferred Stock and the provisions of subsections (a) or (b) of this Bylaw, may at any time increase or decrease the number of members of a committee or terminate the existence of a committee. The membership of a committee member shall terminate on the date of his death or voluntary resignation from the committee or from the Board of Directors. The Board of Directors may at any time for any reason remove any individual committee member and the Board of Directors may fill any committee vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. (D) MEETINGS. Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other committee appointed pursuant to this Section 25 shall be held at such times and places as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of such regular meetings need be given thereafter. Special meetings of any such committee may be held at any place which has been determined from time to time by such committee, and may be called by any director who is a member of such committee, upon notice to the members of such committee of the time and place of such special meeting given in the manner provided for the giving of notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any committee may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends such special meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Unless otherwise provided by the Board of Directors in the resolutions authorizing the creation of the committee, a majority of the authorized number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee. SECTION 26. ORGANIZATION. At every meeting of the directors, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President (if a director), or if the President is absent, the most senior Vice President (if a director), or, in the absence of any such person, a chairman of the meeting chosen by a majority of the directors present, shall preside over the meeting. The Secretary, or in his absence, any Assistant Secretary directed to do so by the President, shall act as secretary of the meeting. 12. ARTICLE V OFFICERS SECTION 27. OFFICERS DESIGNATED. The officers of the corporation shall include, if and when designated by the Board of Directors, the Chairman of the Board of Directors, The Chief Executive Officer, the President, one or more Vice Presidents, the Secretary, the Chief Financial Officer, the Treasurer and the Controller, all of whom shall be elected at the annual organizational meeting of the Board of Directors. The Board of Directors may also appoint one or more Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such other officers and agents with such powers and duties as it shall deem necessary. The Board of Directors may assign such additional titles to one or more of the officers as it shall deem appropriate. Any one person may hold any number of offices of the corporation at any one time unless specifically prohibited therefrom by law. The salaries and other compensation of the officers of the corporation shall be fixed by or in the manner designated by the Board of Directors. SECTION 28. TENURE AND DUTIES OF OFFICERS. (A) GENERAL. All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. (B) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of Directors, when present, shall preside at all meetings of the stockholders and the Board of Directors. The Chairman of the Board of Directors shall perform other duties commonly incident to the office and shall also perform such other duties and have such other powers, as the Board of Directors shall designate from time to time. If there is no President, then the Chairman of the Board of Directors shall also serve as the Chief Executive Officer of the corporation and shall have the powers and duties prescribed in paragraph (c) of this Section 28. (C) DUTIES OF PRESIDENT. The President shall preside at all meetings of the stockholders and at all meetings of the Board of Directors, unless the Chairman of the Board of Directors has been appointed and is present. Unless some other officer has been elected Chief Executive Officer of the corporation, the President shall be the chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. The President shall perform other duties commonly incident to the office and shall also perform such other duties and have such other powers, as the Board of Directors shall designate from time to time. (D) DUTIES OF VICE PRESIDENTS. The Vice Presidents may assume and perform the duties of the President in the absence or disability of the President or whenever the office of President is vacant. The Vice Presidents shall perform other duties commonly incident to their office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. 13. (E) DUTIES OF SECRETARY. The Secretary shall attend all meetings of the stockholders and of the Board of Directors and shall record all acts and proceedings thereof in the minute book of the corporation. The Secretary shall give notice in conformity with these Bylaws of all meetings of the stockholders and of all meetings of the Board of Directors and any committee thereof requiring notice. The Secretary shall perform all other duties provided for in these Bylaws and other duties commonly incident to the office and shall also perform such other duties and have such other powers, as the Board of Directors shall designate from time to time. The President may direct any Assistant Secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform other duties commonly incident to the office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (F) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep or cause to be kept the books of account of the corporation in a thorough and proper manner and shall render statements of the financial affairs of the corporation in such form and as often as required by the Board of Directors or the President. The Chief Financial Officer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The Chief Financial Officer shall perform other duties commonly incident to the office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. The President may direct the Treasurer or any Assistant Treasurer, or the Controller or any Assistant Controller to assume and perform the duties of the Chief Financial Officer in the absence or disability of the Chief Financial Officer, and each Treasurer and Assistant Treasurer and each Controller and Assistant Controller shall perform other duties commonly incident to the office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. SECTION 29. DELEGATION OF AUTHORITY. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officer or agent, notwithstanding any provision hereof. SECTION 30. RESIGNATIONS. Any officer may resign at any time by giving notice in writing or by electronic transmission to the Board of Directors or to the President or to the Secretary. Any such resignation shall be effective when received by the person or persons to whom such notice is given, unless a later time is specified therein, in which event the resignation shall become effective at such later time. Unless otherwise specified in such notice, the acceptance of any such resignation shall not be necessary to make it effective. Any resignation shall be without prejudice to the rights, if any, of the corporation under any contract with the resigning officer. SECTION 31. REMOVAL. Any officer may be removed from office at any time, either with or without cause, by the affirmative vote of a majority of the directors in office at the time, or by the unanimous written consent of the directors in office at the time, or by any committee or superior officers upon whom such power of removal may have been conferred by the Board of Directors. 14. ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION SECTION 32. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute on behalf of the corporation any corporate instrument or document, or to sign on behalf of the corporation the corporate name without limitation, or to enter into contracts on behalf of the corporation, except where otherwise provided by law or these Bylaws, and such execution or signature shall be binding upon the corporation. All checks and drafts drawn on banks or other depositaries on funds to the credit of the corporation or in special accounts of the corporation shall be signed by such person or persons as the Board of Directors shall authorize so to do. Unless authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. SECTION 33. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and other securities of other corporations owned or held by the corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors, or, in the absence of such authorization, by the Chairman of the Board of Directors, the Chief Executive Officer, the President, or any Vice President. ARTICLE VII SHARES OF STOCK SECTION 34. FORM AND EXECUTION OF CERTIFICATES. Certificates for the shares of stock of the corporation shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the corporation shall be entitled to have a certificate signed by or in the name of the corporation by the Chairman of the Board of Directors, or the President or any Vice President and by the Treasurer or Assistant Treasurer or the Secretary or Assistant Secretary, certifying the number of shares owned by him in the corporation. Any or all of the signatures on the certificate may be facsimiles. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Each certificate shall state upon the face or back thereof, in full or in summary, all of the powers, designations, preferences, and rights, and the limitations or restrictions of the shares authorized to be issued or shall, except as otherwise required by law, set forth on the face or back a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional, or other special rights 15. of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Within a reasonable time after the issuance or transfer of uncertificated stock, the corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to this section or otherwise required by law or with respect to this section a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. SECTION 35. LOST CERTIFICATES. A new certificate or certificates shall be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. The corporation may require, as a condition precedent to the issuance of a new certificate or certificates, the owner of such lost, stolen, or destroyed certificate or certificates, or the owner's legal representative, to agree to indemnify the corporation in such manner as it shall require or to give the corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen, or destroyed. SECTION 36. TRANSFERS. (A) Transfers of record of shares of stock of the corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and upon the surrender of a properly endorsed certificate or certificates for a like number of shares. (B) The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the DGCL. SECTION 37. FIXING RECORD DATES. (A) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall, subject to applicable law, not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 16. (B) Prior to the Initial Public Offering, in order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within ten (10) days after the date on which such a request is received, adopt a resolution fixing the record date. If no record date has been fixed by the Board of Directors within ten (10) days of the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. (C) In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. SECTION 38. REGISTERED STOCKHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VIII OTHER SECURITIES OF THE CORPORATION SECTION 39. EXECUTION OF OTHER SECURITIES. All bonds, debentures and other corporate securities of the corporation, other than stock certificates (covered in Section 34), may be signed by the Chairman of the Board of Directors, the President or any Vice President, or such other person as may be authorized by the Board of Directors, and the corporate seal 17. impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Chief Financial Officer or Treasurer or an Assistant Treasurer; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature, or where permissible facsimile signature, of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signatures of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the corporation or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon or on any such interest coupon, shall have ceased to be such officer before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the corporation. ARTICLE IX DIVIDENDS SECTION 40. DECLARATION OF DIVIDENDS. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation and applicable law, if any, may be declared by the Board of Directors pursuant to law at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation and applicable law. SECTION 41. DIVIDEND RESERVE. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. ARTICLE X FISCAL YEAR SECTION 42. FISCAL YEAR. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. 18. ARTICLE XI INDEMNIFICATION SECTION 43. INDEMNIFICATION OF DIRECTORS, EXECUTIVE OFFICERS, OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. (A) DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall indemnify its directors and executive officers (for the purposes of this Article XI, "executive officers" shall have the meaning defined in Rule 3b-7 promulgated under the 1934 Act) to the fullest extent not prohibited by the DGCL or any other applicable law; provided, however, that the corporation may modify the extent of such indemnification by individual contracts with its directors and executive officers; and, provided, further, that the corporation shall not be required to indemnify any director or executive officer in connection with any proceeding (or part thereof) initiated by such person unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board of Directors of the corporation, (iii) such indemnification is provided by the corporation, in its sole discretion, pursuant to the powers vested in the corporation under the DGCL or any other applicable law or (iv) such indemnification is required to be made under subsection (d). (B) OFFICERS, EMPLOYEES AND OTHER AGENTS. The corporation shall have power to indemnify its other officers employees and other agents as set forth in the DGCL or any other applicable law. The Board of Directors shall have the power to delegate the determination of whether indemnification shall be given to any such person except executive officers to such officers or other persons as the Board of Directors shall determine. (C) EXPENSES. The corporation shall advance to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or executive officer, of the corporation, or is or was serving at the request of the corporation as a director or executive officer of another corporation, partnership, joint venture, trust or other enterprise, prior to the final disposition of the proceeding, promptly following request therefor, all expenses incurred by any director or executive officer in connection with such proceeding provided, however, that if the DGCL requires, an advancement of expenses incurred by a director or executive officer in his or her capacity as a director or executive officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this Section 43 or otherwise. Notwithstanding the foregoing, unless otherwise determined pursuant to paragraph (e) of this Section 43, no advance shall be made by the corporation to an executive officer of the corporation (except by reason of the fact that such executive officer is or was a director of the corporation in which event this paragraph shall not apply) in any action, suit or proceeding, 19. whether civil, criminal, administrative or investigative, if a determination is reasonably and promptly made (i) by a majority vote of directors who were not parties to the proceeding, even if not a quorum, or (ii) by a committee of such directors designated by a majority vote of such directors, even though less than a quorum, or (iii) if there are no such directors, or such directors so direct, by independent legal counsel in a written opinion, that the facts known to the decision-making party at the time such determination is made demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation. (D) ENFORCEMENT. Without the necessity of entering into an express contract, all rights to indemnification and advances to directors and executive officers under this Bylaw shall be deemed to be contractual rights and be effective to the same extent and as if provided for in a contract between the corporation and the director or executive officer. Any right to indemnification or advances granted by this Section 43 to a director or executive officer shall be enforceable by or on behalf of the person holding such right in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. The claimant in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting the claim. In connection with any claim for indemnification, the corporation shall be entitled to raise as a defense to any such action that the claimant has not met the standards of conduct that make it permissible under the DGCL or any other applicable law for the corporation to indemnify the claimant for the amount claimed. In connection with any claim by an executive officer of the corporation (except in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such executive officer is or was a director of the corporation) for advances, the corporation shall be entitled to raise a defense as to any such action clear and convincing evidence that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation, or with respect to any criminal action or proceeding that such person acted without reasonable cause to believe that his conduct was lawful. Neither the failure of the corporation (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in the DGCL or any other applicable law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. In any suit brought by a director or executive officer to enforce a right to indemnification or to an advancement of expenses hereunder, the burden of proving that the director or executive officer is not entitled to be indemnified, or to such advancement of expenses, under this Section 43 or otherwise shall be on the corporation. (E) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person by this Bylaw shall not be exclusive of any other right which such person may have or hereafter acquire under any applicable statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. The corporation is specifically authorized to enter into individual contracts with any or all of its directors, officers, employees or 20. agents respecting indemnification and advances, to the fullest extent not prohibited by the DGCL, or by any other applicable law. (F) SURVIVAL OF RIGHTS. The rights conferred on any person by this Bylaw shall continue as to a person who has ceased to be a director or executive officer and shall inure to the benefit of the heirs, executors and administrators of such a person. (G) INSURANCE. To the fullest extent permitted by the DGCL or any other applicable law, the corporation, upon approval by the Board of Directors, may purchase insurance on behalf of any person required or permitted to be indemnified pursuant to this Section 43. (H) AMENDMENTS. Any repeal or modification of this Section 43 shall only be prospective and shall not affect the rights under this Bylaw in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the corporation. (I) SAVING CLAUSE. If this Bylaw or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each director and executive officer to the full extent not prohibited by any applicable portion of this Section 43 that shall not have been invalidated, or by any other applicable law. If this Section 43 shall be invalid due to the application of the indemnification provisions of another jurisdiction, then the corporation shall indemnify each director and executive officer to the full extent under any other applicable law. (J) CERTAIN DEFINITIONS. For the purposes of this Bylaw, the following definitions shall apply: (1) The term "proceeding" shall be broadly construed and shall include, without limitation, the investigation, preparation, prosecution, defense, settlement, arbitration and appeal of, and the giving of testimony in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative. (2) The term "expenses" shall be broadly construed and shall include, without limitation, court costs, attorneys' fees, witness fees, fines, amounts paid in settlement or judgment and any other costs and expenses of any nature or kind incurred in connection with any proceeding. (3) The term the "corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Section 43 with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. 21. (4) References to a "director," "executive officer," "officer," "employee," or "agent" of the corporation shall include, without limitation, situations where such person is serving at the request of the corporation as, respectively, a director, executive officer, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise. (5) References to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Section 43. ARTICLE XII NOTICES SECTION 44. NOTICES. (A) NOTICE TO STOCKHOLDERS. Written notice to stockholders of stockholder meetings shall be given as provided in Section 7 herein. Without limiting the manner by which notice may otherwise be given effectively to stockholders under any agreement or contract with such stockholder, and except as otherwise required by law, written notice to stockholders for purposes other than stockholder meetings may be sent by US mail or nationally recognized overnight courier, or by facsimile, telegraph or telex or by electronic mail or other electronic means. (B) NOTICE TO DIRECTORS. Any notice required to be given to any director may be given by the method stated in subsection (a), as otherwise provided in these Bylaws, or by overnight delivery service, facsimile, telex or telegram, except that such notice other than one which is delivered personally shall be sent to such address as such director shall have filed in writing with the Secretary, or, in the absence of such filing, to the last known post office address of such director. (C) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by a duly authorized and competent employee of the corporation or its transfer agent appointed with respect to the class of stock affected, or other agent, specifying the name and address or the names and addresses of the stockholder or stockholders, or director or directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall in the absence of fraud, be prima facie evidence of the facts therein contained. (D) METHODS OF NOTICE. It shall not be necessary that the same method of giving notice be employed in respect of all recipients of notice, but one permissible method may 22. be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others. (E) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL. Whenever notice is required to be given, under any provision of law or of the Certificate of Incorporation or Bylaws of the corporation, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the DGCL, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful. (F) NOTICE TO STOCKHOLDERS SHARING AN ADDRESS. Except as otherwise prohibited under DGCL, any notice given under the provisions of DGCL, the Certificate of Incorporation or the Bylaws shall be effective if given by a single written notice to stockholders who share an address if consented to by the stockholders at that address to whom such notice is given. Such consent shall have been deemed to have been given if such stockholder fails to object in writing to the corporation within 60 days of having been given notice by the corporation of its intention to send the single notice. Any consent shall be revocable by the stockholder by written notice to the corporation. ARTICLE XIII AMENDMENTS SECTION 45. The Board of Directors is expressly empowered to adopt, amend or repeal the Bylaws of the corporation. Any adoption, amendment or repeal of the Bylaws of the corporation by the Board of Directors shall require the approval of a majority of the authorized number of directors. The stockholders shall also have power to adopt, amend or repeal the Bylaws of the corporation; provided, however, that, in addition to any vote of the holders of any class or series of stock of the corporation required by law or by the Certificate of Incorporation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the capital stock of the corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to adopt, amend or repeal any provision of the Bylaws of the corporation. ARTICLE XIV LOANS TO OFFICERS SECTION 46. LOANS TO OFFICERS. Except as otherwise prohibited by applicable law, the corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiaries, including any officer or employee who is a Director of the corporation or its subsidiaries, whenever, in the judgment of the Board of Directors, such loan, guarantee or assistance may reasonably be expected to benefit the corporation. The loan, guarantee or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of 23. Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in these Bylaws shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 24. An extra section break has been inserted above this paragraph. Do not delete this section break if you plan to add text after the Table of Contents/Authorities. Deleting this break will cause Table of Contents/Authorities headers and footers to appear on any pages following the Table of Contents/Authorities. 1.
EX-4.3 5 v97093orexv4w3.txt EXHIBIT 4.3 EXHIBIT 4.3 BLUE NILE, INC. FOURTH AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT JUNE 29, 2001 TABLE OF CONTENTS
PAGE ---- SECTION 1. Amendment and Restatement of Prior Agreement.................. 1 1.1 Amendment and Restatement..................................... 1 SECTION 2. General....................................................... 2 2.1 Definitions................................................... 2 SECTION 3. Registration; Restrictions on Transfer........................ 3 3.1 Restrictions on Transfer...................................... 3 3.2 Demand Registration........................................... 4 3.3 Piggyback Registrations....................................... 5 3.4 Form S-3 Registration......................................... 6 3.5 Expenses of Registration...................................... 7 3.6 Obligations of the Company.................................... 7 3.7 Termination of Registration Rights............................ 8 3.8 Delay of Registration; Furnishing Information................. 9 3.9 Indemnification............................................... 9 3.10 Assignment of Registration Rights............................. 11 3.11 Amendment of Registration Rights.............................. 11 3.12 Limitation on Subsequent Registration Rights.................. 11 3.13 "Market Stand-Off" Agreement; Agreement to Furnish Information................................................... 11 3.14 Rule 144 Reporting............................................ 12 SECTION 4. Covenants of the Company...................................... 12 4.1 Basic Financial Information and Reporting..................... 12 4.2 Inspection Rights............................................. 13 4.3 Confidentiality of Records.................................... 13 4.4 Reservation of Common Stock................................... 13 4.5 Key Man Insurance............................................. 13 4.6 Proprietary Information and Inventions Agreement.............. 13 4.7 Qualified Small Business...................................... 13 4.8 Real Property Holding Corporation............................. 14 4.9 Directors' Expenses........................................... 14 4.10 Assignment of Right of First Refusal.......................... 14
TABLE OF CONTENTS (CONTINUED)
PAGE ---- 4.12 "Market Stand-Off" Agreement.................................. 14 4.13 Termination of Covenants...................................... 14 SECTION 5. Rights of First Refusal....................................... 15 5.1 Subsequent Offerings.......................................... 15 5.2 Exercise of Rights............................................ 15 5.3 Issuance of Equity Securities to Other Persons................ 15 5.4 Sale Without Notice........................................... 15 5.5 Termination and Waiver of Rights of First Refusal............. 15 5.6 Transfer of Rights of First Refusal........................... 16 5.7 Excluded Securities........................................... 16 SECTION 6. Miscellaneous................................................. 17 6.1 Governing Law................................................. 17 6.2 Survival...................................................... 17 6.3 Successors and Assigns........................................ 17 6.4 Entire Agreement.............................................. 17 6.5 Severability.................................................. 17 6.6 Amendment and Waiver.......................................... 17 6.7 Delays or Omissions........................................... 17 6.8 Notices....................................................... 18 6.9 Attorneys' Fees............................................... 18 6.10 Titles and Subtitles.......................................... 18 6.11 Additional Investors.......................................... 18 6.12 Counterparts.................................................. 18
ii. BLUE NILE, INC. FOURTH AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT THIS FOURTH AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT (the "AGREEMENT") is entered into as of the 29th day of June, 2001, by and among BLUE NILE, INC., a Delaware corporation (the "COMPANY"), Key Holders (as set forth on the signature page) and holders of the Company's Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and the purchasers of the Company's Series E Preferred Stock ("SERIES E PREFERRED STOCK") set forth on EXHIBIT A of that certain Series E Preferred Stock Purchase Agreement of even date herewith (the "PURCHASE AGREEMENT") and EXHIBIT A hereto. The holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and the purchasers of the Series E Preferred Stock shall be referred to hereinafter as the "INVESTORS" and each individually as an "INVESTOR." RECITALS WHEREAS, the Company has issued the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock and Series D Preferred Stock to certain of the Investors and signed the Third Amended Investor Rights Agreement dated April 4, 2000 (the "PRIOR AGREEMENT") entered into between the Company and the holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock. The holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock possess certain registration rights, information rights and other rights under such Prior Agreement; WHEREAS, the Company and the undersigned holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock desire to terminate the Prior Agreement and to accept the rights created pursuant hereto in lieu of the rights granted to them under the Prior Agreement; WHEREAS, the Company proposes to sell and issue up to Eight Million Eight Hundred Thirty-Eight Thousand Two Hundred Forty-Five (8,838,245) shares of its Series E Preferred Stock pursuant to the Purchase Agreement; and WHEREAS, as a condition of entering into the Purchase Agreement, the purchasers of Series E Preferred Stock have requested that the Company extend to them registration rights, information rights and other rights as set forth below. NOW, THEREFORE, in consideration of the mutual promises, representations, warranties, covenants and conditions set forth in this Agreement and in the Purchase Agreement, the parties mutually agree as follows: SECTION 1. AMENDMENT AND RESTATEMENT OF PRIOR AGREEMENT 1.1 AMENDMENT AND RESTATEMENT. The Prior Agreement is terminated in its entirety and restated herein. Such termination and restatement is effective upon execution of this Agreement by the Company and the holders of a majority of the Registrable Securities (as the term is defined in the Prior Agreement). Upon such execution, all provisions of, rights granted and covenants made in the Prior Agreement are hereby waived, released and terminated in their entirety and shall have no further force or effect, including any notice of or rights under Section 5 of such Prior Agreement. The rights and covenants contained in this Agreement set forth the sole and entire agreement among the Company and 1. the holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock on the subject matter hereof and supersede any and all rights granted and covenants made under any prior agreements. SECTION 2. GENERAL 2.1 DEFINITIONS. As used in this Agreement the following terms shall have the following respective meanings: "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FORM S-3" means such form under the Securities Act (as hereinafter defined) as in effect on the date hereof or any successor registration form under the Securities Act subsequently adopted by the SEC (as hereinafter defined) which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. "HOLDER" means any person owning of record Registrable Securities (as hereinafter defined) that have not been sold to the public or any assignee of record of such Registrable Securities in accordance with Section 3.10 hereof. "INITIAL OFFERING" means the Company's first firm commitment underwritten public offering of its common stock registered under the Securities Act. "REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of effectiveness of such registration statement or document. "REGISTRABLE SECURITIES" means (a) common stock of the Company issued or issuable upon conversion of the Shares; and (b) any common stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, such above-described securities. Notwithstanding the foregoing, Registrable Securities shall not include any securities sold by a person to the public pursuant to a registration statement or Rule 144 or sold in a private transaction in which the transferor's rights under Section 3 of this Agreement are not assigned. "REGISTRABLE SECURITIES THEN OUTSTANDING" shall be the number of shares determined by calculating the total number of shares of the Company's common stock that are Registrable Securities and either (a) are then issued and outstanding or (b) are issuable pursuant to then exercisable or convertible securities. "REGISTRATION EXPENSES" shall mean all expenses incurred by the Company in complying with Sections 3.2, 3.3 and 3.4 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company, reasonable fees and disbursements not to exceed twenty-five thousand dollars ($25,000) of a single special counsel for the Holders, blue sky fees and expenses and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company). "SEC" or "COMMISSION" means the Securities and Exchange Commission. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. 2. "SELLING EXPENSES" shall mean all underwriting discounts and selling commissions applicable to the sale. "SHARES" shall mean the Company's Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock held by the Investors listed on EXHIBIT A hereto and their permitted assigns. SECTION 3. REGISTRATION; RESTRICTIONS ON TRANSFER 3.1 RESTRICTIONS ON TRANSFER. (a) Each Holder agrees not to make any disposition of all or any portion of the Shares or Registrable Securities unless and until: (i) There is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (ii) (A) The transferee has agreed in writing to be bound by the terms of this Agreement, (B) such Holder shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (C) if reasonably requested by the Company, such Holder shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Securities Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances. (iii) Notwithstanding the provisions of paragraphs (i) and (ii) above, no such registration statement or opinion of counsel shall be necessary for a transfer by a Holder which is (A) a partnership to its partners or former partners in accordance with partnership interests, (B) a limited liability company to its members or former members in accordance with their interest in the limited liability company, or (C) to the Holder's family member or trust for the benefit of an individual Holder; provided that in each case the transferee will be subject to the terms of this Agreement to the same extent as if he were an original Holder hereunder. (b) Each certificate representing Shares or Registrable Securities shall (unless otherwise permitted by the provisions of the Agreement) be stamped or otherwise imprinted with a legend substantially similar to the following (in addition to any legend required under applicable state securities laws): THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. (c) The Company shall be obligated to reissue promptly unlegended certificates at the request of any holder thereof if the holder shall have obtained an opinion of counsel (which counsel 3. may be counsel to the Company) reasonably acceptable to the Company to the effect that the securities proposed to be disposed of may lawfully be so disposed of without registration, qualification or legend. (d) Any legend endorsed on an instrument pursuant to applicable state securities laws and the stop-transfer instructions with respect to such securities shall be removed upon receipt by the Company of an order of the appropriate blue sky authority authorizing such removal. 3.2 DEMAND REGISTRATION. (a) Subject to the conditions of this Section 3.2, if the Company shall receive a written request from the Holders of a majority of the Registrable Securities then outstanding (the "INITIATING HOLDERS") that the Company file a registration statement under the Securities Act covering the registration of the lesser of (i) at least a majority of the Registrable Securities then outstanding, and (ii) Registrable Securities having a proposed aggregate offering price, net of discounts and commissions, of at least $10,000,000, then the Company shall, within thirty (30) days of the receipt thereof, give written notice of such request to all Holders, and subject to the limitations of this Section 3.2, use its best efforts to effect, as soon as practicable, the registration under the Securities Act of all Registrable Securities that the Holders request to be registered. (b) If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 3.2 or any request pursuant to Section 3.4 and the Company shall include such information in the written notice referred to in Section 3.2(a) or Section 3.4(a), as applicable. In such event, the right of any Holder to include its Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by a majority in interest of the Initiating Holders (which underwriter or underwriters shall be reasonably acceptable to the Company). Notwithstanding any other provision of this Section 3.2 or Section 3.4, if the underwriter advises the Company that marketing factors require a limitation of the number of securities to be underwritten (including Registrable Securities) then the Company shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares that may be included in the underwriting shall be allocated to the Holders of such Registrable Securities on a pro rata basis based on the number of Registrable Securities held by all such Holders (including the Initiating Holders); provided, however, that the number of shares of Registrable Securities to be included in such underwriting shall not be reduced unless all other securities are first entirely excluded from the underwriting. Any Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn from the registration. (c) The Company shall not be required to effect a registration pursuant to this Section 3.2: (i) prior to the earlier of (A) May 1, 2003 or (B) one hundred eighty (180) days following the effective date of the registration statement pertaining to the Initial Offering; (ii) after the Company has effected two (2) registrations pursuant to this Section 3.2, and such registrations have been declared or ordered effective unless such registrations are withdrawn prior to the sale of the securities because of material adverse developments at the Company; 4. (iii) during the period starting with the date of filing of, and ending on the date one hundred eighty (180) days following the effective date of the registration statement pertaining to a public offering; provided that the Company makes reasonable good faith efforts to cause such registration statement to become effective; (iv) if within thirty (30) days of receipt of a written request from Initiating Holders pursuant to Section 3.2(a), the Company gives notice to the Holders of the Company's intention to make a public offering within ninety (90) days; (v) if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 3.2, a certificate signed by the Chairman of the Board stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such registration statement to be effected at such time, in which event the Company shall have the right to defer such filing for a period of not more than one hundred twenty (120) days after receipt of the request of the Initiating Holders; provided that such right to delay a request shall be exercised by the Company not more than once in any twelve (12) month period; or (vi) if the Initiating Holders propose to dispose of shares of Registrable Securities that may be immediately registered on Form S-3 pursuant to a request made pursuant to Section 3.4 below. 3.3 PIGGYBACK REGISTRATIONS. The Company shall notify all Holders of Registrable Securities in writing at least fifteen (15) days prior to the filing of any registration statement under the Securities Act for purposes of a public offering of securities of the Company (including, but not limited to, registration statements relating to secondary offerings of securities of the Company, but excluding registration statements relating to employee benefit plans or with respect to or in any way related to corporate reorganizations or other transactions under Rule 145 of the Securities Act) and will afford each such Holder an opportunity to include in such registration statement all or part of such Registrable Securities held by such Holder. Each Holder desiring to include in any such registration statement all or any part of the Registrable Securities held by it shall, within fifteen (15) days after the above-described notice from the Company, so notify the Company in writing. Such notice shall state the intended method of disposition of the Registrable Securities by such Holder. If a Holder decides not to include all of its Registrable Securities in any registration statement thereafter filed by the Company, such Holder shall nevertheless continue to have the right to include any Registrable Securities in any subsequent registration statement or registration statements as may be filed by the Company with respect to offerings of its securities, all upon the terms and conditions set forth herein. (a) UNDERWRITING. If the registration statement under which the Company gives notice under this Section 3.3 is for an underwritten offering, the Company shall so advise the Holders of Registrable Securities. In such event, the right of any such Holder to be included in a registration pursuant to this Section 3.3 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their Registrable Securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of the Agreement, if the underwriter determines in good faith that marketing factors require a limitation of the number of shares to be underwritten, the number of shares that may be included in the underwriting shall be allocated, first, to the Company; second, to the Holders on a pro rata basis based on the total number of Registrable Securities held by the Holders; and third, to any stockholder of the Company (other than a Holder) on a pro rata basis. No such reduction shall (i) except as required by clause (ii) below, reduce the securities being offered by the Company for its own account to be included in the registration and underwriting, or 5. (ii) reduce the amount of securities of the selling Holders included in the registration below twenty-five percent (25%) of the total amount of securities included in such registration, unless such offering is the Initial Offering and such registration does not include shares of any other selling stockholders, in which event any or all of the Registrable Securities of the Holders may be excluded in accordance with the immediately preceding sentence. If any Holder disapproves of the terms of any such underwriting, such Holder may elect to withdraw therefrom by written notice to the Company and the underwriter, delivered at least ten (10) business days prior to the effective date of the registration statement. Any Registrable Securities excluded or withdrawn from such underwriting shall be excluded and withdrawn from the registration. For any Holder which is a partnership or corporation, the partners, retired partners and shareholders of such Holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing person shall be deemed to be a single "HOLDER", and any pro rata reduction with respect to such "HOLDER" shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "HOLDER," as defined in this sentence. (b) RIGHT TO TERMINATE REGISTRATION. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 3.3 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration. The Registration Expenses of such withdrawn registration shall be borne by the Company in accordance with Section 3.5 hereof. 3.4 FORM S-3 REGISTRATION. In case the Company shall receive from any Holder or Holders of at least fifteen percent (15%) of the Registrable Securities then outstanding a written request or requests that the Company effect a registration on Form S-3 or any similar short-form registration statement and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders of Registrable Securities; and (b) as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within fifteen (15) days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance pursuant to this Section 3.4: (i) if Form S-3 is not available for such offering by the Holders; (ii) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public of less than two million dollars ($2,000,000); (iii) if within thirty (30) days of receipt of a written request from Initiating Holders pursuant to Section 3.2(a), the Company gives notice to the Holders of the Company's intention to make a public offering within ninety (90) days; (iv) if the Company shall furnish to the Holders a certificate signed by the Chairman of the Board of Directors of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for 6. such Form S-3 registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than ninety (90) days after receipt of the request of the Holder or Holders under this Section 3.4; provided, that such right to delay a request shall be exercised by the Company not more than once in any twelve (12) month period; (v) if the Company has, within the twelve (12) month period preceding the date of such request, already effected one registration on Form S-3 for the Holders pursuant to this Section 3.4 unless such registration is withdrawn prior to the sale of the securities because of material adverse developments at the Company; (vi) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. (c) Subject to the foregoing, the Company shall file a Form S-3 registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. Registrations effected pursuant to this Section 3.4 shall not be counted as demands for registration or registrations effected pursuant to Sections 3.2 or 3.3, respectively. 3.5 EXPENSES OF REGISTRATION. Except as specifically provided herein, all Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to Section 3.2 or any registration under Section 3.3 or Section 3.4 herein shall be borne by the Company. All Selling Expenses incurred in connection with any registrations hereunder, shall be borne by the holders of the securities so registered pro rata on the basis of the number of shares so registered. The Company shall not, however, be required to pay for expenses of any registration proceeding begun pursuant to Section 3.2 or 3.4, the request of which has been subsequently withdrawn by the Initiating Holders unless (a) the withdrawal is based upon material adverse information concerning the Company of which the Initiating Holders were not aware at the time of such request or (b) the Holders of a majority of Registrable Securities agree to forfeit their right to one requested registration pursuant to Section 3.2 or Section 3.4, as applicable, in which event such right shall be forfeited by all Holders. If the Holders are required to pay the Registration Expenses, such expenses shall be borne by the holders of securities (including Registrable Securities) requesting such registration in proportion to the number of shares for which registration was requested. If the Company is required to pay the Registration Expenses of a withdrawn offering pursuant to clause (a) above, then the Holders shall not forfeit their rights pursuant to Section 3.2 or Section 3.4 to a demand registration. 3.6 OBLIGATIONS OF THE COMPANY. Whenever required to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use all reasonable efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to thirty (30) days or, if earlier, until the Holder or Holders have completed the distribution related thereto. The Company shall not be required to file, cause to become effective or maintain the effectiveness of any registration statement that contemplates a distribution of securities on a delayed or continuous basis pursuant to Rule 415 under the Securities Act. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be 7. necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement for the period set forth in paragraph (a) above. (c) Furnish to the Holders such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its reasonable best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as shall be reasonably requested by the Holders; provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (g) Use its best efforts to furnish, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, (i) an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and (ii) a letter dated as of such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering addressed to the underwriters. (h) Cause all such Registrable Securities registered pursuant hereto to be listed on each securities exchange on which similar securities issued by the Company are listed. (i) Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereto and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration. 3.7 TERMINATION OF REGISTRATION RIGHTS. All registration rights granted under this Section 3 shall terminate and be of no further force and effect three (3) years after the date of the Company's Initial Offering. In addition, a Holder's registration rights shall expire if (a) such Holder (together with its affiliates, partners and former partners) holds less than 1% of the Company's outstanding common stock (treating all share of convertible preferred stock on an as converted basis) and (b) all Registrable Securities held by and issuable to such Holder (and its affiliates, partners, former partners, members and former members) may be sold under Rule 144 during any ninety (90) day period. 8. 3.8 DELAY OF REGISTRATION; FURNISHING INFORMATION. (a) No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 3. (b) It shall be a condition precedent to the obligations of the Company to take any action pursuant to Section 3.2, 3.3 or 3.4 that the selling Holders shall furnish to the Company such information regarding themselves, the Registrable Securities held by them and the intended method of disposition of such securities as shall be required to effect the registration of their Registrable Securities. (c) The Company shall have no obligation with respect to any registration requested pursuant to Section 3.2 or Section 3.4 if, due to the operation of subsection 3.2(a), the number of shares or the anticipated aggregate offering price of the Registrable Securities to be included in the registration does not equal or exceed the number of shares or the anticipated aggregate offering price required to originally trigger the Company's obligation to initiate such registration as specified in Section 3.2 or Section 3.4, whichever is applicable. 3.9 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under Sections 3.2, 3.3 or 3.4: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners, officers and directors of each Holder, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law (including common law), insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "VIOLATION") by the Company: (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto; (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading; or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law in connection with the offering covered by such registration statement; and the Company will pay as incurred to each such Holder, partner, officer, director, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided however, that the indemnity agreement contained in this Section 3.9(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by such Holder, partner, officer, director, underwriter or controlling person of such Holder. (b) To the extent permitted by law, each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration qualifications or compliance is being effected, indemnify and hold harmless the Company, each of its directors, its officers and each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter and any other Holder selling securities under such registration statement or any of such other Holder's 9. partners, directors or officers or any person who controls such Holder, against any losses, claims, damages or liabilities (joint or several) to which the Company or any such director, officer, controlling person, underwriter or other such Holder, or partner, director, officer or controlling person of such other Holder may become subject under the Securities Act, the Exchange Act or other federal or state law (including common law), insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder under an instrument duly executed by such Holder and stated to be specifically for use in connection with such registration; and each such Holder will pay as incurred any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, underwriter or other Holder, or partner, officer, director or controlling person of such other Holder in connection with investigating or defending any such loss, claim, damage, liability or action if it is judicially determined that there was such a Violation; provided, however, that the indemnity agreement contained in this Section 3.9(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided further, that in no event shall any indemnity under this Section 3.9 exceed the net proceeds from the offering received by such Holder. (c) Promptly after receipt by an indemnified party under this Section 3.9 of written notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 3.9, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if materially prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 3.9, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 3.9. (d) If the indemnification provided for in this Section 3.9 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any losses, claims, damages or liabilities referred to herein, the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall to the extent permitted by applicable law contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the Violation(s) that resulted in such loss, claim, damage or liability, as well as any other relevant equitable considerations; provided, that in no event shall any contribution by a Holder under this Subsection 3.9(d) exceed the net proceeds from the offering received by such Holder. The relative fault of the indemnifying party and of the indemnified party shall be determined by a court of law by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; provided, that in no event shall any contribution by a Holder hereunder exceed the proceeds from the offering received by such Holder. 10. (e) The obligations of the Company and Holders under this Section 3.9 shall survive completion of any offering of Registrable Securities in a registration statement and the termination of this agreement. No indemnifying party, in the defense of any such claim or litigation, shall, except with the consent of each indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. 3.10 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities pursuant to this Section 3 may be assigned by a Holder to a transferee or assignee of Registrable Securities which (a) is a subsidiary, parent, affiliate, general partner, limited partner, retired partner, member or retired member of a Holder, (b) is a Holder's family member or trust for the benefit of an individual Holder, or (c) acquires at least one hundred thousand (100,000) shares of Registrable Securities (as adjusted for stock splits and combinations); provided, however, (i) the transferor shall, within ten (10) days after such transfer, furnish to the Company written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned and (ii) such transferee shall agree to be subject to all restrictions set forth in this Agreement. 3.11 AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Section 3 may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Holders of at least a majority of the Registrable Securities then outstanding. Any amendment or waiver effected in accordance with this Section 3.11 shall be binding upon each Holder and the Company. By acceptance of any benefits under this Section 3, Holders of Registrable Securities hereby agree to be bound by the provisions hereunder. 3.12 LIMITATION ON SUBSEQUENT REGISTRATION RIGHTS. After the date of this Agreement, the Company shall not, without the prior written consent of the Holders of a majority of the Registrable Securities then outstanding, enter into any agreement with any holder or prospective holder of any securities of the Company that would grant such holder registration rights senior to those granted to the Holders hereunder. 3.13 "MARKET STAND-OFF" AGREEMENT; AGREEMENT TO FURNISH INFORMATION. Each Holder hereby agrees that such Holder shall not sell, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, any common stock (or other securities) of the Company held by such Holder (other than those included in the registration) for a period specified by the representative of the underwriters of common stock (or other securities) of the Company not to exceed one hundred eighty (180) days following the effective date of a registration statement of the Company filed under the Securities Act relating to the Initial Offering, provided that all officers and directors of the Company enter into similar agreements; provided, further, that such restrictions shall not apply to shares of common stock (or other securities) purchased in the Initial Offering or in the open market following the Initial Offering Each Holder agrees to execute and deliver such other agreements as may be reasonably requested by the Company or the underwriter which are consistent with the foregoing or which are necessary to give further effect thereto. In addition, if requested by the Company or the representative of the underwriters of common stock (or other securities) of the Company, each Holder shall provide, within ten (10) days of such request, such information as may be required by the Company or such representative in connection with the completion of any public offering of the Company's securities pursuant to a registration statement filed under the Securities Act. The obligations described in this Section 3.13 shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a Commission Rule 145 transaction 11. on Form S-4 or similar forms that may be promulgated in the future. The Company may impose stop-transfer instructions with respect to the shares of common stock (or other securities) subject to the foregoing restriction until the end of said one hundred eighty (180) day period. 3.14 RULE 144 REPORTING. With a view to making available to the Holders the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its best efforts to: (a) Make and keep public information available, as those terms are understood and defined in SEC Rule 144 or any similar or analogous rule promulgated under the Securities Act, at all times after the effective date of the first registration filed by the Company for an offering of its securities to the general public; (b) File with the SEC, in a timely manner, all reports and other documents required of the Company under the Exchange Act; and (c) So long as a Holder owns any Registrable Securities, furnish to such Holder forthwith upon request: a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 of the Securities Act, and of the Exchange Act (at any time after it has become subject to such reporting requirements); a copy of the most recent annual or quarterly report of the Company; and such other reports and documents as a Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing it to sell any such securities without registration. SECTION 4. COVENANTS OF THE COMPANY 4.1 BASIC FINANCIAL INFORMATION AND REPORTING. (a) The Company will maintain true books and records of account in which full and correct entries will be made of all its business transactions pursuant to a system of accounting established and administered in accordance with generally accepted accounting principles consistently applied, and will set aside on its books all such proper accruals and reserves as shall be required under generally accepted accounting principles consistently applied. (b) As soon as practicable after the end of each fiscal year of the Company, and in any event within one hundred twenty (120) days thereafter, the Company will furnish each Investor a balance sheet of the Company, as at the end of such fiscal year, and a statement of income and a statement of cash flows of the Company, for such year, all prepared in accordance with generally accepted accounting principles consistently applied and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail. Such financial statements shall be accompanied by a report and opinion thereon by independent public accountants of national standing selected by the Company's Board of Directors. (c) The Company will furnish each Investor, as soon as practicable after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company, and in any event within forty-five (45) days thereafter, a balance sheet of the Company as of the end of each such quarterly period, and a statement of income and a statement of cash flows of the Company for such period and for the current fiscal year to date, prepared in accordance with generally accepted accounting principles, with the exception that no notes need be attached to such statements and year-end audit adjustments may not have been made. 12. (d) So long as an Investor (with its affiliates) shall own not less than three hundred thousand (300,000) shares of Registrable Securities (as adjusted for stock splits and combinations) (a "MAJOR INVESTOR"), the Company will furnish each such Major Investor (i) at least thirty (30) days prior to the beginning of each fiscal year an annual budget and operating plans for such fiscal year (and as soon as available, any subsequent revisions thereto); and (ii) as soon as practicable after the end of each month, and in any event within twenty (20) days thereafter, a balance sheet of the Company as of the end of each such month, and a statement of income and a statement of cash flows of the Company for such month and for the current fiscal year to date, including a comparison to plan figures for such period, prepared in accordance with generally accepted accounting principles consistently applied, with the exception that no notes need be attached to such statements and year-end audit adjustments may not have been made. 4.2 INSPECTION RIGHTS. Each Major Investor shall have the right to visit and inspect any of the properties of the Company or any of its subsidiaries, and to discuss the affairs, finances and accounts of the Company or any of its subsidiaries with its officers, and to review such information as is reasonably requested all at such reasonable times and as often as may be reasonably requested; provided, however, that the Company shall not be obligated under this Section 4.2 with respect to a competitor of the Company or with respect to information which the Board of Directors determines in good faith is confidential and should not, therefore, be disclosed. 4.3 CONFIDENTIALITY OF RECORDS. Each Investor agrees to use, and to use its best efforts to insure that its authorized representatives use, the same degree of care as such Investor uses to protect its own confidential information to keep confidential any information furnished to it which the Company identifies as being confidential or proprietary (so long as such information is not in the public domain), except that such Investor may disclose such proprietary or confidential information to any partner, member, subsidiary or parent of such Investor for the purpose of evaluating its investment in the Company as long as such partner, member, subsidiary or parent is advised of the confidentiality provisions of this Section 4.3. 4.4 RESERVATION OF COMMON STOCK. The Company will at all times reserve and keep available, solely for issuance and delivery upon the conversion of the preferred stock, all common stock issuable from time to time upon such conversion. 4.5 KEY MAN INSURANCE. Subject to the approval of the Board of Directors, the Company will use its best efforts to obtain and maintain in full force and effect term life insurance in the amount of one million ($1,000,000) dollars on the life of Mark Vadon, naming the Company as beneficiary. 4.6 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. The Company shall require all employees and consultants to execute and deliver a Proprietary Information and Inventions Agreement in the form attached to the Purchase Agreement. 4.7 QUALIFIED SMALL BUSINESS. For so long as any of the Registrable Securities that qualify as of the date of issuance as Qualified Small Business Stock as defined in Section 1202(c) of the Internal Revenue Code of 1986, as amended (the "Code") are held by an Investor (or a transferee in whose hands such shares of Registrable Securities are eligible to qualify as Qualified Small Business Stock, the Company will use its reasonable efforts to comply with the reporting and recordkeeping requirements of Section 1202 of the Code, any regulations promulgated thereunder and any similar state laws and regulations, and agrees not to repurchase any stock of the Company if such repurchase would cause such Registrable Securities to not so qualify as Qualified Small Business Stock so long as the Company's Board of Directors determines that it is in the best interests of and not unduly burdensome to comply with the provisions of Section 1202 of the Code. 13. 4.8 REAL PROPERTY HOLDING CORPORATION. The Company is not and will use its reasonable efforts to avoid treatment as a real property holding corporation within the meaning of Code Section 897(c)(2) and any regulations promulgated thereunder. 4.9 DIRECTORS' EXPENSES. The Company shall reimburse members of the Company's Board of Directors for reasonable expenses incurred in connection with the performance of their duties as Directors. 4.10 ASSIGNMENT OF RIGHT OF FIRST REFUSAL. In the event the Company elects not to exercise any right of first refusal or right of first offer the Company may have on a proposed transfer of any of the Company's outstanding capital stock by any Founder (as such term is defined in the Fourth Amended and Restated Co-Sale Agreement dated June 22, 2001, as amended (the "Amended and Restated Co-Sale Agreement")) pursuant to the Company's Amended and Restated Bylaws, by contract or otherwise, the Company shall, to the extent it may do so, assign such right of first refusal or right of first offer to each Investor in accordance with the terms of Section 3(b) of the Amended and Restated Co-Sale Agreement. 4.11 VISITATION RIGHTS. The Company shall allow one representative designated by each of Kleiner Perkins Caufield & Byers, Weiss Peck & Greer Venture Partners and Vulcan Ventures Incorporated to attend all meetings of the Company's Board of Directors in a nonvoting capacity, and in connection therewith, the Company shall give such representatives copies of all notices, minutes, consents and other materials, financial or otherwise, which the Company provides to its Board of Directors ("Board Materials"); provided, however, that the Company reserves the right to exclude such representatives from access to any material or meeting or portion thereof if the Company believes upon advice of counsel that such exclusion is reasonably necessary to preserve the attorney-client privilege, to protect highly confidential proprietary information or for other similar reasons. The Company shall, at the same time as such materials are provided to the Board of Directors (if provided in advance of any meeting), provide to Integral Capital Partners all Board Materials subject to the limitations set forth in the prior sentence. 4.12 "MARKET STAND-OFF" AGREEMENT. Unless otherwise approved by the Board of Directors of the Company, all Common Stock issued pursuant to the 1999 Equity Incentive Plan and the agreements with the Key Holders (as that term is defined in the Fourth Amended and Restated Voting Agreement) will include restrictions substantially in the form of the relevant market stand-off provisions in the founder stock purchase agreements for Mark Vadon and Ben Elowitz, the form of noncompetition agreement executed by Doug Williams, the form of stock option agreement under the Plan, the form of restricted stock purchase agreement under the Plan or the form of notice of exercise attached to the early exercise purchase agreement under the Plan. 4.13 TERMINATION OF COVENANTS. All covenants of the Company contained in Section 4 of this Agreement shall expire and terminate as to each Investor upon the earlier of (a) the effective date of the registration statement pertaining to the Initial Offering, or (b) upon (i) the sale, lease or other disposition of all or substantially all of the assets of the Company or (ii) an acquisition of the Company by another corporation or entity by consolidation, merger or other reorganization in which the holders of the Company's outstanding voting stock immediately prior to such transaction own, immediately after such transaction, securities representing less than fifty percent (50%) of the voting power of the corporation or other entity surviving such transaction, provided that this Section 4.13(b)(ii) shall not apply to a merger effected exclusively for the purpose of changing the domicile of the Company (a "CHANGE IN CONTROL"). 14. SECTION 5. RIGHTS OF FIRST REFUSAL 5.1 SUBSEQUENT OFFERINGS. Each Major Investor shall have a right of first refusal to purchase its pro rata share of all Equity Securities, as defined below, that the Company may, from time to time, propose to sell and issue after the date of this Agreement, other than the Equity Securities excluded by Section 5.7 hereof. Each Major Investor's pro rata share is equal to the ratio of (a) the number of shares of the Company's common stock (including all shares of common stock issued or issuable upon conversion of the Shares) which such Major Investor is deemed to be a holder immediately prior to the issuance of such Equity Securities to (b) the total number of shares of the Company's outstanding common stock (including all shares of common stock issued or issuable upon conversion of the Shares or upon the exercise of any outstanding warrants or options) immediately prior to the issuance of the Equity Securities. The term "EQUITY SECURITIES" shall mean (a) any common stock, preferred stock or other security of the Company, (b) any security convertible, with or without consideration, into any common stock, preferred stock or other security (including any option to purchase such a convertible security), (c) any security carrying any warrant or right to subscribe to or purchase any common stock, preferred stock or other security or (d) any such warrant or right. 5.2 EXERCISE OF RIGHTS. If the Company proposes to issue any Equity Securities, it shall give each Major Investor written notice of its intention, describing the Equity Securities, the price and the terms and conditions upon which the Company proposes to issue the same. Each Major Investor shall have fifteen (15) days from the giving of such notice to agree to purchase up to its pro rata share of the Equity Securities for the price and upon the terms and conditions specified in the notice by giving written notice to the Company and stating therein the quantity of Equity Securities to be purchased. Notwithstanding the foregoing, the Company shall not be required to offer or sell such Equity Securities to any Investor who would cause the Company to be in violation of applicable federal securities laws by virtue of such offer or sale. Each Major Investor shall be entitled to allocate its rights under Section 5 hereof to other affiliated entities, as designated by such Major Investor. 5.3 ISSUANCE OF EQUITY SECURITIES TO OTHER PERSONS. If not all of the Major Investors elect to purchase their pro rata share of the Equity Securities, then the Company shall promptly notify in writing the Major Investors who do so elect and shall offer such Major Investors the right to acquire such unsubscribed shares. The Major Investors shall have five (5) days after receipt of such notice to notify the Company of its election to purchase all or a portion thereof of the unsubscribed shares. If the Major Investors fail to exercise in full the rights of first refusal, the Company shall have ninety (90) days thereafter to sell the Equity Securities in respect of which the Major Investor's rights were not exercised, at a price and upon general terms and conditions materially no more favorable to the purchasers thereof than specified in the Company's notice to the Major Investors pursuant to 5.2 hereof. If the Company has not sold such Equity Securities within ninety (90) days of the notice provided pursuant to Section 5.2, the Company shall not thereafter issue or sell any Equity Securities, without first offering such securities to the Major Investors in the manner provided above. 5.4 SALE WITHOUT NOTICE. In lieu of giving notice to the Major Investors prior to the issuance of Equity Securities as provided in Section 5.2, the Company may elect to give notice to the Major Investors within thirty (30) days after the issuance of Equity Securities. Such notice shall describe the type, price and terms of the Equity Securities. Each Major Investor shall have twenty (20) days from the date of receipt of such notice to elect to purchase its pro rata share of Equity Securities (as defined in Section 5.1, and calculated before giving effect to the sale of the Equity Securities to the purchasers thereof). The closing of such sale shall occur within sixty (60) days of the date of notice to the Investors. 5.5 TERMINATION AND WAIVER OF RIGHTS OF FIRST REFUSAL. The rights of first refusal established by this Section 5 shall not apply to, and shall terminate upon the earlier of (a) effective date of 15. the registration statement pertaining to the Company's Initial Offering or (b) a Change in Control. The rights of first refusal established by this Section 5 may be amended, or any provision waived with the written consent of Major Investors holding a majority of the Registrable Securities held by all Major Investors, or as permitted by Section 6.6. 5.6 TRANSFER OF RIGHTS OF FIRST REFUSAL. The rights of first refusal of each Investor under this Section 5 may be transferred to the same parties, subject to the same restrictions, as any transfer of registration rights pursuant to Section 3.10. 5.7 EXCLUDED SECURITIES. The rights of first refusal established by this Section 5 shall have no application to any of the following Equity Securities: (a) shares of common stock issued pursuant to Board approval as required by the Company's 1999 Equity Incentive Plan (and/or options, warrants or other Common Stock purchase rights issued pursuant to such options, warrants or other rights) to be issued to employees, officers or directors of, or consultants or advisors to the Company or any subsidiary, pursuant to stock purchase or stock option plans or other arrangements that are approved by the Board of Directors; (b) shares of Common Stock and/or options, warrants or other rights issued to suppliers of the Company pursuant to arrangements approved by the Board; (c) stock issued pursuant to any rights, agreements, options or warrants outstanding as of the date of this Agreement, options and warrants outstanding as of the date of this Agreement; (d) stock issued pursuant to rights, agreements, options or warrants granted after the date of this Agreement; provided that the rights of first refusal established by this Section 5 applied with respect to the initial sale or grant by the Company of such rights, agreements, options or warrants; (e) any Equity Securities issued for consideration other than cash pursuant to a merger, consolidation, acquisition or similar business combination approved by the Board of Directors; (f) shares of common stock issued in connection with any stock split, stock dividend or recapitalization by the Company; (g) shares of common stock issued upon conversion of the Shares; (h) any Equity Securities issued pursuant to any equipment leasing or loan arrangement, or debt financing from a bank or similar financial or lending institution, approved by the Board of Directors; (i) any Equity Securities that are issued by the Company pursuant to a registration statement filed under the Securities Act; (j) shares of the Company's common stock or preferred stock issued in connection with strategic transactions involving the Company and other entities, including (i) joint ventures, manufacturing, marketing or distribution arrangements or (ii) technology transfer or development arrangements; provided that such strategic transactions and the issuance of shares therein has been approved by the Company's Board of Directors, including the representative designated by the holders of the Shares; or 16. (k) any Equity Securities issued pursuant to that certain Amendment of Noncompetition Agreement and Separation Agreement, dated June 25, 2001, by and between Douglas B. Williams and the Company. SECTION 6. MISCELLANEOUS 6.1 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of Delaware as applied to agreements among Delaware residents entered into and to be performed entirely within Delaware. 6.2 SURVIVAL. The representations, warranties, covenants, and agreements made herein shall survive any investigation made by any Holder and the closing of the transactions contemplated hereby. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder solely as of the date of such certificate or instrument. 6.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of Registrable Securities from time to time; provided, however, that prior to the receipt by the Company of adequate written notice of the transfer of any Registrable Securities specifying the full name and address of the transferee, the Company may deem and treat the person listed as the holder of such shares in its records as the absolute owner and holder of such shares for all purposes, including the payment of dividends or any redemption price. 6.4 ENTIRE AGREEMENT. This Agreement, the Exhibits hereto, the Purchase Agreement and the other documents delivered pursuant thereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. 6.5 SEVERABILITY. In the event one or more of the provisions of this Agreement should, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 6.6 AMENDMENT AND WAIVER. (a) Except as otherwise expressly provided, this Agreement may be amended or modified only upon the written consent of the Company and the holders of at least a majority of the Registrable Securities. (b) Except as otherwise expressly provided, the obligations of the Company and the rights of the Holders under this Agreement may be waived only with the written consent of the holders of at least a majority of the Registrable Securities. (c) Notwithstanding the foregoing, (i) this Agreement may be amended with only the written consent of the Company to include additional purchasers of Shares as "INVESTORS," "HOLDERS" and parties hereto and (ii) Section 4.11 hereto shall not be amended or waived without the consent of KPCB Holdings, Inc. or Weiss Peck and Greer Venture Partners, as applicable. 17. 6.7 DELAYS OR OMISSIONS. It is agreed that no delay or omission to exercise any right, power, or remedy accruing to any Holder, upon any breach, default or noncompliance of the Company under this Agreement shall impair any such right, power, or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent, or approval of any kind or character on any Holder's part of any breach, default or noncompliance under the Agreement or any waiver on such Holder's part of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, by law, or otherwise afforded to Holders, shall be cumulative and not alternative. 6.8 NOTICES. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified; (b) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient; if not, then on the next business day; (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the party to be notified at the address as set forth on the signature pages hereof or EXHIBIT A hereto or at such other address as such party may designate by ten (10) days advance written notice to the other parties hereto. 6.9 ATTORNEYS' FEES. In the event that any suit or action is instituted to enforce any provision in this Agreement, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. 6.10 TITLES AND SUBTITLES. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 6.11 ADDITIONAL INVESTORS. Notwithstanding anything to the contrary contained herein, if the Company shall issue additional shares of its Series E Preferred Stock pursuant to the Purchase Agreement, any purchaser of such shares of Series E Preferred Stock may become a party to this Agreement by executing and delivering an additional counterpart signature page to this Agreement and shall be deemed an "INVESTOR" hereunder. 6.12 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 18. IN WITNESS WHEREOF, the parties hereto have executed this FOURTH AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT as of the date set forth in the first paragraph hereof.
COMPANY: INVESTORS: BLUE NILE, INC. TRINITY VENTURES VI, L.P. The Market Place Tower Building a California limited partnership 2025 First Avenue North, Suite 300 By: Trinity TVL VI, LLC, Seattle, WA 98121 a California limited liability company By: /s/ Mark Vadon By: /s/ Tod Francis -------------------------------------- ----------------------------------- Mark Vadon, Chief Executive Officer Tod Francis, Manager KEY HOLDERS: TRINITY VI SIDE-BY-SIDE FUND, L.P. a California limited partnership By: Trinity TVL VI, LLC, /s/ Larry Elowitz a California limited liability company - ------------------------------------------ Larry Elowitz /s/ Mark Vadon By: /s/ Tod Francis - ------------------------------------------ ----------------------------------- Mark Vadon Tod Francis, Manager /s/ Douglas Williams - ------------------------------------------ Douglas B. Williams and Lori Williams BESSEMER VENTURE PARTNERS IV L.P. as Joint Tenants with Right of Survivorship By: Deer IV & Co. LLC, General Partner /s/ Lori Williams By: /s/ Robert H. Buescher - ------------------------------------------ ----------------------------------- Douglas B. Williams and Lori Williams Robert H. Buescher, Manager as Joint Tenants with Right of Survivorship BESSEC VENTURES IV L.P. By: Deer IV & Co. LLC, General Partner By: /s/ Robert H. Buescher ----------------------------------- Robert H. Buescher, Manager KPCB HOLDINGS, INC., AS NOMINEE By: /s/ Kevin Compton ----------------------------------- its Senior Vice President
FOURTH AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT SIGNATURE PAGE WEISS, PECK & GREER VENTURE ASSOCIATES V, L.L.C. By: WPG VC Fund Adviser II, L.L.C., Fund Investment Advisory Member By: /s/ Peter Nieh ----------------------------------- Peter Nieh, Managing Member WEISS, PECK & GREER VENTURE ASSOCIATES V-A, L.L.C. By: WPG VC Fund Adviser II, L.L.C., Fund Investment Advisory Member By: /s/ Peter Nieh ----------------------------------- Peter Nieh, Managing Member WEISS, PECK & GREER VENTURE ASSOCIATES V CAYMAN, L.P. By: WPG VC Fund Adviser II, L.L.C., Fund Investment Advisory Partner By: /s/ Peter Nieh ----------------------------------- Peter Nieh, Managing Member WPG INFORMATION SCIENCES ENTREPRENEUR FUND II, L.L.C. By: WPG VC Fund Adviser II, L.L.C., Fund Investment Advisory Member By: /s/ Peter Nieh ----------------------------------- Peter Nieh, Managing Member WPG INFORMATION SCIENCES ENTREPRENEUR FUND II-A, L.L.C. By: WPG VC Fund Adviser II, L.L.C., Fund Investment Advisory Member By: /s/ Peter Nieh ----------------------------------- Peter Nieh, Managing Member
FOURTH AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT SIGNATURE PAGE INTEGRAL CAPITAL PARTNERS IV, L.P. By: Integral Capital Management IV, LLC Its: General Partner By: /s/ Pamela Hagenah ----------------------------------- Pamela Hagenah, Manager INTEGRAL CAPITAL PARTNERS IV MS SIDE FUND, L.P. By: Integral Capital Partners NBT, LLC Its: General Partner By: /s/ Pamela Hagenah ----------------------------------- Pamela Hagenah, Manager VULCAN VENTURES INCORPORATED By: /s/ William Savoy ----------------------------------- William Savoy, President /s/ Ray Woolridge --------------------------------------- Ray Wooldridge
FOURTH AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT SIGNATURE PAGE Investor: KARR FAMILY 1982 TRUST --------------------------------------- (Name of Entity) By: /s/ Howard L. Karr -------------------------------- Title: Trustee --------------------------------
Investor: CYNTHIA KARR --------------------------------------- (Name of Entity) By: /s/ Cynthia Karr -------------------------------- Title: --------------------------------
FOURTH AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT SIGNATURE PAGE
EX-10.1.1 6 v97093orexv10w1w1.txt EXHIBIT 10.1.1 EXHIBIT 10.1.1 BLUE NILE, INC. AMENDED AND RESTATED 1999 EQUITY INCENTIVE PLAN ADOPTED BY BOARD OF DIRECTORS ON APRIL 17, 1999 APPROVED BY STOCKHOLDERS ON APRIL 17, 1999 AMENDMENT BY BOARD OF DIRECTORS ON MAY 17, 1999 APPROVED BY STOCKHOLDERS ON MAY 17, 1999 AMENDMENT AND RESTATEMENT BY THE BOARD OF DIRECTORS ON AUGUST 10, 1999 APPROVED BY STOCKHOLDERS ON SEPTEMBER 28, 1999 AMENDMENT AND RESTATEMENT BY THE BOARD OF DIRECTORS ON JANUARY 21, 2000 APPROVED BY STOCKHOLDERS ON FEBRUARY 15, 2000 AMENDMENT AND RESTATEMENT BY THE BOARD OF DIRECTORS ON JUNE 25, 2001 APPROVED BY STOCKHOLDERS ON JUNE 27, 2001 AMENDMENT AND RESTATEMENT BY THE BOARD OF DIRECTORS ON JULY 23, 2002 APPROVED BY STOCKHOLDERS ON AUGUST 23, 2002 TERMINATION DATE: APRIL 16, 2009 1. PURPOSES. (a) ELIGIBLE STOCK AWARD RECIPIENTS. The persons eligible to receive Stock Awards are the Employees, Directors and Consultants of the Company and its Affiliates. (b) AVAILABLE STOCK AWARDS. The purpose of the Plan is to provide a means by which eligible recipients of Stock Awards may be given an opportunity to benefit from increases in value of the Common Stock through the granting of the following Stock Awards: (i) Incentive Stock Options; (ii) Nonstatutory Stock Options; (iii) stock bonuses; and (iv) rights to acquire restricted stock. (c) AMENDMENT AND RESTATEMENT. The Plan initially was established effective as of April 17, 1999 and named the "1999 Equity Incentive Plan" (the "INITIAL PLAN"). The Initial Plan thereafter was amended and restated in its entirety on May 17, 1999 and on August 10, 1999 and was renamed the "Amended and Restated 1999 Equity Incentive Plan" (collectively, the "AMENDED AND RESTATED PLAN"). The Amended and Restated Plan hereby is amended and restated in its entirety, effective as of its adoption by the Board. The terms of the Plan shall apply to all Awards made pursuant to both the Initial Plan and the Amended and Restated Plan. (d) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain the services of the group of persons eligible to receive Stock Awards, to secure and retain the services of new members of this group and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. 2. DEFINITIONS. (a) "AFFILIATE" means any parent corporation or subsidiary corporation of the Company, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code. (b) "BOARD" means the Board of Directors of the Company. (c) "CODE" means the Internal Revenue Code of 1986, as amended. 1. (d) "COMMITTEE" means a committee of one or more members of the Board appointed by the Board in accordance with subsection 3(c). (e) "COMMON STOCK" means the common stock of the Company. (f) "COMPANY" means Blue Nile, Inc., a Delaware corporation. (g) "CONSULTANT" means any person, including an advisor, (i) engaged by the Company or an Affiliate to render consulting or advisory services and who is compensated for such services or (ii) who is a member of the Board of Directors of an Affiliate. However, the term "CONSULTANT" shall not include either Directors who are not compensated by the Company for their services as Directors or Directors who are merely paid a director's fee by the Company for their services as Directors. (h) "CONTINUOUS SERVICE" means that the Participant's service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. The Participant's Continuous Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant renders service to the Company or an Affiliate as an Employee, Consultant or Director or a change in the entity for which the Participant renders such service, provided that there is no interruption or termination of the Participant's Continuous Service. For example, a change in status from an Employee of the Company to a Consultant of an Affiliate or a Director will not constitute an interruption of Continuous Service. The Board or the chief executive officer of the Company, in that party's sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal leave. (i) "COVERED EMPLOYEE" means the chief executive officer and the four (4) other highest compensated officers of the Company for whom total compensation is required to be reported to stockholders under the Exchange Act, as determined for purposes of Section 162(m) of the Code. (j) "DIRECTOR" means a member of the Board of Directors of the Company. (k) "DISABILITY" means the permanent and total disability of a person within the meaning of Section 22(e)(3) of the Code. (l) "EMPLOYEE" means any person employed by the Company or an Affiliate. Mere service as a Director or payment of a director's fee by the Company or an Affiliate shall not be sufficient to constitute "employment" by the Company or an Affiliate. (m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (n) "FAIR MARKET VALUE" means, as of any date, the value of the Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable. (ii) In the absence of such markets for the Common Stock, the Fair Market Value shall be determined in good faith by the Board. (o) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. 2. (p) "LISTING DATE" means the first date upon which any security of the Company is listed (or approved for listing) upon notice of issuance on any securities exchange or designated (or approved for designation) upon notice of issuance as a national market security on an interdealer quotation system. (q) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a current Employee or Officer of the Company or its parent or a subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or a subsidiary for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act ("REGULATION S-K")), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K and is not engaged in a business relationship as to which disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-employee director" for purposes of Rule 16b-3. (r) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. (s) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (t) "OPTION" means an Incentive Stock Option or a Nonstatutory Stock Option granted pursuant to the Plan. (u) "OPTION AGREEMENT" means a written agreement between the Company and an Optionholder evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. (v) "OPTIONHOLDER" means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option. (w) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current employee of the Company or an "AFFILIATED CORPORATION" (within the meaning of Treasury Regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "AFFILIATED CORPORATION" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at any time and is not currently receiving direct or indirect remuneration from the Company or an "AFFILIATED CORPORATION" for services in any capacity other than as a Director or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. (x) "PARTICIPANT" means a person to whom a Stock Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Stock Award. (y) "PLAN" means this Blue Nile, Inc. 1999 Equity Incentive Plan. (z) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3, as in effect from time to time. (aa) "SECURITIES ACT" means the Securities Act of 1933, as amended. (bb) "STOCK AWARD" means any right granted under the Plan, including an Option, a stock bonus and a right to acquire restricted stock. (cc) "STOCK AWARD AGREEMENT" means a written agreement between the Company and a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan. 3. (dd) "TEN PERCENT STOCKHOLDER" means a person who owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates. 3. ADMINISTRATION. (a) ADMINISTRATION BY BOARD. The Board shall administer the Plan unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). Any interpretation of the Plan by the Board and any decision by the Board under the Plan shall be final and binding on all persons. (b) POWERS OF BOARD. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine from time to time which of the persons eligible under the Plan shall be granted Stock Awards; when and how each Stock Award shall be granted; what type or combination of types of Stock Award shall be granted; the provisions of each Stock Award granted (which need not be identical), including the time or times when a person shall be permitted to receive Common Stock pursuant to a Stock Award; and the number of shares of Common Stock with respect to which a Stock Award shall be granted to each such person. (ii) To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iii) To amend the Plan or a Stock Award as provided in Section 12. (iv) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company which are not in conflict with the provisions of the Plan. (c) DELEGATION TO COMMITTEE. (i) GENERAL. The Board may delegate administration of the Plan to a Committee or Committees of one (1) or more members of the Board, and the term "COMMITTEE" shall apply to any person or persons to whom such authority has been delegated. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. (ii) COMMITTEE COMPOSITION WHEN COMMON STOCK IS PUBLICLY TRADED. At such time as the Common Stock is publicly traded, in the discretion of the Board, a Committee may consist solely of two or more Outside Directors, in accordance with Section 162(m) of the Code, and/or solely of two or more Non-Employee Directors, in accordance with Rule 16b-3. Within the scope of such authority, the Board or the Committee may (A) delegate to a Committee of one or more members of the Board who are not Outside Directors the authority to grant Stock Awards to eligible persons who are either (I) not then Covered Employees and are not expected to be Covered Employees at the time of recognition of income resulting from such Stock Award or (II) not persons with respect to whom the Company wishes to comply with Section 162(m) of the Code and/or) (B) delegate to a Committee of one or more members of the Board who are not Non-Employee Directors the authority to grant Stock Awards to eligible persons who are not then subject to Section 16 of the Exchange Act. 4. 4. SHARES SUBJECT TO THE PLAN. (a) SHARE RESERVE. Subject to the provisions of Section 11 relating to adjustments upon changes in Common Stock, the Common Stock that may be issued pursuant to Stock Awards shall not exceed in the aggregate eight million two hundred seventy six thousand (8,276,000) shares of Common Stock. (b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Stock Award shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the shares of Common Stock not acquired under such Stock Award shall revert to and again become available for issuance under the Plan. (c) SOURCE OF SHARES. The shares of Common Stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 5. ELIGIBILITY. (a) ELIGIBILITY FOR SPECIFIC STOCK AWARDS. Incentive Stock Options may be granted only to Employees. Stock Awards other than Incentive Stock Options may be granted to Employees, Directors and Consultants. (b) TEN PERCENT STOCKHOLDERS. A Ten Percent Stockholder shall not be granted an Incentive Stock Option unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of the Common Stock at the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant. (c) SECTION 162(m) LIMITATION. Subject to the provisions of Section 11 relating to adjustments upon changes in the shares of Common Stock, no Employee shall be eligible to be granted Options covering more than one million seven hundred twenty-five thousand (1,725,000) shares of Common Stock during any calendar year. This subsection 5(c) shall not apply prior to the Listing Date and, following the Listing Date, this subsection 5(c) shall not apply until (i) the earliest of: (A) the first material modification of the Plan (including any increase in the number of shares of Common Stock reserved for issuance under the Plan in accordance with Section 4); (B) the issuance of all of the shares of Common Stock reserved for issuance under the Plan; (C) the expiration of the Plan; or (D) the first meeting of stockholders at which Directors are to be elected that occurs after the close of the third calendar year following the calendar year in which occurred the first registration of an equity security under Section 12 of the Exchange Act; or (ii) such other date required by Section 162(m) of the Code and the rules and regulations promulgated thereunder. (d) CONSULTANTS. (i) Prior to the Listing Date, a Consultant shall not be eligible for the grant of a Stock Award if, at the time of grant, either the offer or the sale of the Company's securities to such Consultant is not exempt under Rule 701 of the Securities Act ("RULE 701") because of the nature of the services that the Consultant is providing to the Company, or because the Consultant is not a natural person, or as otherwise provided by Rule 701, unless the Company determines that such grant need not comply with the requirements of Rule 701 and will satisfy another exemption under the Securities Act as well as comply with the securities laws of all other relevant jurisdictions. (ii) From and after the Listing Date, a Consultant shall not be eligible for the grant of a Stock Award if, at the time of grant, a Form S-8 Registration Statement under the Securities Act ("FORM S-8") is not available to register either the offer or the sale of the Company's securities to such Consultant because of the nature of the services that the Consultant is providing to the Company, or because the Consultant is not a natural person, or as otherwise provided by the rules governing the use of Form S-8, unless the Company determines both (A) that such grant (I) shall be registered in another manner under the Securities Act (e.g., on a Form S-3 Registration Statement) or (II) does not require registration under the Securities Act in order to comply with the requirements of the Securities Act, if applicable, and (B) that such grant complies with the securities laws of all other relevant jurisdictions. 5. (iii) As of April 7, 1999, Rule 701 and Form S-8 generally are available to consultants and advisors only if (A) they are natural persons, (B) they provide bona fide services to the issuer, its parents, its majority-owned subsidiaries or majority-owned subsidiaries of the issuer's parent, and (C) the services are not in connection with the offer or sale of securities in a capital-raising transaction, and do not directly or indirectly promote or maintain a market for the issuer's securities. 6. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and, if certificates are issued, a separate certificate or certificates will be issued for shares of Common Stock purchased on exercise of each type of Option. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: (a) TERM. Subject to the provisions of subsection 5(b) regarding Ten Percent Stockholders, no Incentive Stock Option shall be exercisable after the expiration of ten (10) years from the date it was granted. (b) EXERCISE PRICE OF AN INCENTIVE STOCK OPTION. Subject to the provisions of subsection 5(b) regarding Ten Percent Stockholders, the exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, an Incentive Stock Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another Option in a manner satisfying the provisions of Section 424(a) of the Code. (c) EXERCISE PRICE OF A NONSTATUTORY STOCK OPTION. The exercise price of each Nonstatutory Stock Option shall be not less than eighty-five percent (85%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, a Nonstatutory Stock Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (d) CONSIDERATION. The purchase price of Common Stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised or (ii) at the discretion of the Board at the time of the grant of the Option (or subsequently in the case of a Nonstatutory Stock Option) (A) by delivery to the Company of other Common Stock, (B) according to a deferred payment or other similar arrangement with the Optionholder or (C) in any other form of legal consideration that may be acceptable to the Board; provided, however, that at any time that the Company is incorporated in Delaware, payment of the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall not be made by deferred payment. In the case of any deferred payment arrangement, interest shall be compounded at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. (e) TRANSFERABILITY OF AN INCENTIVE STOCK OPTION. An Incentive Stock Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option. (f) TRANSFERABILITY OF A NONSTATUTORY STOCK OPTION. A Nonstatutory Stock Option shall be transferable to the extent provided in the Option Agreement. If the Nonstatutory Stock Option does not provide for 6. transferability, then the Nonstatutory Stock Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option. (g) VESTING GENERALLY. The total number of shares of Common Stock subject to an Option may, but need not, vest and therefore become exercisable in periodic installments that may, but need not, be equal. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options may vary. The provisions of this subsection 6(g) are subject to any Option provisions governing the minimum number of shares of Common Stock as to which an Option may be exercised. (h) TERMINATION OF CONTINUOUS SERVICE. In the event an Optionholder's Continuous Service terminates (other than upon the Optionholder's death or Disability), the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Optionholder's Continuous Service (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate. (i) EXTENSION OF TERMINATION DATE. An Optionholder's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionholder's Continuous Service (other than upon the Optionholder's death or Disability) would be prohibited at any time solely because the issuance of shares of Common Stock would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in subsection 6(a) or (ii) the expiration of a period of three (3) months after the termination of the Optionholder's Continuous Service during which the exercise of the Option would not be in violation of such registration requirements. (j) DISABILITY OF OPTIONHOLDER. In the event that an Optionholder's Continuous Service terminates as a result of the Optionholder's Disability, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period specified in the Option Agreement) or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified herein, the Option shall terminate. (k) DEATH OF OPTIONHOLDER. In the event (i) an Optionholder's Continuous Service terminates as a result of the Optionholder's death or (ii) the Optionholder dies within the period (if any) specified in the Option Agreement after the termination of the Optionholder's Continuous Service for a reason other than death, then the Option may be exercised (to the extent the Optionholder was entitled to exercise such Option as of the date of death) by the Optionholder's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionholder's death pursuant to subsection 6(e) or 6(f), but only within the period ending on the earlier of (A) the date eighteen (18) months following the date of death (or such longer or shorter period specified in the Option Agreement) or (B) the expiration of the term of such Option as set forth in the Option Agreement. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate. (l) EARLY EXERCISE. The Option may, but need not, include a provision whereby the Optionholder may elect at any time before the Optionholder's Continuous Service terminates to exercise the Option as to any part or all of the shares of Common Stock subject to the Option prior to the full vesting of the Option. Any unvested shares of Common Stock so purchased may be subject to a repurchase option in favor of the Company or to any other restriction the Board determines to be appropriate. 7. (m) RIGHT OF REPURCHASE. The Option may, but need not, include a provision whereby the Company may elect, prior to the Listing Date, to repurchase all or any part of the vested shares of Common Stock acquired by the Optionholder pursuant to the exercise of the Option. (n) RIGHT OF FIRST REFUSAL. The Option may, but need not, include a provision whereby the Company may elect, prior to the Listing Date, to exercise a right of first refusal following receipt of notice from the Optionholder of the intent to transfer all or any part of the shares of Common Stock received upon the exercise of the Option. Except as expressly provided in this subsection 6(n), such right of first refusal shall otherwise comply with any applicable provisions of the Bylaws of the Company. (o) RE-LOAD OPTIONS. Without in any way limiting the authority of the Board to make or not to make grants of Options hereunder, the Board shall have the authority (but not an obligation) to include as part of any Option Agreement a provision entitling the Optionholder to a further Option (a "RE-LOAD OPTION") in the event the Optionholder exercises the Option evidenced by the Option Agreement, in whole or in part, by surrendering other shares of Common Stock in accordance with this Plan and the terms and conditions of the Option Agreement. Any such Re-Load Option shall (i) provide for a number of shares of Common Stock equal to the number of shares of Common Stock surrendered as part or all of the exercise price of such Option; (ii) have an expiration date which is the same as the expiration date of the Option the exercise of which gave rise to such Re-Load Option; and (iii) have an exercise price which is equal to one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Re-Load Option on the date of exercise of the original Option. Notwithstanding the foregoing, a Re-Load Option shall be subject to the same exercise price and term provisions heretofore described for Options under the Plan. Any such Re-Load Option may be an Incentive Stock Option or a Nonstatutory Stock Option, as the Board may designate at the time of the grant of the original Option; provided, however, that the designation of any Re-Load Option as an Incentive Stock Option shall be subject to the one hundred thousand dollar ($100,000) annual limitation on the exercisability of Incentive Stock Options described in subsection 10(d) and in Section 422(d) of the Code. There shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall be subject to the availability of sufficient shares of Common Stock under subsection 4(a) and the Section 162(m) Limitation on the grants of Options under subsection 5(c) and shall be subject to such other terms and conditions as the Board may determine which are not inconsistent with the express provisions of the Plan regarding the terms of Options. 7. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS. (a) STOCK BONUS AWARDS. Each stock bonus agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of stock bonus agreements may change from time to time, and the terms and conditions of separate stock bonus agreements need not be identical, but each stock bonus agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions: (i) CONSIDERATION. A stock bonus may be awarded in consideration for past services actually rendered to the Company or an Affiliate for its benefit. (ii) VESTING. Shares of Common Stock awarded under the stock bonus agreement may, but need not, be subject to a share repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board. (iii) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. In the event a Participant's Continuous Service terminates, the Company may reacquire any or all of the shares of Common Stock held by the Participant which have not vested as of the date of termination under the terms of the stock bonus agreement. (iv) TRANSFERABILITY. Rights to acquire shares of Common Stock under the stock bonus agreement shall be transferable by the Participant only upon such terms and conditions as are set forth in the stock 8. bonus agreement, as the Board shall determine in its discretion, so long as Common Stock awarded under the stock bonus agreement remains subject to the terms of the stock bonus agreement. (b) RESTRICTED STOCK AWARDS. Each restricted stock purchase agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of the restricted stock purchase agreements may change from time to time, and the terms and conditions of separate restricted stock purchase agreements need not be identical, but each restricted stock purchase agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions: (i) PURCHASE PRICE. The purchase price of restricted stock awards shall not be less than eighty-five percent (85%) of the Common Stock's Fair Market Value on the date such award is made or at the time the purchase is consummated. (ii) CONSIDERATION. The purchase price of Common Stock acquired pursuant to the restricted stock purchase agreement shall be paid either: (i) in cash at the time of purchase; (ii) at the discretion of the Board, according to a deferred payment or other similar arrangement with the Participant; or (iii) in any other form of legal consideration that may be acceptable to the Board in its discretion; provided, however, that at any time that the Company is incorporated in Delaware, then payment of the Common Stock's "PAR VALUE," as defined in the Delaware General Corporation Law, shall not be made by deferred payment. (iii) VESTING. Shares of Common Stock acquired under the restricted stock purchase agreement may, but need not, be subject to a share repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board. (iv) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. In the event a Participant's Continuous Service terminates, the Company may repurchase or otherwise reacquire any or all of the shares of Common Stock held by the Participant which have not vested as of the date of termination under the terms of the restricted stock purchase agreement. (v) TRANSFERABILITY. Rights to acquire shares of Common Stock under the restricted stock purchase agreement shall be transferable by the Participant only upon such terms and conditions as are set forth in the restricted stock purchase agreement, as the Board shall determine in its discretion, so long as Common Stock awarded under the restricted stock purchase agreement remains subject to the terms of the restricted stock purchase agreement. 8. COVENANTS OF THE COMPANY. (a) AVAILABILITY OF SHARES. During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of Common Stock required to satisfy such Stock Awards. (b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Stock Awards and to issue and sell shares of Common Stock upon exercise of the Stock Awards; provided, however, that this undertaking shall not require the Company to register under the Securities Act the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of Common Stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell Common Stock upon exercise of such Stock Awards unless and until such authority is obtained. 9. 9. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of Common Stock pursuant to Stock Awards shall constitute general funds of the Company. 10. MISCELLANEOUS. (a) ACCELERATION OF EXERCISABILITY AND VESTING. The Board shall have the power to accelerate the time at which a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest in accordance with the Plan, notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time during which it will vest. (b) STOCKHOLDER RIGHTS. No Participant shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to such Stock Award unless and until such Participant has satisfied all requirements for exercise of the Stock Award pursuant to its terms. (c) NO EMPLOYMENT OR OTHER SERVICE RIGHTS. Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto shall confer upon any Participant any right to continue to serve the Company or an Affiliate in the capacity in effect at the time the Stock Award was granted or shall affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to the terms of such Consultant's agreement with the Company or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the Company or an Affiliate, and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated, as the case may be. (d) INCENTIVE STOCK OPTION $100,000 LIMITATION. To the extent that the aggregate Fair Market Value (determined at the time of grant) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionholder during any calendar year (under all plans of the Company and its Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options. (e) INVESTMENT ASSURANCES. The Company may require a Participant, as a condition of exercising or acquiring Common Stock under any Stock Award, (i) to give written assurances satisfactory to the Company as to the Participant's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (ii) to give written assurances satisfactory to the Company stating that the Participant is acquiring Common Stock subject to the Stock Award for the Participant's own account and not with any present intention of selling or otherwise distributing the Common Stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (iii) the issuance of the shares of Common Stock upon the exercise or acquisition of Common Stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act or (iv) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the Common Stock. (f) WITHHOLDING OBLIGATIONS. To the extent provided by the terms of a Stock Award Agreement, the Participant may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of Common Stock under a Stock Award by any of the following means (in addition to the Company's right to withhold from any compensation paid to the Participant by the Company) or by a combination of such means: (i) tendering a cash payment; (ii) authorizing the Company to withhold shares of Common Stock from the shares of Common Stock 10. otherwise issuable to the Participant as a result of the exercise or acquisition of Common Stock under the Stock Award; or (iii) delivering to the Company owned and unencumbered shares of Common Stock. 11. ADJUSTMENTS UPON CHANGES IN STOCK. (a) CAPITALIZATION ADJUSTMENTS. If any change is made in the Common Stock subject to the Plan, or subject to any Stock Award, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the class(es) and maximum number of securities subject to the Plan pursuant to subsection 4(a) and the maximum number of securities subject to award to any person pursuant to subsection 5(c), and the outstanding Stock Awards will be appropriately adjusted in the class(es) and number of securities and price per share of Common Stock subject to such outstanding Stock Awards. The Board shall make such adjustments, and its determination shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a transaction "without receipt of consideration" by the Company.) (b) DISSOLUTION OR LIQUIDATION. In the event of a dissolution or liquidation of the Company, then all outstanding Stock Awards shall terminate immediately prior to such event. (c) CHANGE IN CONTROL--ASSET SALE, MERGER, CONSOLIDATION OR REVERSE MERGER. In the event of (i) a sale, lease or other disposition of all or substantially all of the assets of the Company, (ii) a consolidation, merger or reverse merger of the Company with or into any other corporation or other entity or person, or any other corporate reorganization, in which the stockholders of the Company immediately prior to such consolidation, merger or reorganization, own less than fifty percent (50%) of the Company's outstanding voting power of the surviving entity (or its parent) following the consolidation, merger or reorganization or (iii) any transaction or series of related transactions in which in excess of fifty percent (50%) of the Company's voting power is transferred, then any surviving corporation or acquiring corporation shall assume any Stock Awards outstanding under the Plan or shall substitute similar stock awards (including an award to acquire the same consideration paid to the stockholders in the transaction described in this subsection 11(c)) for those outstanding under the Plan. In the event any surviving corporation or acquiring corporation refuses to assume such Stock Awards or to substitute similar stock awards for those outstanding under the Plan, then with respect to Stock Awards held by Participants whose Continuous Service has not terminated, the vesting of such Stock Awards (and, if applicable, the time during which such Stock Awards may be exercised) shall be accelerated in full, and the Stock Awards shall terminate if not exercised (if applicable) at or prior to such event. With respect to any other Stock Awards outstanding under the Plan, such Stock Awards shall terminate if not exercised (if applicable) prior to such event. (d) CHANGE IN CONTROL--SECURITIES ACQUISITION. After the Listing Date, in the event of an acquisition by any person, entity or group within the meaning of Section 13(d) or 14(d) of the Exchange Act, or any comparable successor provisions (excluding any employee benefit plan, or related trust, sponsored or maintained by the Company or an Affiliate) of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of Directors and provided that such acquisition does not occur in connection with, in contemplation of or as a result of a transaction described in subsection 11(c) hereof, then with respect to Stock Awards held by Participants whose Continuous Service has not terminated, the vesting of such Stock Awards (and, if applicable, the time during which such Stock Awards may be exercised) shall be accelerated in full. (e) STOCK VESTING PURSUANT TO A CHANGE OF CONTROL TRANSACTION. In the event of any transaction described in paragraph 11(c) above (other than a merger or consolidation for the primary purpose of a change in domicile) and subject to any limitation set forth in a Stock Award, with respect to Stock Awards held by Participants whose Continuous Service has not terminated prior to the closing of such event described in paragraph 11(c) above, the vesting of such Stock Awards shall be treated as follows: the portion of the Stock Awards not subject to monthly vesting, but vesting based on the expiration of a one-year period (the "CLIFF PERIOD") shall be treated as if 11. the Stock Awards had vested ratably on a monthly basis from the Vesting Commencement Date (as described in the relevant Stock Awards) during those months that the Optionholder is deemed to have performed Continuous Service for the Company (the "DEEMED VESTED PROVISION"); provided, further, an additional 12.5% of all shares (the "Additional Vested Shares") subject to such Stock Awards, or an amount equal to the remaining unvested shares if less, shall vest immediately upon the closing of such event (after giving effect to the Deemed Vested Provision). The Additional Vested Shares shall be deducted on a pro rata basis from each remaining periodic installment of unvested shares under the Stock Award, if applicable, such that any remaining unvested shares shall vest according to the same schedule and over the entire remaining vesting period as would apply in the absence of such accelerated vesting. 12. AMENDMENT OF THE PLAN AND STOCK AWARDS. (a) AMENDMENT OF PLAN. The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 11 relating to adjustments upon changes in Common Stock, no amendment shall be effective unless approved by the stockholders of the Company to the extent stockholder approval is necessary to satisfy the requirements of Section 422 of the Code, Rule 16b-3 or any Nasdaq or securities exchange listing requirements. (b) STOCKHOLDER APPROVAL. The Board may, in its sole discretion, submit any other amendment to the Plan for stockholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to certain executive officers. (c) CONTEMPLATED AMENDMENTS. It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith. (d) NO IMPAIRMENT OF RIGHTS. Rights under any Stock Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing. (e) AMENDMENT OF STOCK AWARDS. The Board at any time, and from time to time, may amend the terms of any one or more Stock Awards; provided, however, that the rights under any Stock Award shall not be impaired by any such amendment unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing. 13. TERMINATION OR SUSPENSION OF THE PLAN. (a) PLAN TERM. The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on the day before the tenth (10th) anniversary of the date the Plan is adopted by the Board or approved by the stockholders of the Company, whichever is earlier. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated. (b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan shall not impair rights and obligations under any Stock Award granted while the Plan is in effect except with the written consent of the Participant. 14. EFFECTIVE DATE OF PLAN. The Plan shall become effective as determined by the Board, but no Stock Award shall be exercised (or, in the case of a stock bonus, shall be granted) unless and until the Plan has been approved by the stockholders of the 12. Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board. 15. CHOICE OF LAW. The law of the State of Washington shall govern all questions concerning the construction, validity and interpretation of this Plan, without regard to such state's conflict of laws rules. 13. EX-10.1.2 7 v97093orexv10w1w2.txt EXHIBIT 10.1.2 EXHIBIT 10.1.2 BLUE NILE, INC. 1999 EQUITY INCENTIVE PLAN STOCK OPTION AGREEMENT (INCENTIVE AND NONSTATUTORY STOCK OPTIONS) Pursuant to your Stock Option Grant Notice ("GRANT NOTICE") and this Stock Option Agreement, Blue Nile, Inc. (the "COMPANY") has granted you an Option under its 1999 Equity Incentive Plan (the "PLAN") to purchase the number of shares of the Company's Common Stock indicated in your Grant Notice at the exercise price indicated in your Grant Notice. Defined terms not explicitly defined in this Stock Option Agreement but defined in the Plan shall have the same definitions as in the Plan. The details of your Option are as follows: 1. VESTING. Subject to the limitations contained herein, your Option will vest as provided in your Grant Notice, provided that vesting will cease upon the termination of your Continuous Service. 2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common Stock subject to your Option and your exercise price per share referenced in your Grant Notice may be adjusted from time to time for Capitalization Adjustments, as provided in the Plan. 3. EXERCISE PRIOR TO VESTING ("EARLY EXERCISE"). If permitted in your Grant Notice (i.e., the "EXERCISE SCHEDULE" indicates that "EARLY EXERCISE" of your Option is permitted) and subject to the provisions of your Option, you may elect at any time that is both (a) during the period of your Continuous Service and (b) during the term of your Option, to exercise all or part of your Option, including the nonvested portion of your Option; provided, however, that: (a) a partial exercise of your Option shall be deemed to cover first vested shares of Common Stock and then the earliest vesting installment of unvested shares of Common Stock; (b) any shares of Common Stock so purchased from installments that have not vested as of the date of exercise shall be subject to the purchase option in favor of the Company as described in the Company's form of Early Exercise Stock Purchase Agreement; (c) you shall enter into the Company's form of Early Exercise Stock Purchase Agreement with a vesting schedule that will result in the same vesting as if no early exercise had occurred; and (d) if your Option is an Incentive Stock Option, then, as provided in the Plan, to the extent that the aggregate Fair Market Value (determined at the time of grant) of the shares of Common Stock with respect to which your Option plus all other Incentive Stock Options you hold are exercisable for the first time by you during any calendar year (under all plans of the Company and its Affiliates) exceeds one hundred thousand dollars ($100,000), your Option(s) or portions thereof that exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Option(s). 1. 4. METHOD OF PAYMENT. Payment of the exercise price is due in full upon exercise of all or any part of your Option. You may elect to make payment of the exercise price in cash or by check or in any other manner PERMITTED BY YOUR GRANT NOTICE, which may include one or more of the following: (a) In the Company's sole discretion at the time your Option is exercised and provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds. (b) Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, by delivery of already-owned shares of Common Stock either that you have held for the period required to avoid a charge to the Company's reported earnings (generally six months) or that you did not acquire, directly or indirectly from the Company, that are owned free and clear of any liens, claims, encumbrances or security interests, and that are valued at Fair Market Value on the date of exercise. "Delivery" for these purposes, in the sole discretion of the Company at the time you exercise your Option, shall include delivery to the Company of your attestation of ownership of such shares of Common Stock in a form approved by the Company. Notwithstanding the foregoing, you may not exercise your Option by tender to the Company of Common Stock to the extent such tender would violate the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. (c) Pursuant to the following deferred payment alternative: (i) Not less than one hundred percent (100%) of the aggregate exercise price, plus accrued interest, shall be due four (4) years from date of exercise or, at the Company's election, upon termination of your Continuous Service. (ii) Interest shall be compounded at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any portion of any amounts other than amounts stated to be interest under the deferred payment arrangement. (iii) At any time that the Company is incorporated in Delaware, payment of the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall be made in cash and not by deferred payment. (iv) In order to elect the deferred payment alternative, you must, as a part of your written notice of exercise, give notice of the election of this payment alternative and, in order to secure the payment of the deferred exercise price to the Company hereunder, if the Company so requests, you must tender to the Company a promissory note and a security agreement covering the purchased shares of Common Stock, both in form and substance satisfactory to the Company, or such other or additional documentation as the Company may request. 5. WHOLE SHARES. You may exercise your Option only for whole shares of Common Stock. 2. 6. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, you may not exercise your Option unless the shares of Common Stock issuable upon such exercise are then registered under the Securities Act or, if such shares of Common Stock are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. The exercise of your Option must also comply with other applicable laws and regulations governing your Option, and you may not exercise your Option if the Company determines that such exercise would not be in material compliance with such laws and regulations. 7. TERM. The term of your Option commences on the Date of Grant and expires upon the EARLIEST of the following: (a) three (3) months after the termination of your Continuous Service for any reason other than your Disability or death, provided that if during any part of such three (3) month period your Option is not exercisable solely because of the condition set forth in the preceding paragraph relating to "Securities Law Compliance," your Option shall not expire until the earlier of the Expiration Date or until it shall have been exercisable for an aggregate period of three (3) months after the termination of your Continuous Service; (b) twelve (12) months after the termination of your Continuous Service due to your Disability; (c) eighteen (18) months after your death if you die either during your Continuous Service or within three (3) months after your Continuous Service terminates; (d) the Expiration Date indicated in your Grant Notice; or (e) the tenth (10th) anniversary of the Date of Grant. If your Option is an Incentive Stock Option, note that, to obtain the federal income tax advantages associated with an "INCENTIVE STOCK OPTION," the Code requires that at all times beginning on the date of grant of your Option and ending on the day three (3) months before the date of your Option's exercise, you must be an employee of the Company or an Affiliate, except in the event of your death or Disability. The Company has provided for extended exercisability of your Option under certain circumstances for your benefit but cannot guarantee that your Option will necessarily be treated as an "INCENTIVE STOCK OPTION" if you continue to provide services to the Company or an Affiliate as a Consultant or Director after your employment terminates or if you otherwise exercise your Option more than three (3) months after the date your employment terminates. 8. EXERCISE. (a) You may exercise the vested portion of your Option (and the unvested portion of your Option if your Grant Notice so permits) during its term by delivering a Notice of Exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require. (b) By exercising your Option you agree that, as a condition to any exercise of your Option, the Company may require you to enter into an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of your Option, (2) the lapse of any substantial risk of forfeiture to which the shares of Common Stock are 3. subject at the time of exercise, or (3) the disposition of shares of Common Stock acquired upon such exercise. (c) If your Option is an Incentive Stock Option, by exercising your Option you agree that you will notify the Company in writing within fifteen (15) days after the date of any disposition of any of the shares of the Common Stock issued upon exercise of your Option that occurs within two (2) years after the date of your Option grant or within one (1) year after such shares of Common Stock are transferred upon exercise of your Option. (d) By exercising your Option you agree that the Company (or a representative of the underwriter(s)) may, in connection with the first underwritten registration of the offering of any securities of the Company under the Securities Act, require that you not sell, dispose of, transfer, make any short sale of, grant any Option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, any shares of Common Stock or other securities of the Company held by you, for a period of time specified by the underwriter(s) (not to exceed one hundred eighty (180) days) following the effective date of the registration statement of the Company filed under the Securities Act. You further agree to execute and deliver such other agreements as may be reasonably requested by the Company and/or the underwriter(s) that are consistent with the foregoing or that are necessary to give further effect thereto. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to your shares of Common Stock until the end of such period. 9. TRANSFERABILITY. Your Option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise your Option. 10. RIGHT OF FIRST REFUSAL. Shares of Common Stock that you acquire upon exercise of your Option are subject to any right of first refusal that may be described in the Company's bylaws in effect at such time the Company elects to exercise its right. The Company's right of first refusal shall expire on the Listing Date. 11. RIGHT OF REPURCHASE. To the extent provided in the Company's Bylaws, as amended from time to time, the Company shall have the right to repurchase all or any part of the shares of Common Stock you acquire pursuant to the exercise of your Option. 12. OPTION NOT A SERVICE CONTRACT. Your Option is not an employment or service contract, and nothing in your Option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or of the Company or an Affiliate to continue your employment. In addition, nothing in your Option shall obligate the Company or an Affiliate, their respective stockholders, Boards of Directors, Officers or Employees to continue any relationship that you might have as a Director or Consultant for the Company or an Affiliate. 13. WITHHOLDING OBLIGATIONS. (a) At the time you exercise your Option, in whole or in part, or at any time thereafter as requested by the Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for (including by means of a "cashless exercise" pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the federal, state, 4. local and foreign tax withholding obligations of the Company or an Affiliate, if any, which arise in connection with your Option. (b) Upon your request and subject to approval by the Company, in its sole discretion, and compliance with any applicable conditions or restrictions of law, the Company may withhold from fully vested shares of Common Stock otherwise issuable to you upon the exercise of your Option a number of whole shares of Common Stock having a Fair Market Value, determined by the Company as of the date of exercise, not in excess of the minimum amount of tax required to be withheld by law. If the date of determination of any tax withholding obligation is deferred to a date later than the date of exercise of your Option, share withholding pursuant to the preceding sentence shall not be permitted unless you make a proper and timely election under Section 83(b) of the Code, covering the aggregate number of shares of Common Stock acquired upon such exercise with respect to which such determination is otherwise deferred, to accelerate the determination of such tax withholding obligation to the date of exercise of your Option. Notwithstanding the filing of such election, shares of Common Stock shall be withheld solely from fully vested shares of Common Stock determined as of the date of exercise of your Option that are otherwise issuable to you upon such exercise. Any adverse consequences to you arising in connection with such share withholding procedure shall be your sole responsibility. (c) You may not exercise your Option unless the tax withholding obligations of the Company and/or any Affiliate are satisfied. Accordingly, you may not be able to exercise your Option when desired even though your Option is vested, and the Company shall have no obligation to issue a certificate for such shares of Common Stock or release such shares of Common Stock from any escrow provided for herein. 14. NOTICES. Any notices provided for in your Option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. 15. GOVERNING PLAN DOCUMENT. Your Option is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your Option, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your Option and those of the Plan, the provisions of the Plan shall control. 16. TRANSFERABILITY. (a) If your Option is an Incentive Stock Option, your Option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise your Option. (b) If your Option is a Nonstatutory Stock Option, your Option is not transferable, except (i) by will or by the laws of descent and distribution, (ii) with the prior written approval of the Company, by instrument to an inter vivos or testamentary trust, in a form accepted by the Company, in which the Option is to be passed to beneficiaries upon the death of the trustor (settlor) and (iii) with the prior written approval of the Company, by gift, in a form accepted by the Company, to your "immediate family" as that term is defined in 17 C.F.R. 240.16a-1(e). The term "immediate family" is defined in 17 5. C.F.R. 240.16a-1(e) to mean any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, and includes adoptive relationships. Your Option is exercisable during your life only by you or a transferee satisfying the above-stated conditions. The right of a transferee to exercise the transferred portion of your Option after termination of your Continuous Service shall terminate in accordance with your right to exercise your Option as specified in your Option. In the event that your Continuous Service terminates due to your death, your transferee will be treated as a person who acquired the right to exercise your Option by bequest or inheritance. In addition to the foregoing, the Company may require, as a condition of the transfer of your Option to a trust or by gift, that your transferee enter into an Option transfer agreement provided by, or acceptable to, the Company. The terms of your Option shall be binding upon your transferees, executors, administrators, heirs, successors, and assigns. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise your Option. 6. EX-10.2.1 8 v97093orexv10w2w1.txt EXHIBIT 10.2.1 EXHIBIT 10.2.1 BLUE NILE, INC. 2004 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN ADOPTED MARCH 9, 2004 APPROVED BY STOCKHOLDERS MARCH _____, 2004 1. PURPOSES. (a) ELIGIBLE OPTION RECIPIENTS. The persons eligible to receive Options are the Non-Employee Directors of the Company. (b) AVAILABLE OPTIONS. The purpose of the Plan is to provide a means by which Non-Employee Directors may be given an opportunity to benefit from increases in value of the Common Stock through the granting of Nonstatutory Stock Options. (c) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain the services of its Non-Employee Directors, to secure and retain the services of new Non-Employee Directors and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. 2. DEFINITIONS. (a) "ACCOUNTANT" means the independent public accountants of the Company. (b) "AFFILIATE" means any parent corporation or subsidiary corporation of the Company, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code. (c) "ANNUAL GRANT" means an Option granted annually to all Non-Employee Directors who meet the specified criteria pursuant to Section 6(c). (d) "ANNUAL MEETING" means the annual meeting of the stockholders of the Company. (e) "BOARD" means the Board of Directors of the Company. (f) "CAPITALIZATION ADJUSTMENT" has the meaning ascribed to that term in Section 11(a). 1. (g) "CHANGE IN CONTROL" means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events: (i) any Exchange Act Person becomes the Owner, directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company's then outstanding securities other than by virtue of a merger, consolidation or similar transaction. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because the level of Ownership held by any Exchange Act Person (the "Subject Person") exceeds the designated percentage threshold of the outstanding voting securities as a result of a repurchase or other acquisition of voting securities by the Company reducing the number of shares outstanding, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of voting securities by the Company, and after such share acquisition, the Subject Person becomes the Owner of any additional voting securities that, assuming the repurchase or other acquisition had not occurred, increases the percentage of the then outstanding voting securities Owned by the Subject Person over the designated percentage threshold, then a Change in Control shall be deemed to occur; (ii) there is consummated a merger, consolidation or similar transaction involving (directly or indirectly) the Company and, immediately after the consummation of such merger, consolidation or similar transaction, the stockholders of the Company immediately prior thereto do not Own, directly or indirectly, outstanding voting securities representing more than fifty percent (50%) of the combined outstanding voting power of the surviving Entity in such merger, consolidation or similar transaction or more than fifty percent (50%) of the combined outstanding voting power of the parent of the surviving Entity in such merger, consolidation or similar transaction; (iii) the stockholders of the Company approve or the Board approves a plan of complete dissolution or liquidation of the Company, or a complete dissolution or liquidation of the Company shall otherwise occur; (iv) there is consummated a sale, lease, license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries, other than a sale, lease, license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries to an Entity, more than fifty percent (50%) of the combined voting power of the voting securities of which are Owned by stockholders of the Company in substantially the same proportions as their Ownership of the Company immediately prior to such sale, lease, license or other disposition; or (v) individuals who, on the date this Plan is adopted by the Board, are members of the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the members of the Board; (provided, however, that if the appointment or election (or nomination for election) of any new Board member was approved or recommended by a majority vote of the members of the Incumbent Board then still in office, such new member shall, for purposes of this Plan, be considered as a member of the Incumbent Board). (h) "CODE" means the Internal Revenue Code of 1986, as amended. 2. (i) "COMMON STOCK" means the common stock of the Company. (j) "COMPANY" means Blue Nile, Inc., a Delaware corporation. (k) "CONSULTANT" means any person, including an advisor, (i) engaged by the Company or an Affiliate to render consulting or advisory services and who is compensated for such services or (ii) serving as a member of the Board of Directors of an Affiliate. However, the term "Consultant" shall not include either Directors of the Company who are not compensated by the Company for their services as Directors or Directors of the Company who are merely paid a director's fee by the Company for their services as Directors. (l) "CONTINUOUS SERVICE" means that the Optionholder's service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. The Optionholder's Continuous Service shall not be deemed to have terminated merely because of a change in the capacity in which the Optionholder renders service to the Company or an Affiliate as an Employee, Consultant or Director or a change in the entity for which the Optionholder renders such service, provided that there is no interruption or termination of the Optionholder's Continuous Service. For example, a change in status from a Non-Employee Director of the Company to a Consultant of an Affiliate or an Employee of the Company will not constitute an interruption of Continuous Service. The Board or the chief executive officer of the Company, in that party's sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal leave. (m) "CORPORATE TRANSACTION" means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events: (i) a sale or other disposition of all or substantially all, as determined by the Board in its discretion, of the consolidated assets of the Company and its Subsidiaries; (ii) a sale or other disposition of at least ninety percent (90%) of the outstanding securities of the Company; (iii) a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or (iv) a merger, consolidation or similar transaction following which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise. (n) "DIRECTOR" means a member of the Board of Directors of the Company. (o) "DISABILITY" means the inability of a person, in the opinion of a qualified physician acceptable to the Company, to perform the major duties of that person's position with the Company or an Affiliate of the Company because of the sickness or injury of the person. 3. (p) "EMPLOYEE" means any person employed by the Company or an Affiliate. Service as a Director or payment of a director's fee by the Company or an Affiliate shall not be sufficient to constitute "employment" by the Company or an Affiliate. (q) "ENTITY" means a corporation, partnership or other entity. (r) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (s) "EXCHANGE ACT PERSON" means any natural person, Entity or "group" (within the meaning of Section 13(d) or 14(d) of the Exchange Act), except that "Exchange Act Person" shall not include (A) the Company or any Subsidiary of the Company, (B) any employee benefit plan of the Company or any Subsidiary of the Company or any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary of the Company, (C) an underwriter temporarily holding securities pursuant to an offering of such securities, or (D) an Entity Owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their Ownership of stock of the Company. (t) "FAIR MARKET VALUE" means, as of any date, the value of the Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable. (ii) In the absence of such markets for the Common Stock, the Fair Market Value shall be determined in good faith by the Board. (u) "INITIAL GRANT" means an Option granted to a Non-Employee Director who meets the specified criteria pursuant to Section 6(a). (v) "IPO DATE" means the date on which the registration statement in connection with the Company's initial public offering is declared effective. (w) "NON-EMPLOYEE DIRECTOR" means a Director who is not an Employee. (x) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (y) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (z) "OPTION" means a Nonstatutory Stock Option granted pursuant to the Plan. 4. (aa) "OPTION AGREEMENT" means a written agreement between the Company and an Optionholder evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. (bb) "OPTIONHOLDER" means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option. (cc) "OWN," "OWNED," "OWNER," "OWNERSHIP" A person or Entity shall be deemed to "Own," to have "Owned," to be the "Owner" of, or to have acquired "Ownership" of securities if such person or Entity, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares voting power, which includes the power to vote or to direct the voting, with respect to such securities. (dd) "PLAN" means this Blue Nile, Inc. 2004 Non-Employee Directors' Stock Option Plan. (ee) "RELOAD GRANT" means an Option granted to a Non-Employee Director who meets the specified criteria pursuant to Section 6(b). (ff) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3, as in effect from time to time. (gg) "SECURITIES ACT" means the Securities Act of 1933, as amended. (hh) "SUBSIDIARY" means, with respect to the Company, (i) any corporation of which more than fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, Owned by the Company, and (ii) any partnership in which the Company has a direct or indirect interest (whether in the form of voting or participation in profits or capital contribution) of more than fifty percent (50%). 3. ADMINISTRATION. (a) ADMINISTRATION BY BOARD. The Board shall administer the Plan. The Board may not delegate administration of the Plan to a committee. (b) POWERS OF BOARD. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine the provisions of each Option to the extent not specified in the Plan. (ii) To construe and interpret the Plan and Options granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any 5. Option Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iii) To amend the Plan or an Option as provided in Section 12. (iv) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company and that are not in conflict with the provisions of the Plan. (c) EFFECT OF BOARD'S DECISION. All determinations, interpretations and constructions made by the Board in good faith shall not be subject to review by any person and shall be final, binding and conclusive on all persons. 4. SHARES SUBJECT TO THE PLAN. (a) SHARE RESERVE. Subject to the provisions of Section 11 relating to adjustments upon changes in the Common Stock, the Common Stock that may be issued pursuant to Options shall not exceed in the aggregate One Million (1,000,000) shares of Common Stock, plus an annual increase for ten years beginning on January 1, 2005 and ending on (and including) January 1, 2014 equal to the number of shares subject to Options granted during the prior calendar year. Notwithstanding the foregoing, the Board may act, prior to the first day of any fiscal year of the Company, to increase the share reserve by such number of shares of Common Stock as the Board shall determine, which number shall be less than the amount described in the foregoing sentence. (b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Option shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the shares of Common Stock not acquired under such Option shall revert to and again become available for issuance under the Plan. (c) SOURCE OF SHARES. The shares of Common Stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 5. ELIGIBILITY. The Options, as set forth in Section 6, automatically shall be granted under the Plan to all Non-Employee Directors who meet the criteria specified in Section 6. 6. NON-DISCRETIONARY GRANTS. (a) INITIAL GRANTS. Without any further action of the Board, (i) each person who is a Non-Employee Director on the IPO Date and (ii) each person who after the IPO Date is elected or appointed for the first time to be a Non-Employee Director automatically shall, upon the IPO Date or the date of his or her initial election or appointment to be a Non-Employee Director, as applicable, be granted an Initial Grant to purchase Fifty Thousand (50,000) shares of Common Stock on the terms and conditions set forth herein. 6. (b) RELOAD GRANTS. Without any further action of the Board, (i) each person who receives an Initial Grant pursuant to Section 6(a) automatically shall, upon the date that such Initial Grant becomes fully vested in accordance with Section 7(e), be granted a Reload Grant to purchase Forty Thousand (40,000) shares of Common Stock on the terms and conditions set forth herein, provided that such person is a Non-Employee Director on the date of such Reload Grant; and (ii) each Non-Employee Director who receives a Reload Grant in accordance with the foregoing automatically shall be granted a Reload Grant upon the date that any previously granted Reload Grant becomes fully vested in accordance with Section 7(e), provided that such person is a Non-Employee Director on such date. (c) ANNUAL GRANTS. Without any further action of the Board, on the day following each Annual Meeting, commencing with the Annual Meeting in 2005, each person who is then a Non-Employee Director automatically shall be granted an Annual Grant to purchase Ten Thousand (10,000) shares of Common Stock on the terms and conditions set forth herein; provided, however, that if the person has not been serving as a Non-Employee Director for the entire period since the preceding Annual Meeting, then the number of shares subject to such Annual Grant shall be reduced pro rata for each full quarter prior to the date of grant during which such person did not serve as a Non- Employee Director. 7. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as required by the Plan. Each Option shall contain such additional terms and conditions, not inconsistent with the Plan, as the Board shall deem appropriate. Each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: (a) TERM. No Option shall be exercisable after the expiration of ten (10) years from the date it was granted. (b) EXERCISE PRICE. The exercise price of each Option shall be one hundred percent (100%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted. (c) CONSIDERATION. The purchase price of stock acquired pursuant to an Option may be paid, to the extent permitted by applicable law, in any combination of (i) cash or check, (ii) delivery to the Company of other Common Stock or (iii) pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds. The purchase price of Common Stock acquired pursuant to an Option that is paid by delivery to the Company of other Common Stock acquired, directly or indirectly from the Company, shall be paid only by shares of the Common Stock of the Company that have been held for more than six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes). 7. (d) TRANSFERABILITY. Except as otherwise provided for in this Section, an Option is transferable only by will or by the laws of descent and distribution and exercisable only by the Optionholder during the life of the Optionholder. However, an Option may be transferred for no consideration upon written consent of the Board (i) if, at the time of transfer, a Form S-8 registration statement under the Securities Act is available for the issuance of shares by the Company upon the exercise of such transferred Option or (ii) the transfer is to the Optionholder's employer at the time of transfer or an affiliate of the Optionholder's employer at the time of transfer. Any such transfer is subject to such limits as the Board may establish, and subject to the transferee agreeing to remain subject to all the terms and conditions applicable to the Option prior to such transfer. The forgoing right to transfer the Option shall apply to the right to consent to amendments to the Stock Option Agreement for such Option. In addition, until the Optionholder transfers the Option, an Optionholder may, by delivering written notice to the Company, in a form provided by or otherwise satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option. (e) VESTING. Options shall vest as follows: (i) Initial Grants: 1/30th of the shares shall vest monthly from the date of grant for one (1) year and 1/60th of the shares shall vest monthly thereafter over the next three (3) years. (ii) Reload Grants: 1/48th of the shares shall vest monthly from the date of grant for four (4) years. (iii) Annual Grants: 1/12th of the shares shall vest monthly from the date of grant for one (1) year. (f) EARLY EXERCISE. The Option may, but need not, include a provision whereby the Optionholder may elect at any time before the Optionholder's Continuous Service terminates to exercise the Option as to any part or all of the shares of Common Stock subject to the Option prior to the full vesting of the Option. Any unvested shared of Common Stock so purchased may be subject to a repurchase option in favor of the Company or to any other restriction the Board determines to be appropriate. The Company will not exercise its repurchase option until at least six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes) have elapsed following exercise of the Option unless the Board otherwise specifically provides in the Option. (g) TERMINATION OF CONTINUOUS SERVICE. In the event an Optionholder's Continuous Service terminates (other than upon the Optionholder's death or Disability), the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise it as of the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Optionholder's Continuous Service, or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If the Optionholder's Continuous Service terminates in a manner described in Section 11(d), then the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise it as of the date of termination) but only within such period of time ending on the earlier 8. of (i) the date twelve (12) months following the termination of the Optionholder's Continuous Service, or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate. (h) EXTENSION OF TERMINATION DATE. If the exercise of the Option following the termination of the Optionholder's Continuous Service (other than upon the Optionholder's death or Disability) would be prohibited at any time solely because the issuance of shares would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option as set forth in the Option Agreement or (ii) the expiration of a period of three (3) months after the termination of the Optionholder's Continuous Service during which the exercise of the Option would not be in violation of such registration requirements. (i) DISABILITY OF OPTIONHOLDER. In the event an Optionholder's Continuous Service terminates as a result of the Optionholder's Disability, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise it as of the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified herein, the Option shall terminate. (j) DEATH OF OPTIONHOLDER. In the event (i) an Optionholder's Continuous Service terminates as a result of the Optionholder's death or (ii) the Optionholder dies within the three-month period after the termination of the Optionholder's Continuous Service for a reason other than death, then the Option may be exercised (to the extent the Optionholder was entitled to exercise the Option as of the date of death) by the Optionholder's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the Option upon the Optionholder's death, but only within the period ending on the earlier of (1) the date eighteen (18) months following the date of death or (2) the expiration of the term of such Option as set forth in the Option Agreement. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate. 8. SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Options and to issue and sell shares of Common Stock upon exercise of the Options; provided, however, that this undertaking shall not require the Company to register under the Securities Act the Plan, any Option or any stock issued or issuable pursuant to any such Option. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such Options unless and until such authority is obtained. 9. 9. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock pursuant to Options shall constitute general funds of the Company. 10. MISCELLANEOUS. (a) STOCKHOLDER RIGHTS. No Optionholder shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Option unless and until such Optionholder has satisfied all requirements for exercise of the Option pursuant to its terms. (b) NO SERVICE RIGHTS. Nothing in the Plan or any instrument executed or Option granted pursuant thereto shall confer upon any Optionholder any right to continue to serve the Company as a Non-Employee Director or shall affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to the terms of such Consultant's agreement with the Company or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the Company or an Affiliate, and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated, as the case may be. (c) INVESTMENT ASSURANCES. The Company may require an Optionholder, as a condition of exercising or acquiring stock under any Option, (i) to give written assurances satisfactory to the Company as to the Optionholder's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Option; and (ii) to give written assurances satisfactory to the Company stating that the Optionholder is acquiring the stock subject to the Option for the Optionholder's own account and not with any present intention of selling or otherwise distributing the stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (1) the issuance of the shares upon the exercise or acquisition of stock under the Option has been registered under a then currently effective registration statement under the Securities Act or (2) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock. (d) WITHHOLDING OBLIGATIONS. The Optionholder may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of stock under an Option by any of the following means (in addition to the Company's right to withhold from any compensation paid to the Optionholder by the Company) or by a combination of such means: (i) tendering a cash payment; (ii) authorizing the Company to withhold shares from the shares of the Common Stock otherwise issuable to the Optionholder as a result of the exercise or acquisition of stock under the Option; provided, however, that no shares of Common Stock are withheld 10. with a value exceeding the minimum amount of tax required to be withheld by law; or (iii) delivering to the Company owned and unencumbered shares of the Common Stock. 11. ADJUSTMENTS UPON CHANGES IN COMMON STOCK. (a) CAPITALIZATION ADJUSTMENTS. If, on or after the date the Plan is adopted by the Board, any change is made in, or other events occur with respect to, the stock subject to the Plan, or subject to any Option, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company (each a "Capitalization Adjustment")), the Plan will be appropriately adjusted in the class(es) and maximum number of securities subject both to the Plan pursuant to Section 4 and to the nondiscretionary Options specified in Section 6, and the outstanding Options will be appropriately adjusted in the class(es) and number of securities and price per share of stock subject to such outstanding Options. The Board shall make such adjustments, and its determination shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a transaction "without receipt of consideration" by the Company.) (b) DISSOLUTION OR LIQUIDATION. In the event of a dissolution or liquidation of the Company, then all outstanding Options shall terminate immediately prior to the completion of such dissolution or liquidation. (c) CORPORATE TRANSACTION. In the event of a Corporate Transaction, any surviving corporation or acquiring corporation may assume any or all Options outstanding under the Plan or may substitute similar stock options for Options outstanding under the Plan (it being understood that similar stock options include, but are not limited to, options to acquire the same consideration paid to the stockholders or the Company, as the case may be, pursuant to the Corporate Transaction). In the event that any surviving corporation or acquiring corporation does not assume any or all such outstanding Options or substitute similar stock options for such outstanding Options, then with respect to Options that have been neither assumed nor substituted and that are held by Optionholders whose Continuous Service has not terminated prior to the effective time of the Corporate Transaction, the vesting of such Options (and, if applicable, the time at which such Options may be exercised) shall (contingent upon the effectiveness of the Corporate Transaction) be accelerated in full to a date prior to the effective time of such Corporate Transaction as the Board shall determine (or, if the Board shall not determine such a date, to the date that is five (5) days prior to the effective time of the Corporate Transaction), and the Options shall terminate if not exercised (if applicable) at or prior to such effective time. With respect to any other Options outstanding under the Plan that have been neither assumed nor substituted, the vesting of such Options (and, if applicable, the time at which such Options may be exercised) shall not be accelerated unless otherwise provided in Section 11(d) or in a written agreement between the Company or any Affiliate and the holder of such Options, and such Options shall terminate if not exercised (if applicable) prior to the effective time of the Corporate Transaction. 11. (d) CHANGE IN CONTROL. If a Change in Control occurs, then, immediately prior to such Change in Control, the Optionholder's Options shall become fully vested and exercisable. (e) PARACHUTE PAYMENTS. If the acceleration of the vesting and exercisability of Options provided for in Section 11(c) or (d), together with payments and other benefits of an Optionholder, (collectively, the "Payment") (i) constitute a "parachute payment" within the meaning of Section 280G of the Code, or any comparable successor provisions, and (ii) but for this Section 11(e) would be subject to the excise tax imposed by Section 4999 of the Code, or any comparable successor provisions (the "Excise Tax"), then such Payment shall be either (1) provided to such Optionholder in full, or (2) provided to such Optionholder as to such lesser extent that would result in no portion of such Payment being subject to the Excise Tax, whichever of the foregoing amounts, when taking into account applicable federal, state, local and foreign income and employment taxes, the Excise Tax, and any other applicable taxes, results in the receipt by such Optionholder, on an after-tax basis, of the greatest amount of the Payment, notwithstanding that all or some portion of the Payment may be subject to the Excise Tax. Unless the Company and such Optionholder otherwise agree in writing, any determination required under this Section 11(e) shall be made in writing in good faith by the Accountant. If a reduction in the Payment is to be made as provided above, reductions shall occur in the following order unless the Optionholder elects in writing a different order (provided, however, that such election shall be subject to Company approval if made on or after the date that triggers the Payment or a portion thereof): reduction of cash payments; cancellation of accelerated vesting of Options; reduction of employee benefits. If acceleration of vesting of Options is to be reduced, such acceleration of vesting shall be cancelled in the reverse order of date of grant of Options (i.e., earliest granted Option cancelled last) unless the Optionholder elects in writing a different order for cancellation. For purposes of making the calculations required by this Section 11(e), the Accountant may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of the Code and other applicable legal authority. The Company and the Optionholder shall furnish to the Accountant such information and documents as the Accountant may reasonably request in order to make such a determination. The Company shall bear all costs the Accountant may reasonably incur in connection with any calculations contemplated by this Section 11(e). If, notwithstanding any reduction described above, the Internal Revenue Service (the "IRS") determines that the Optionholder is liable for the Excise Tax as a result of the Payment, then the Optionholder shall be obligated to pay back to the Company, within thirty (30) days after a final IRS determination or, in the event that the Optionholder challenges the final IRS determination, a final judicial determination, a portion of the Payment equal to the "Repayment Amount." The Repayment Amount with respect to the Payment shall be the smallest such amount, if any, as shall be required to be paid to the Company so that the Optionholder's net after-tax proceeds with respect to the Payment (after taking into account the payment of the Excise Tax and all other applicable taxes imposed on the Payment) shall be maximized. The Repayment Amount with respect to the Payment shall be zero if a Repayment Amount of more than zero would not result in the Optionholder's net after-tax proceeds with 12. respect to the Payment being maximized. If the Excise Tax is not eliminated pursuant to this paragraph, the Optionholder shall pay the Excise Tax. Notwithstanding any other provision of this Section 11(e), if (i) there is a reduction in the Payment as described above, (ii) the IRS later determines that the Optionholder is liable for the Excise Tax, the payment of which would result in the maximization of the Optionholder's net after-tax proceeds of the Payment (calculated as if the Payment had not previously been reduced), and (iii) the Optionholder pays the Excise Tax, then the Company shall pay or otherwise provide to the Optionholder that portion of the Payment that was reduced pursuant to this Section 11(e) contemporaneously or as soon as administratively possible after the Optionholder pays the Excise Tax so that the Optionholder's net after-tax proceeds with respect to the Payment are maximized. If the Optionholder either (i) brings any action to enforce rights pursuant to this Section 11(e), or (ii) defends any legal challenge to his or her rights under this Section 11(e), the Optionholder shall be entitled to recover attorneys' fees and costs incurred in connection with such action, regardless of the outcome of such action; provided, however, that if such action is commenced by the Optionholder, the court finds that the action was brought in good faith. 12. AMENDMENT OF THE PLAN AND OPTIONS. (a) AMENDMENT OF PLAN. The Board, at any time and from time to time, may amend the Plan. However, except as provided in Section 11 relating to adjustments upon changes in Common Stock, no amendment shall be effective unless approved by the stockholders of the Company to the extent stockholder approval is necessary to satisfy the requirements of applicable laws. (b) STOCKHOLDER APPROVAL. The Board, in its sole discretion, may submit any other amendment to the Plan for stockholder approval. (c) NO IMPAIRMENT OF RIGHTS. Rights under any Option granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the Optionholder and (ii) the Optionholder consents in writing. (d) AMENDMENT OF OPTIONS. The Board, at any time, and from time to time, may amend the terms of any one or more Options; provided, however, that the rights under any Option shall not be impaired by any such amendment unless (i) the Company requests the consent of the Optionholder and (ii) the Optionholder consents in writing. 13. TERMINATION OR SUSPENSION OF THE PLAN. (a) PLAN TERM. The Board may suspend or terminate the Plan at any time. No Options may be granted under the Plan while the Plan is suspended or after it is terminated. (b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan shall not impair rights and obligations under any Option granted while the Plan is in effect except with the written consent of the Optionholder. 13. 14. EFFECTIVE DATE OF PLAN. The Plan shall become effective on the IPO Date, but no Option shall be exercised unless and until the Plan has been approved by the stockholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board. 15. CHOICE OF LAW. The law of the state of Delaware shall govern all questions concerning the construction, validity and interpretation of this Plan, without regard to such state's conflict of laws rules. 14. EX-10.2.2 9 v97093orexv10w2w2.txt EXHIBIT 10.2.2 EXHIBIT 10.2.2 BLUE NILE, INC. 2004 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN STOCK OPTION AGREEMENT (NONSTATUTORY STOCK OPTION) Pursuant to your Stock Option Grant Notice ("Grant Notice") and this Stock Option Agreement, Blue Nile, Inc. (the "Company") has granted you an option under its 2004 Non-Employee Directors' Stock Option Plan (the "Plan") to purchase the number of shares of the Company's Common Stock indicated in your Grant Notice at the exercise price indicated in your Grant Notice. Defined terms not explicitly defined in this Stock Option Agreement but defined in the Plan shall have the same definitions as in the Plan. The details of your option are as follows: 1. VESTING. Subject to the limitations contained herein, your option will vest as provided in your Grant Notice, provided that vesting will cease upon the termination of your Continuous Service. 2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common Stock subject to your option and your exercise price per share referenced in your Grant Notice may be adjusted from time to time for Capitalization Adjustments. 3. METHOD OF PAYMENT. Payment of the exercise price is due in full upon exercise of all or any part of your option. You may elect to make payment of the exercise price in cash or by check or in any other manner PERMITTED BY YOUR GRANT NOTICE, which may include one or more of the following: (a) In the Company's sole discretion at the time your option is exercised and provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds. (b) Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, by delivery of already-owned shares of Common Stock either that you have held for the period required to avoid a charge to the Company's reported earnings (generally six (6) months) or that you did not acquire, directly or indirectly from the Company, that are owned free and clear of any liens, claims, encumbrances 1. or security interests, and that are valued at Fair Market Value on the date of exercise. "Delivery" for these purposes, in the sole discretion of the Company at the time you exercise your option, shall include delivery to the Company of your attestation of ownership of such shares of Common Stock in a form approved by the Company. Notwithstanding the foregoing, you may not exercise your option by tender to the Company of Common Stock to the extent such tender would violate the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. 4. WHOLE SHARES. You may exercise your option only for whole shares of Common Stock. 5. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, you may not exercise your option unless the shares of Common Stock issuable upon such exercise are then registered under the Securities Act or, if such shares of Common Stock are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. The exercise of your option also must comply with other applicable laws and regulations governing your option, and you may not exercise your option if the Company determines that such exercise would not be in material compliance with such laws and regulations. 6. TERM. You may not exercise your option before the commencement or after the expiration of its term. The term of your option commences on the Date of Grant and expires upon the earliest of the following: (a) three (3) months after the termination of your Continuous Service for any reason other than your Disability or death, provided that if during any part of such three (3) month period your option is not exercisable solely because of the condition set forth in Section 5, your option shall not expire until the earlier of the Expiration Date or until it shall have been exercisable for an aggregate period of three (3) months after the termination of your Continuous Service; (b) twelve (12) months after the termination of your Continuous Service due to your Disability; (c) eighteen (18) months after your death if you die either during your Continuous Service or within three (3) months after your Continuous Service terminates; (d) the Expiration Date indicated in your Grant Notice; or (e) the day before the tenth (10th) anniversary of the Date of Grant. 7. EXERCISE. (a) You may exercise the vested portion of your option during its term by delivering a Notice of Exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require. 2. (b) By exercising your option you agree that, as a condition to any exercise of your option, the Company may require you to enter into an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of your option, (2) the lapse of any substantial risk of forfeiture to which the shares of Common Stock are subject at the time of exercise, or (3) the disposition of shares of Common Stock acquired upon such exercise. 8. TRANSFERABILITY. Your option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise your option. 9. OPTION NOT A SERVICE CONTRACT. Your option is not an employment or service contract, and nothing in your option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or of the Company or an Affiliate to continue your employment. In addition, nothing in your option shall obligate the Company or an Affiliate, their respective stockholders, Boards of Directors, Officers or Employees to continue any relationship that you might have as a Director or Consultant for the Company or an Affiliate. 10. CHANGE IN CONTROL. (a) If a Change in Control occurs and your Continuous Service with the Company has not terminated as of, or immediately prior to, the effective time of the Change in Control, then, as of the effective time of such Change in Control, the vesting and exercisability of your option shall be accelerated in full. (b) If any payment or benefit you would receive pursuant to a Change in Control from the Company or otherwise ("Payment") would (i) constitute a "parachute payment" within the meaning of Section 280G of the Code, and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then such Payment shall be equal to the Reduced Amount. The "Reduced Amount" shall be either (x) the largest portion of the Payment that would result in no portion of the Payment being subject to the Excise Tax or (y) the largest portion, up to and including the total, of the Payment, whichever amount, after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest applicable marginal rate), results in your receipt, on an after-tax basis, of the greater amount of the Payment notwithstanding that all or some portion of the Payment may be subject to the Excise Tax. If a reduction in payments or benefits constituting "parachute payments" is necessary so that the Payment equals the Reduced Amount, reduction shall occur in the following order unless you elect in writing a different order (provided, however, that such election shall be subject to Company approval if made on or after the effective date of the event that triggers the Payment): reduction of cash payments; cancellation of accelerated vesting of Stock Awards; reduction of employee benefits. In the event that acceleration of vesting of Stock Award compensation is to be reduced, such acceleration of vesting shall be cancelled in the reverse order of the date of grant of your Stock Awards (i.e., 3. earliest granted Stock Award cancelled last) unless you elect in writing a different order for cancellation. The accounting firm engaged by the Company for general audit purposes as of the day prior to the effective date of the Change in Control shall perform the foregoing calculations. If the accounting firm so engaged by the Company is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Company shall appoint a nationally recognized accounting firm to make the determinations required hereunder. The Company shall bear all expenses with respect to the determinations by such accounting firm required to be made hereunder. (c) The accounting firm engaged to make the determinations hereunder shall provide its calculations, together with detailed supporting documentation, to you and the Company within fifteen (15) calendar days after the date on which your right to a Payment is triggered (if requested at that time by you or the Company) or such other time as requested by you or the Company. If the accounting firm determines that no Excise Tax is payable with respect to a Payment, either before or after the application of the Reduced Amount, it shall furnish you and the Company with an opinion reasonably acceptable to you that no Excise Tax will be imposed with respect to such Payment. Any good faith determinations of the accounting firm made hereunder shall be final, binding and conclusive upon you and the Company. 11. WITHHOLDING OBLIGATIONS. (a) At the time you exercise your option, in whole or in part, or at any time thereafter as requested by the Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for (including by means of a "cashless exercise" pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if any, which arise in connection with the exercise of your option. (b) Upon your request and subject to approval by the Company, in its sole discretion, and compliance with any applicable legal conditions or restrictions, the Company may withhold from fully vested shares of Common Stock otherwise issuable to you upon the exercise of your option a number of whole shares of Common Stock having a Fair Market Value, determined by the Company as of the date of exercise, not in excess of the minimum amount of tax required to be withheld by law (or such lower amount as may be necessary to avoid variable award accounting). If the date of determination of any tax withholding obligation is deferred to a date later than the date of exercise of your option, share withholding pursuant to the preceding sentence shall not be permitted unless you make a proper and timely election under Section 83(b) of the Code, covering the aggregate number of shares of Common Stock acquired upon such exercise with respect to which such determination is otherwise deferred, to accelerate the determination of such tax withholding obligation to the date of exercise of your option. Notwithstanding the filing of such election, shares of Common Stock shall be withheld solely from fully vested shares of Common Stock determined as of the date of exercise of your option that are otherwise issuable to you upon such exercise. Any adverse consequences to you arising in connection with such share withholding procedure shall be your sole responsibility. 4. (c) You may not exercise your option unless the tax withholding obligations of the Company and/or any Affiliate are satisfied. Accordingly, you may not be able to exercise your option when desired even though your option is vested, and the Company shall have no obligation to issue a certificate for such shares of Common Stock or release such shares of Common Stock from any escrow provided for herein unless such obligations are satisfied. 12. NOTICES. Any notices provided for in your option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. 13. GOVERNING PLAN DOCUMENT. Your option is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your option, and is further subject to all interpretations, amendments, rules and regulations, which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your option and those of the Plan, the provisions of the Plan shall control. 5. EX-10.3 10 v97093orexv10w3.txt EXHIBIT 10.3 EXHIBIT 10.3 BLUE NILE, INC. 2004 EMPLOYEE STOCK PURCHASE PLAN ADOPTED BY THE BOARD OF DIRECTORS MARCH 9, 2004 APPROVED BY STOCKHOLDERS MARCH _____, 2004 1. PURPOSE. (a) The purpose of the Plan is to provide a means by which Employees of the Company and certain designated Related Corporations may be given an opportunity to purchase shares of the Common Stock of the Company. (b) The Company, by means of the Plan, seeks to retain the services of such Employees, to secure and retain the services of new Employees and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Related Corporations. (c) The Company intends that the Purchase Rights be considered options issued under an Employee Stock Purchase Plan. 2. DEFINITIONS. (a) "BOARD" means the Board of Directors of the Company. (b) "CODE" means the Internal Revenue Code of 1986, as amended. (c) "COMMITTEE" means a committee appointed by the Board in accordance with Section 3(c) of the Plan. (d) "COMMON STOCK" means the common stock of the Company. (e) "COMPANY" means Blue Nile, Inc., a Delaware corporation. (f) "CONTRIBUTIONS" means the payroll deductions, and other additional payments specifically provided for in the Offering, that a Participant contributes to fund the exercise of a Purchase Right. A Participant may make additional payments into his or her account, if specifically provided for in the Offering, and then only if the Participant has not already had the maximum permitted amount through payroll deductions withheld during the Offering. (g) "CORPORATE TRANSACTION" means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events: 1. (i) a sale, lease, license or other disposition of all or substantially all of the consolidated assets of the Company; (ii) a sale or other disposition of at least ninety percent (90%) of the outstanding securities of the Company; (iii) a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or (iv) a merger, consolidation or similar transaction following which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise. (h) "DIRECTOR" means a member of the Board. (i) "ELIGIBLE EMPLOYEE" means an Employee who meets the requirements set forth in the Offering for eligibility to participate in the Offering, provided that such Employee also meets the requirements for eligibility to participate set forth in the Plan. (j) "EMPLOYEE" means any person, including Officers and Directors, who is employed for purposes of Section 423(b)(4) of the Code by the Company or a Related Corporation. Neither service as a Director nor payment of a director's fee shall be sufficient to make an individual an Employee of the Company or a Related Corporation. (k) "EMPLOYEE STOCK PURCHASE PLAN" means a plan that grants Purchase Rights intended to be options issued under an "employee stock purchase plan," as that term is defined in Section 423(b) of the Code. (l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (m) "FAIR MARKET VALUE" means the value of a security, as determined in good faith by the Board. If the security is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of the security, unless otherwise determined by the Board, shall be the closing sales price (rounded up where necessary to the nearest whole cent) for such security (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the relevant security of the Company) on the Trading Day prior to the relevant determination date, as reported in The Wall Street Journal or such other source as the Board deems reliable. (n) "OFFERING" means the grant of Purchase Rights to purchase shares of Common Stock under the Plan to Eligible Employees. (o) "OFFERING DATE" means a date selected by the Board for an Offering to commence. 2. (p) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (q) "PARTICIPANT" means an Eligible Employee who holds an outstanding Purchase Right granted pursuant to the Plan. (r) "PLAN" means this Blue Nile, Inc. 2004 Employee Stock Purchase Plan. (s) "PURCHASE DATE" means one or more dates during an Offering established by the Board on which Purchase Rights shall be exercised and as of which purchases of shares of Common Stock shall be carried out in accordance with such Offering. (t) "PURCHASE PERIOD" means a period of time specified within an Offering beginning on the Offering Date or on the next day following a Purchase Date within an Offering and ending on a Purchase Date. An Offering may consist of one or more Purchase Periods. (u) "PURCHASE RIGHT" means an option to purchase shares of Common Stock granted pursuant to the Plan. (v) "RELATED CORPORATION" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code. (w) "SECURITIES ACT" means the Securities Act of 1933, as amended. (x) "TRADING DAY" means any day the exchange(s) or market(s) on which shares of Common Stock are listed, whether it be any established stock exchange, the Nasdaq National Market, the Nasdaq SmallCap Market or otherwise, is open for trading. 3. ADMINISTRATION. (a) The Board shall administer the Plan unless and until the Board delegates administration to a Committee, as provided in Section 3(c). Whether or not the Board has delegated administration, the Board shall have the final power to determine all questions of policy and expediency that may arise in the administration of the Plan. (b) The Board (or the Committee) shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine when and how Purchase Rights to purchase shares of Common Stock shall be granted and the provisions of each Offering of such Purchase Rights (which need not be identical). (ii) To designate from time to time which Related Corporations of the Company shall be eligible to participate in the Plan. (iii) To construe and interpret the Plan and Purchase Rights, and to establish, amend and revoke rules and regulations for the administration of the Plan. The Board, in the 3. exercise of this power, may correct any defect, omission or inconsistency in the Plan, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iv) To amend the Plan as provided in Section 15. (v) Generally, to exercise such powers and to perform such acts as it deems necessary or expedient to promote the best interests of the Company and its Related Corporations and to carry out the intent that the Plan be treated as an Employee Stock Purchase Plan. (c) The Board may delegate administration of the Plan to a Committee of the Board composed of one (1) or more members of the Board. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. If administration is delegated to a Committee, references to the Board in this Plan and in the Offering document shall thereafter be deemed to be to the Board or the Committee, as the case may be. 4. SHARES OF COMMON STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 14 relating to adjustments upon changes in securities, the shares of Common Stock that may be sold pursuant to Purchase Rights shall not exceed in the aggregate Two Million Five Hundred Thousand (2,500,000) shares of Common Stock, plus an annual increase to be added on the first day of the fiscal year of the Company for a period of twenty (20) years, commencing on the first day of the fiscal year that begins after the effective date of the first Offering under the Plan and ending on (and including) the first day of the fiscal year that begins twenty (20) years thereafter (each such day, a "Calculation Date"), equal to the lesser of (i) One and One-Half percent (1.5%) of the shares of Common Stock outstanding on each such Calculation Date (rounded down to the nearest whole share); or (ii) Eight Hundred Thousand (800,000) shares of Common Stock. Notwithstanding the foregoing, the Board may act, prior to the first day of any fiscal year of the Company, to increase the share reserve by such number of shares of Common Stock as the Board shall determine, which number shall be less than each of (i) and (ii). If any Purchase Right granted under the Plan shall for any reason terminate without having been exercised, the shares of Common Stock not purchased under such Purchase Right shall again become available for issuance under the Plan. 5. GRANT OF PURCHASE RIGHTS; OFFERING. (a) The Board may from time to time grant or provide for the grant of Purchase Rights to purchase shares of Common Stock under the Plan to Eligible Employees in an Offering (consisting of one or more Purchase Periods) on an Offering Date or Offering Dates selected by the Board. Each Offering shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate, which shall comply with the requirement of Section 423(b)(5) of the Code that all Employees granted Purchase Rights shall have the same rights and privileges. The terms and conditions of an Offering shall be incorporated by reference into the Plan and treated as part of the Plan. The provisions of separate Offerings need not be identical, 4. but each Offering shall include (through incorporation of the provisions of this Plan by reference in the document comprising the Offering or otherwise) the period during which the Offering shall be effective, which period shall not exceed twenty-seven (27) months beginning with the Offering Date, and the substance of the provisions contained in Sections 6 through 9, inclusive. (b) If a Participant has more than one Purchase Right outstanding under the Plan, unless he or she otherwise indicates in agreements or notices delivered hereunder: (i) each agreement or notice delivered by that Participant shall be deemed to apply to all of his or her Purchase Rights under the Plan, and (ii) a Purchase Right with a lower exercise price (or an earlier-granted Purchase Right, if different Purchase Rights have identical exercise prices) shall be exercised to the fullest possible extent before a Purchase Right with a higher exercise price (or a later-granted Purchase Right if different Purchase Rights have identical exercise prices) shall be exercised. 6. ELIGIBILITY. (a) Purchase Rights may be granted only to Employees of the Company or, as the Board may designate as provided in Section 3(b), to Employees of a Related Corporation. Except as provided in Section 6(b), an Employee shall not be eligible to be granted Purchase Rights under the Plan unless, on the Offering Date, such Employee has been in the employ of the Company or the Related Corporation, as the case may be, for such continuous period preceding such Offering Date as the Board may require, but in no event shall the required period of continuous employment be greater than two (2) years. In addition, the Board may provide that no Employee shall be eligible to be granted Purchase Rights under the Plan unless, on the Offering Date, such Employee's customary employment with the Company or the Related Corporation is more than twenty (20) hours per week and more than five (5) months per calendar year. (b) The Board may provide that each person who, during the course of an Offering, first becomes an Eligible Employee shall, on a date or dates specified in the Offering which coincides with the day on which such person becomes an Eligible Employee or which occurs thereafter, receive a Purchase Right under that Offering, which Purchase Right shall thereafter be deemed to be a part of that Offering. Such Purchase Right shall have the same characteristics as any Purchase Rights originally granted under that Offering, as described herein, except that: (i) the date on which such Purchase Right is granted shall be the "Offering Date" of such Purchase Right for all purposes, including determination of the exercise price of such Purchase Right; (ii) the period of the Offering with respect to such Purchase Right shall begin on its Offering Date and end coincident with the end of such Offering; and (iii) the Board may provide that if such person first becomes an Eligible Employee within a specified period of time before the end of the Offering, he or she shall not receive any Purchase Right under that Offering. (c) No Employee shall be eligible for the grant of any Purchase Rights under the Plan if, immediately after any such Purchase Rights are granted, such Employee owns stock 5. possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Related Corporation. For purposes of this Section 6(c), the rules of Section 424(d) of the Code shall apply in determining the stock ownership of any Employee, and stock which such Employee may purchase under all outstanding Purchase Rights and options shall be treated as stock owned by such Employee. (d) As specified by Section 423(b)(8) of the Code, an Eligible Employee may be granted Purchase Rights under the Plan only if such Purchase Rights, together with any other rights granted under all Employee Stock Purchase Plans of the Company and any Related Corporations, do not permit such Eligible Employee's rights to purchase stock of the Company or any Related Corporation to accrue at a rate which exceeds twenty five thousand dollars ($25,000) of Fair Market Value of such stock (determined at the time such rights are granted, and which, with respect to the Plan, shall be determined as of their respective Offering Dates) for each calendar year in which such rights are outstanding at any time. (e) Officers of the Company and any designated Related Corporation, if they are otherwise Eligible Employees, shall be eligible to participate in Offerings under the Plan. Notwithstanding the foregoing, the Board may provide in an Offering that Employees who are highly compensated Employees within the meaning of Section 423(b)(4)(D) of the Code shall not be eligible to participate. 7. PURCHASE RIGHTS; PURCHASE PRICE. (a) On each Offering Date, each Eligible Employee, pursuant to an Offering made under the Plan, shall be granted a Purchase Right to purchase up to that number of shares of Common Stock purchasable either with a percentage or with a maximum dollar amount, as designated by the Board, but in either case not exceeding ten percent (10%), of such Employee's Earnings (as defined by the Board in each Offering) during the period that begins on the Offering Date (or such later date as the Board determines for a particular Offering) and ends on the date stated in the Offering, which date shall be no later than the end of the Offering. (b) The Board shall establish one (1) or more Purchase Dates during an Offering as of which Purchase Rights granted pursuant to that Offering shall be exercised and purchases of shares of Common Stock shall be carried out in accordance with such Offering. (c) In connection with each Offering made under the Plan, the Board may specify a maximum number of shares of Common Stock that may be purchased by any Participant on any Purchase Date during such Offering. In connection with each Offering made under the Plan, the Board may specify a maximum aggregate number of shares of Common Stock that may be purchased by all Participants pursuant to such Offering. In addition, in connection with each Offering that contains more than one Purchase Date, the Board may specify a maximum aggregate number of shares of Common Stock that may be purchased by all Participants on any given Purchase Date under the Offering. If the aggregate purchase of shares of Common Stock issuable upon exercise of Purchase Rights granted under the Offering would exceed any such maximum aggregate number, then, in the absence of any Board action otherwise, a pro rata allocation of the shares of Common Stock available shall be made in as nearly a uniform manner as shall be practicable and equitable. 6. (d) The purchase price of shares of Common Stock acquired pursuant to Purchase Rights shall be not less than the lesser of: (i) an amount equal to eighty-five percent (85%) of the Fair Market Value of the shares of Common Stock on the Offering Date; or (ii) an amount equal to eighty-five percent (85%) of the Fair Market Value of the shares of Common Stock on the applicable Purchase Date. 8. PARTICIPATION; WITHDRAWAL; TERMINATION. (a) A Participant may elect to authorize payroll deductions pursuant to an Offering under the Plan by completing and delivering to the Company, within the time specified in the Offering, an enrollment form (in such form as the Company may provide). Each such enrollment form shall authorize an amount of Contributions expressed as a percentage of the submitting Participant's Earnings (as defined in each Offering) during the Offering (not to exceed the maximum percentage specified by the Board). Each Participant's Contributions shall be credited to a bookkeeping account for such Participant under the Plan and shall be deposited with the general funds of the Company except where applicable law requires that Contributions be deposited with a third party. To the extent provided in the Offering, a Participant may begin such Contributions after the beginning of the Offering. To the extent provided in the Offering, a Participant may thereafter reduce (including to zero) or increase his or her Contributions. To the extent specifically provided in the Offering, in addition to making Contributions by payroll deductions, a Participant may make Contributions through the payment by cash or check prior to each Purchase Date of the Offering. (b) During an Offering, a Participant may cease making Contributions and withdraw from the Offering by delivering to the Company a notice of withdrawal in such form as the Company may provide. Such withdrawal may be elected at any time prior to the end of the Offering, except as provided otherwise in the Offering. Upon such withdrawal from the Offering by a Participant, the Company shall distribute to such Participant all of his or her accumulated Contributions (reduced to the extent, if any, such Contributions have been used to acquire shares of Common Stock for the Participant) under the Offering, and such Participant's Purchase Right in that Offering shall thereupon terminate. A Participant's withdrawal from an Offering shall have no effect upon such Participant's eligibility to participate in any other Offerings under the Plan, but such Participant shall be required to deliver a new enrollment form in order to participate in subsequent Offerings. (c) Purchase Rights granted pursuant to any Offering under the Plan shall terminate immediately upon a Participant ceasing to be an Employee for any reason or for no reason (subject to any post-employment participation period required by law) or other lack of eligibility. The Company shall distribute to such terminated or otherwise ineligible Employee all of his or her accumulated Contributions (reduced to the extent, if any, such Contributions have been used to acquire shares of Common Stock for the terminated or otherwise ineligible Employee) under the Offering. 7. (d) Purchase Rights shall not be transferable by a Participant otherwise than by will or the laws of descent and distribution, or by a beneficiary designation as provided in Section 13 and, during a Participant's lifetime, shall be exercisable only by such Participant. (e) Unless otherwise specified in an Offering, the Company shall have no obligation to pay interest on Contributions. 9. EXERCISE. (a) On each Purchase Date during an Offering, each Participant's accumulated Contributions shall be applied to the purchase of shares of Common Stock up to the maximum number of shares of Common Stock permitted pursuant to the terms of the Plan and the applicable Offering, at the purchase price specified in the Offering. No fractional shares shall be issued upon the exercise of Purchase Rights unless specifically provided for in the Offering. (b) If any amount of accumulated Contributions remains in a Participant's account after the purchase of shares of Common Stock and such remaining amount is less than the amount required to purchase one share of Common Stock on the final Purchase Date of an Offering, then such remaining amount shall be held in such Participant's account for the purchase of shares of Common Stock under the next Offering under the Plan, unless such Participant withdraws from such next Offering, as provided in Section 8(b), or is not eligible to participate in such Offering, as provided in Section 6, in which case such amount shall be distributed to such Participant after the final Purchase Date, without interest. If the amount of Contributions remaining in a Participant's account after the purchase of shares of Common Stock is at least equal to the amount required to purchase one (1) whole share of Common Stock on the final Purchase Date of the Offering, then such remaining amount shall be distributed in full to such Participant at the end of the Offering. (c) No Purchase Rights may be exercised to any extent unless the shares of Common Stock to be issued upon such exercise under the Plan are covered by an effective registration statement pursuant to the Securities Act and the Plan is in material compliance with all applicable federal, state, foreign and other securities and other laws applicable to the Plan. If on a Purchase Date during any Offering hereunder the shares of Common Stock are not so registered or the Plan is not in such compliance, no Purchase Rights or any Offering shall be exercised on such Purchase Date, and the Purchase Date shall be delayed until the shares of Common Stock are subject to such an effective registration statement and the Plan is in such compliance, except that the Purchase Date shall not be delayed more than twelve (12) months and the Purchase Date shall in no event be more than twenty-seven (27) months from the Offering Date. If, on the Purchase Date under any Offering hereunder, as delayed to the maximum extent permissible, the shares of Common Stock are not registered and the Plan is not in such compliance, no Purchase Rights or any Offering shall be exercised and all Contributions accumulated during the Offering (reduced to the extent, if any, such Contributions have been used to acquire shares of Common Stock) shall be distributed to the Participants. 8. 10. COVENANTS OF THE COMPANY. The Company shall seek to obtain from each federal, state, foreign or other regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of Common Stock upon exercise of the Purchase Rights. If, after commercially reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority that counsel for the Company deems necessary for the lawful issuance and sale of shares of Common Stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell shares of Common Stock upon exercise of such Purchase Rights unless and until such authority is obtained. 11. USE OF PROCEEDS FROM SHARES OF COMMON STOCK. Proceeds from the sale of shares of Common Stock pursuant to Purchase Rights shall constitute general funds of the Company. 12. RIGHTS AS A STOCKHOLDER. A Participant shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to, shares of Common Stock subject to Purchase Rights unless and until the Participant's shares of Common Stock acquired upon exercise of Purchase Rights are recorded in the books of the Company (or its transfer agent). 13. DESIGNATION OF BENEFICIARY. (a) A Participant may file a written designation of a beneficiary who is to receive any shares of Common Stock and/or cash, if any, from the Participant's account under the Plan in the event of such Participant's death subsequent to the end of an Offering but prior to delivery to the Participant of such shares of Common Stock or cash. In addition, a Participant may file a written designation of a beneficiary who is to receive any cash from the Participant's account under the Plan in the event of such Participant's death during an Offering. Any such designation shall be on a form provided by or otherwise acceptable to the Company. (b) The Participant may change such designation of beneficiary at any time by written notice to the Company. In the event of the death of a Participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such Participant's death, the Company shall deliver such shares of Common Stock and/or cash to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its sole discretion, may deliver such shares of Common Stock and/or cash to the spouse or to any one or more dependents or relatives of the Participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 14. ADJUSTMENTS UPON CHANGES IN SECURITIES; CORPORATE TRANSACTIONS. (a) If, on or after the date the Plan is adopted by the Board, any change is made in the shares of Common Stock, subject to the Plan, or subject to any Purchase Right, without the receipt of consideration by the Company (through merger, consolidation, reorganization, 9. recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan shall be appropriately adjusted in the type(s), class(es) and maximum number of shares of Common Stock subject to the Plan pursuant to Section 4(a), and the outstanding Purchase Rights shall be appropriately adjusted in the type(s), class(es), number of shares and purchase limits of such outstanding Purchase Rights. The Board shall make such adjustments, and its determination shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a "transaction not involving the receipt of consideration by the Company.") (b) In the event of a Corporate Transaction, then: (i) any surviving or acquiring corporation may continue or assume Purchase Rights outstanding under the Plan or may substitute similar rights (including a right to acquire the same consideration paid to stockholders in the Corporate Transaction) for those outstanding under the Plan, or (ii) if any surviving or acquiring corporation does not continue or assume such Purchase Rights or does not substitute similar rights for Purchase Rights outstanding under the Plan, then, the Participants' accumulated Contributions shall be used to purchase shares of Common Stock within five (5) business days prior to the Corporate Transaction under the ongoing Offering, and the Participants' Purchase Rights under the ongoing Offering shall terminate immediately after such purchase. 15. AMENDMENT OF THE PLAN. (a) The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 14 relating to adjustments upon changes in securities and except as to amendments solely to benefit the administration of the Plan, to take account of a change in legislation or to obtain or maintain favorable tax, exchange control or regulatory treatment for Participants or the Company or any Related Corporation, no amendment shall be effective unless approved by the stockholders of the Company to the extent stockholder approval is necessary for the Plan to satisfy the requirements of Section 423 of the Code or other applicable laws or regulations. (b) It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Employee Stock Purchase Plans and/or to bring the Plan and/or Purchase Rights into compliance therewith. (c) The rights and obligations under any Purchase Rights granted before amendment of the Plan shall not be impaired by any amendment of the Plan except: (i) with the consent of the person to whom such Purchase Rights were granted, or (ii) as necessary to comply with any laws or governmental regulations (including, without limitation, the provisions of the Code and the regulations promulgated thereunder relating to Employee Stock Purchase Plans). 10. 16. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board in its discretion may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate at the time that all of the shares of Common Stock reserved for issuance under the Plan, as increased and/or adjusted from time to time, have been issued under the terms of the Plan. No Purchase Rights may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Any benefits, privileges, entitlements and obligations under any Purchase Rights while the Plan is in effect shall not be impaired by suspension or termination of the Plan except (i) as expressly provided in the Plan or with the consent of the person to whom such Purchase Rights were granted, (ii) as necessary to comply with any laws, regulations, or listing requirements, or (iii) as necessary to ensure that the Plan and/or Purchase Rights comply with the requirements of Section 423 of the Code. 17. EFFECTIVE DATE OF PLAN. The Plan shall become effective as determined by the Board, but no Purchase Rights shall be exercised unless and until the Plan has been approved by the stockholders of the Company within twelve (12) months before or after the date the Plan is adopted by the Board. 18. MISCELLANEOUS PROVISIONS. (a) The Plan and Offering do not constitute an employment contract. Nothing in the Plan or in the Offering shall in any way alter the at will nature of a Participant's employment or be deemed to create in any way whatsoever any obligation on the part of any Participant to continue in the employ of the Company or a Related Corporation, or on the part of the Company or a Related Corporation to continue the employment of a Participant. (b) The provisions of the Plan shall be governed by the laws of the State of Delaware without resort to that state's conflicts of laws rules. 11. EX-10.4.1 11 v97093orexv10w4w1.txt EXHIBIT 10.4.1 EXHIBIT 10.4.1 BLUE NILE, INC. 2004 EQUITY INCENTIVE PLAN ADOPTED BY THE BOARD OF DIRECTORS: MARCH 9, 2004 APPROVED BY STOCKHOLDERS: MARCH __, 2004 1. PURPOSES. (a) ELIGIBLE STOCK AWARD RECIPIENTS. The persons eligible to receive Stock Awards are Employees, Directors and Consultants. (b) AVAILABLE STOCK AWARDS. The purpose of the Plan is to provide a means by which eligible recipients of Stock Awards may be given an opportunity to benefit from increases in value of the Common Stock through the granting of the following Stock Awards: (i) Nonstatutory Stock Options, (ii) Restricted Stock Awards, (iii) Stock Appreciation Rights, (iv) Restricted Stock Units and (v) Other Stock Awards. (c) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain the services of the group of persons eligible to receive Stock Awards, to secure and retain the services of new members of this group and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. 2. DEFINITIONS. (a) "AFFILIATE" means any parent corporation or subsidiary corporation of the Company, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code. (b) "BOARD" means the Board of Directors of the Company. (c) "CAPITALIZATION ADJUSTMENT" has the meaning ascribed to that term in Section 11(a). (d) "CHANGE IN CONTROL" means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events: (i) any Exchange Act Person becomes the Owner, directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company's then outstanding securities other than by virtue of a merger, consolidation or similar transaction. 1. (ii) there is consummated a merger, consolidation or similar transaction involving (directly or indirectly) the Company if, immediately after the consummation of such merger, consolidation or similar transaction, the stockholders of the Company immediately prior thereto do not Own, directly or indirectly, either (A) outstanding voting securities representing more than fifty percent (50%) of the combined outstanding voting power of the surviving Entity in such merger, consolidation or similar transaction or (B) more than fifty percent (50%) of the combined outstanding voting power of the parent of the surviving Entity in such merger, consolidation or similar transaction; (iii) there is consummated a sale, lease, license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries, other than a sale, lease, license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries to an Entity, more than fifty percent (50%) of the combined voting power of the voting securities of which are Owned by stockholders of the Company in substantially the same proportion as their Ownership of the Company immediately prior to such sale, lease, license or other disposition; or (iv) individuals who, on the date this Plan is adopted by the Board, are members of the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the members of the Board; (provided, however, that if the appointment or election (or nomination for election) of any new Board member was approved or recommended by a majority vote of the members of the Incumbent Board then still in office, such new member shall, for purposes of this Plan, be considered as a member of the Incumbent Board). The term Change in Control shall not include a sale of assets, merger or other transaction effected exclusively for the purpose of changing the domicile of the Company. Notwithstanding the foregoing or any other provision of this Plan, the definition of Change in Control (or any analogous term) in an individual written agreement between the Company or any Affiliate and the Participant shall supersede the foregoing definition with respect to Stock Awards subject to such agreement (it being understood, however, that if no definition of Change in Control or any analogous term is set forth in such an individual written agreement, the foregoing definition shall apply). (e) "CODE" means the Internal Revenue Code of 1986, as amended. (f) "COMMITTEE" means a committee of one or more members of the Board appointed by the Board in accordance with Section 3(c). (g) "COMMON STOCK" means the common stock of the Company. (h) "COMPANY" means Blue Nile, Inc., a Delaware corporation. (i) "CONSULTANT" means any person, including an advisor, (i) engaged by the Company or an Affiliate to render consulting or advisory services and who is compensated for such services or (ii) serving as a member of the Board of Directors of an Affiliate and who is compensated for such services. However, the term "Consultant" shall not include Directors who are not compensated by the Company for their services as Directors, and the payment of a 2. director's fee by the Company for services as a Director shall not cause a Director to be considered a "Consultant" for purposes of the Plan. (j) "CONTINUOUS SERVICE" means that the Participant's service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. A change in the capacity in which the Participant renders service to the Company or an Affiliate as an Employee, Consultant or Director or a change in the entity for which the Participant renders such service, provided that there is no interruption or termination of the Participant's service with the Company or an Affiliate, shall not terminate a Participant's Continuous Service. For example, a change in status from an employee of the Company to a consultant to an Affiliate or to a Director shall not constitute an interruption of Continuous Service. The Board or the chief executive officer of the Company, in that party's sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal leave. Notwithstanding the foregoing, a leave of absence shall be treated as Continuous Service for purposes of vesting in a Stock Award only to such extent as may be provided in the Company's leave of absence policy or in the written terms of the Participant's leave of absence. (k) "CORPORATE TRANSACTION" means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events: (i) a sale or other disposition of all or substantially all, as determined by the Board in its discretion, of the consolidated assets of the Company and its Subsidiaries; (ii) a sale or other disposition of at least fifty percent (50%) of the outstanding securities of the Company; (iii) a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or (iv) a merger, consolidation or similar transaction following which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise. (l) "COVERED EMPLOYEE" means the chief executive officer and the four (4) other highest compensated officers of the Company for whom total compensation is required to be reported to stockholders under the Exchange Act, as determined for purposes of Section 162(m) of the Code. (m) "DIRECTOR" means a member of the Board. (n) "DISABILITY" means the permanent and total disability of a person within the meaning of Section 22(e)(3) of the Code. (o) "EMPLOYEE" means any person employed by the Company or an Affiliate. Service as a Director or payment of a director's fee by the Company for such service or for 3. service as a member of the Board of Directors of an Affiliate shall not be sufficient to constitute "employment" by the Company or an Affiliate. (p) "ENTITY" means a corporation, partnership or other entity. (q) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (r) "EXCHANGE ACT PERSON" means any natural person, Entity or "group" (within the meaning of Section 13(d) or 14(d) of the Exchange Act), except that "Exchange Act Person" shall not include (A) the Company or any Subsidiary of the Company, (B) any employee benefit plan of the Company or any Subsidiary of the Company or any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary of the Company, (C) an underwriter temporarily holding securities pursuant to an offering of such securities, or (D) an Entity Owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their Ownership of stock of the Company. (s) "FAIR MARKET VALUE" means, as of any date, the value of the Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable. (ii) In the absence of such markets for the Common Stock, the Fair Market Value shall be determined in good faith by the Board. (t) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (u) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not currently an employee or officer of the Company or its parent or a subsidiary, does not receive compensation, either directly or indirectly, from the Company or its parent or a subsidiary, for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act ("Regulation S-K")), does not possess an interest in any other transaction for which disclosure would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship for which disclosure would be required pursuant to Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-employee director" for purposes of Rule 16b-3. (v) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. 4. (w) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (x) "OPTION" means a Nonstatutory Stock Option granted pursuant to the Plan. (y) "OPTION AGREEMENT" means a written agreement between the Company and an Optionholder evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. (z) "OPTIONHOLDER" means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option. (aa) "OTHER STOCK AWARD" means an award based in whole or in part by reference to the Common Stock which is granted pursuant to the terms and conditions of Section 7(d). (bb) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current employee of the Company or an "affiliated corporation" (within the meaning of Treasury Regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year, has not been an officer of the Company or an "affiliated corporation", and does not receive remuneration from the Company or an "affiliated corporation," either directly or indirectly, in any capacity other than as a Director or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. (cc) "OWN," "OWNED," "OWNER," "OWNERSHIP" A person or Entity shall be deemed to "Own," to have "Owned," to be the "Owner" of, or to have acquired "Ownership" of securities if such person or Entity, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares voting power, which includes the power to vote or to direct the voting, with respect to such securities. (dd) "PARTICIPANT" means a person to whom a Stock Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Stock Award. (ee) "PLAN" means this Blue Nile, Inc. 2004 Equity Incentive Plan. (ff) "RESTRICTED STOCK AWARD" means an award of shares of Common Stock which is granted pursuant to the terms and conditions of Section 7(a). (gg) "RESTRICTED STOCK UNIT" means a right to receive shares of Common Stock which is granted pursuant to the terms and conditions of Section 7(b). (hh) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3, as in effect from time to time. (ii) "SECURITIES ACT" means the Securities Act of 1933, as amended. (jj) "STOCK APPRECIATION RIGHT" means a right to receive the appreciation on Common Stock that is granted pursuant to the terms and conditions of Section 7(c). 5. (kk) "STOCK AWARD" means any right granted under the Plan, including an Option, Restricted Stock Award, Restricted Stock Unit, Stock Appreciation Right and Other Stock Award. (ll) "STOCK AWARD AGREEMENT" means a written agreement between the Company and a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan. (mm) "SUBSIDIARY" means, with respect to the Company, (i) any corporation of which more than fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, Owned by the Company, and (ii) any partnership in which the Company has a direct or indirect interest (whether in the form of voting or participation in profits or capital contribution) of more than fifty percent (50%). 3. ADMINISTRATION. (a) ADMINISTRATION BY BOARD. The Board shall administer the Plan unless and until the Board delegates administration to a Committee, as provided in Section 3(c). (b) POWERS OF BOARD. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine from time to time which of the persons eligible under the Plan shall be granted Stock Awards; when and how each Stock Award shall be granted; what type or combination of types of Stock Award shall be granted; the provisions of each Stock Award granted (which need not be identical), including the time or times when a person shall be permitted to receive Common Stock pursuant to a Stock Award; and the number of shares of Common Stock with respect to which a Stock Award shall be granted to each such person. (ii) To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iii) To effect, at any time and from time to time, with the consent of any adversely affected Optionholder, (1) the reduction of the exercise price of any outstanding Option under the Plan, (2) the cancellation of any outstanding Option under the Plan and the grant in substitution therefor of (A) a new Option under the Plan or another equity plan of the Company covering the same or a different number of shares of Common Stock, (B) a Restricted Stock Award (including a stock bonus), (C) a Stock Appreciation Right, (D) Restricted Stock Unit, (E) an Other Stock Award, (F) cash and/or (G) other valuable consideration (as determined by the Board, in its sole discretion), or (3) any other action that is treated as a repricing under generally accepted accounting principles. 6. (iv) To amend the Plan or a Stock Award as provided in Section 12. (v) To terminate or suspend the Plan as provided in Section 13. (vi) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company and that are not in conflict with the provisions of the Plan. (c) DELEGATION TO COMMITTEE. (i) GENERAL. The Board may delegate administration of the Plan to a Committee or Committees of one (1) or more members of the Board, and the term "Committee" shall apply to any person or persons to whom such authority has been delegated. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. (ii) SECTION 162(m) AND RULE 16b-3 COMPLIANCE. In the discretion of the Board, the Committee may consist solely of two or more Outside Directors, in accordance with Section 162(m) of the Code, and/or solely of two or more Non-Employee Directors, in accordance with Rule 16b-3. In addition, the Board or the Committee may delegate to a committee of one or more members of the Board the authority to grant Stock Awards to eligible persons who are either (a) not then Covered Employees and are not expected to be Covered Employees at the time of recognition of income resulting from such Stock Award, (b) not persons with respect to whom the Company wishes to comply with Section 162(m) of the Code, or (c) not then subject to Section 16 of the Exchange Act. (d) EFFECT OF BOARD'S DECISION. All determinations, interpretations and constructions made by the Board in good faith shall not be subject to review by any person and shall be final, binding and conclusive on all persons. 4. SHARES SUBJECT TO THE PLAN. (a) SHARE RESERVE. Subject to the provisions of Section 11(a) relating to Capitalization Adjustments, the shares of Common Stock that may be issued pursuant to Stock Awards shall not exceed in the aggregate Six Million Four Hundred Thousand (6,400,000) shares of Common Stock, plus an annual increase to be added on the first day of the fiscal year of the Company for a period of ten (10) years, commencing on the first day of the fiscal year that begins on January 1, 2005 and ending on (and including) the first day of the fiscal year that begins on January 1, 2014 (each such day, a "Calculation Date"), equal to five percent (5%) of the shares of Common Stock outstanding on each such Calculation Date (rounded down to the nearest whole share). Notwithstanding the foregoing, the Board may act, prior to the first day of any fiscal year of the Company, to increase the share reserve by such number of shares of 7. Common Stock as the Board shall determine, which number shall be less than five percent (5%) of the shares of Common Stock Outstanding on the Calculation Date. (b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Stock Award granted under the Plan or under the Company's 1999 Equity Incentive Plan shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, or if any shares of Common Stock issued to a Participant pursuant to a Stock Award granted under the Plan or under the Company's 1999 Equity Incentive Plan are forfeited back to or repurchased by the Company, including, but not limited to, any repurchase or forfeiture caused by the failure to meet a contingency or condition required for the vesting of such shares, then the shares of Common Stock not acquired under such Stock Award shall revert to and again become available for issuance under the Plan. If any shares subject to a Stock Award are not delivered to a Participant because such shares are withheld for the payment of taxes or the Stock Award is exercised through a reduction of shares subject to the Stock Award (i.e., "net exercised"), then the number of shares that are not delivered shall revert to and again become available for issuance under the Plan. If the exercise price of any Stock Award is satisfied by tendering shares of Common Stock held the Participant (either by actual deliver or attestation), then the number of such tendered shares shall revert to and again become available for issuance under the Plan. (c) SOURCE OF SHARES. The shares of Common Stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 5. ELIGIBILITY. (a) ELIGIBILITY FOR SPECIFIC STOCK AWARDS. Stock Awards may be granted to Employees, Directors and Consultants. (b) SECTION 162(m) LIMITATION ON ANNUAL GRANTS. Subject to the provisions of Section 11(a) relating to Capitalization Adjustments, no Employee shall be eligible to be granted Options covering more than Two Million Five Hundred Thousand (2,500,000) shares of Common Stock during any calendar year. (c) CONSULTANTS. A Consultant shall not be eligible for the grant of a Stock Award if, at the time of grant, a Form S-8 Registration Statement under the Securities Act ("Form S-8") is not available to register either the offer or the sale of the Company's securities to such Consultant because of the nature of the services that the Consultant is providing to the Company, because the Consultant is not a natural person, or because of any other rule governing the use of Form S-8. 6. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. All Options shall be designated Nonstatutory Stock Options at the time of grant. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: 8. (a) TERM. No Option shall be exercisable after the expiration of ten (10) years from the date on which it was granted. (b) EXERCISE PRICE. The exercise price of each Nonstatutory Stock Option shall be not less than fifty percent (50%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, a Nonstatutory Stock Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (c) CONSIDERATION. The purchase price of Common Stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised or (ii) at the discretion of the Board at the time of the grant of the Option (or subsequently in the case of a Nonstatutory Stock Option) (1) by delivery to the Company of other Common Stock, (2) according to a deferred payment or other similar arrangement with the Optionholder or (3) by a "net exercise" of the Option (as further described below) (4) pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instruction to pay the aggregate exercise price to the Company from the sales proceeds or (5) in any other form of legal consideration that may be acceptable to the Board. Unless otherwise specifically provided in the Option, the purchase price of Common Stock acquired pursuant to an Option that is paid by delivery to the Company of other Common Stock acquired, directly or indirectly from the Company, shall be paid only by shares of the Common Stock of the Company that have been held for more than six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes). At any time that the Company is incorporated in Delaware, payment of the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall not be made by deferred payment. In the case of any deferred payment arrangement, interest shall be compounded at least annually and shall be charged at the minimum rate of interest necessary to avoid (1) the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement and (2) the treatment of the Option as a variable award for financial accounting purposes. In the case of a "net exercise" of an Option, the Company will not require a payment of the exercise price of the Option from the Participant but will reduce the number of shares of Common Stock issued upon the exercise by the largest number of whole shares that has a Fair Market Value that does not exceed the aggregate exercise price. With respect to any remaining balance of the aggregate exercise price, the Company shall accept a cash payment from the Participant. The shares of Common Stock so used to pay the exercise price of an Option under a "net exercise" will be considered to have resulted from the exercise of the Option, and accordingly, the Option will not again be exercisable with respect to such shares, the shares actually delivered to the Participant, and any shares withheld for purposes of tax withholding. (d) TRANSFERABILITY. A Nonstatutory Stock Option shall be transferable to the extent provided in the Option Agreement. If the Nonstatutory Stock Option does not provide for transferability, then the Nonstatutory Stock Option shall not be transferable except by will or by 9. the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option. (e) VESTING GENERALLY. The total number of shares of Common Stock subject to an Option may, but need not, vest and therefore become exercisable in periodic installments that may, but need not, be equal. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options may vary. The provisions of this Section 6(g) are subject to any Option provisions governing the minimum number of shares of Common Stock as to which an Option may be exercised. (f) TERMINATION OF CONTINUOUS SERVICE. In the event that an Optionholder's Continuous Service terminates (other than upon the Optionholder's death or Disability), the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Optionholder's Continuous Service (or such longer or shorter period specified in the Option Agreement or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate. (g) EXTENSION OF TERMINATION DATE. An Optionholder's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionholder's Continuous Service (other than upon the Optionholder's death or Disability) would be prohibited at any time solely because the issuance of shares of Common Stock would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in Section 6(a) or (ii) the expiration of a period of three (3) months after the termination of the Optionholder's Continuous Service during which the exercise of the Option would not be in violation of such registration requirements. (h) DISABILITY OF OPTIONHOLDER. In the event that an Optionholder's Continuous Service terminates as a result of the Optionholder's Disability, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period specified in the Option Agreement or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified herein, the Option shall terminate. (i) DEATH OF OPTIONHOLDER. In the event that (i) an Optionholder's Continuous Service terminates as a result of the Optionholder's death or (ii) the Optionholder dies within the period (if any) specified in the Option Agreement after the termination of the Optionholder's Continuous Service for a reason other than death, then the Option may be exercised (to the extent the Optionholder was entitled to exercise such Option as of the date of death) by the Optionholder's estate, by a person who acquired the right to exercise the Option by bequest or 10. inheritance or by a person designated to exercise the option upon the Optionholder's death pursuant to Section 6(e) or 6(f), but only within the period ending on the earlier of (1) the date eighteen (18) months following the date of death (or such longer or shorter period specified in the Option Agreement or (2) the expiration of the term of such Option as set forth in the Option Agreement. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate. (j) EARLY EXERCISE. The Option may, but need not, include a provision whereby the Optionholder may elect at any time before the Optionholder's Continuous Service terminates to exercise the Option as to any part or all of the shares of Common Stock subject to the Option prior to the full vesting of the Option. Any unvested shares of Common Stock so purchased may be subject to a repurchase option in favor of the Company or to any other restriction the Board determines to be appropriate. The Company will not exercise its repurchase option until at least six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes) have elapsed following exercise of the Option unless the Board otherwise specifically provides in the Option. 7. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS. (a) RESTRICTED STOCK AWARDS. Each Restricted Stock Award agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of Restricted Stock Award agreements may change from time to time, and the terms and conditions of separate Restricted Stock Award agreements need not be identical; provided, however, that each Restricted Stock Award agreement shall include (through incorporation of the provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions: (i) PURCHASE PRICE. At the time of the grant of a Restricted Stock Award, the Board will determine the price to be paid by the Participant for each share subject to the Restricted Stock Award. To the extent required by applicable law, the price to be paid by the Participant for each share of the Restricted Stock Award will not be less than the par value of a share of Common Stock. A Restricted Stock Award may be awarded as a stock bonus (i.e., with no cash purchase price to be paid) to the extent permissible under applicable law. (ii) CONSIDERATION. At the time of the grant of a Restricted Stock Award, the Board will determine the consideration permissible for the payment of the purchase price of the Restricted Stock Award. The purchase price of Common Stock acquired pursuant to the Restricted Stock Award shall be paid in one of the following ways: (i) in cash at the time of purchase; (ii) at the discretion of the Board, according to a deferred payment or other similar arrangement with the Participant; (iii) by services rendered or to be rendered to the Company; or (iv) in any other form of legal consideration that may be acceptable to the Board; provided, however, that at any time that the Company is incorporated in Delaware, the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall not be paid by deferred payment and must be paid in a form of consideration that is permissible under the Delaware Corporation Law. 11. (iii) VESTING. Shares of Common Stock acquired under a Restricted Stock Award may, but need not, be subject to a share repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board. (iv) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. In the event that a Participant's Continuous Service terminates, the Company may repurchase or otherwise reacquire any or all of the shares of Common Stock held by the Participant that have not vested as of the date of termination under the terms of the Restricted Stock Award agreement. The Company will not exercise its repurchase option until at least six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes) have elapsed following the purchase of the restricted stock unless otherwise determined by the Board or provided in the Restricted Stock Award agreement. (v) TRANSFERABILITY. Rights to purchase or receive shares of Common Stock granted under a Restricted Stock Award shall be transferable by the Participant only upon such terms and conditions as are set forth in the Restricted Stock Award agreement, as the Board shall determine in its discretion, and so long as Common Stock awarded under the Restricted Stock Award remains subject to the terms of the Restricted Stock Award agreement. (b) RESTRICTED STOCK UNITS. Each Restricted Stock Unit agreement shall be in such form and shall contain such terms and conditions as the Board shall determine. The terms and conditions of Restricted Stock Unit agreements may change from time to time, and the terms and conditions of separate Restricted Stock Unit agreements need not be identical; provided, however, that each Restricted Stock Unit agreement shall include (through incorporation of the provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions: (i) CONSIDERATION. At the time of grant of a Restricted Stock Unit award, the Board will determine the consideration, if any, to be paid by the Participant upon delivery of each share of Common Stock subject to the Restricted Stock Unit award. To the extent required by applicable law, the consideration to be paid by the Participant for each share of Common Stock subject to a Restricted Stock Unit award will not be less than the par value of a share of Common Stock. Such consideration may be paid in any form permitted under applicable law. (ii) VESTING. At the time of the grant of a Restricted Stock Unit award, the Board may impose such restrictions or conditions to the vesting of the shares Restricted Stock Unit as it deems appropriate. (iii) PAYMENT. A Restricted Stock Unit award may be settled by the delivery of shares of Common Stock, their cash equivalent, or any combination of the two, as the Board deems appropriate. (iv) ADDITIONAL RESTRICTIONS. At the time of the grant of a Restricted Stock Unit award, the Board, as it deems appropriate, may impose such restrictions or conditions that delay the delivery of the shares of Common Stock (or their cash equivalent) subject to a Restricted Stock Unit award after the vesting of such Award. 12. (v) DIVIDEND EQUIVALENTS. Dividend equivalents may be credited in respect of Restricted Stock Units, as the Board deems appropriate. Such dividend equivalents may be converted into additional Restricted Stock Units by dividing (1) the aggregate amount or value of the dividends paid with respect to that number of shares of Common Stock equal to the number of Restricted Stock Units then credited by (2) the Fair Market Value per share of Common Stock on the payment date for such dividend. The additional Restricted Stock Units credited by reason of such dividend equivalents will be subject to all the terms and conditions of the underlying Restricted Stock Unit award to which they relate. (vi) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. Except as otherwise provided in the applicable Stock Award Agreement, Restricted Stock Units that have not vested will be forfeited upon the Participant's termination of Continuous Service for any reason. (c) STOCK APPRECIATION RIGHTS. Each Stock Appreciation Right agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of Stock Appreciation Right agreements may change from time to time, and the terms and conditions of separate Stock Appreciation Rights agreements need not be identical, but each Stock Appreciation Right agreement shall include (through incorporation of the provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions: (i) CALCULATION OF APPRECIATION. Each Stock Appreciation Right will be denominated in share of Common Stock equivalents. The appreciation distribution payable on the exercise of a Stock Appreciation Right will be not greater than an amount equal to the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the Stock Appreciation Right) of a number of shares of Common Stock equal to the number of share of Common Stock equivalents in which the Participant is vested under such Stock Appreciation Right and with respect to which the Participant is exercising the Stock Appreciation Right on such date, over (B) an amount that will be determined by the Committee at the time of grant of the Stock Appreciation Right. (ii) VESTING. At the time of the grant of a Stock Appreciation Right, the Board may impose such restrictions or conditions to the vesting of such Right as it deems appropriate. (iii) EXERCISE. To exercise any outstanding Stock Appreciation Right, the Participant must provide written notice of exercise to the Company in compliance with the provisions of the Stock Appreciation Rights agreement evidencing such Right. (iv) PAYMENT. The appreciation distribution in respect of a Stock Appreciation Right may be paid in Common Stock, in cash, or any combination of the two, as the Board deems appropriate. (v) TERMINATION OF CONTINUOUS SERVICE. If a Participant's Continuous Service terminates for any reason, any unvested Stock Appreciation Rights shall be forfeited and any vested Stock Appreciation Rights shall be automatically redeemed. (d) OTHER STOCK AWARDS. Other forms of Stock Awards valued in whole or in part by reference to, or otherwise based on, Common Stock may be granted either alone or in 13. addition to Stock Awards provided for under Section 6 and the preceding provisions of this Section 7. Subject to the provisions of the Plan, the Board shall have sole and complete authority to determine the persons to whom and the time or times at which such Other Stock Awards will be granted, the number of shares of Common Stock (or the cash equivalent thereof) to be granted pursuant to such Awards and all other terms and conditions of such Awards. 8. COVENANTS OF THE COMPANY. (a) AVAILABILITY OF SHARES. During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of Common Stock required to satisfy such Stock Awards. (b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Stock Awards and to issue and sell shares of Common Stock upon exercise of the Stock Awards; provided, however, that this undertaking shall not require the Company to register under the Securities Act the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of Common Stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell Common Stock upon exercise of such Stock Awards unless and until such authority is obtained. 9. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of Common Stock pursuant to Stock Awards shall constitute general funds of the Company. 10. MISCELLANEOUS. (a) ACCELERATION OF EXERCISABILITY AND VESTING. The Board shall have the power to accelerate the time at which a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest in accordance with the Plan, notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time during which it will vest. (b) STOCKHOLDER RIGHTS. Subject to the further limitations of Section 7(b)(iv) hereof, no Participant shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to such Stock Award unless and until such Participant has satisfied all requirements for exercise of the Stock Award pursuant to its terms. (c) NO EMPLOYMENT OR OTHER SERVICE RIGHTS. Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto shall confer upon any Participant any right to continue to serve the Company or an Affiliate in the capacity in effect at the time the Stock Award was granted or shall affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to the terms of such Consultant's agreement with the Company or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the Company or an Affiliate, 14. and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated, as the case may be. (d) INVESTMENT ASSURANCES. The Company may require a Participant, as a condition of exercising or acquiring Common Stock under any Stock Award, (i) to give written assurances satisfactory to the Company as to the Participant's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (ii) to give written assurances satisfactory to the Company stating that the Participant is acquiring Common Stock subject to the Stock Award for the Participant's own account and not with any present intention of selling or otherwise distributing the Common Stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (1) the issuance of the shares of Common Stock upon the exercise or acquisition of Common Stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act or (2) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the Common Stock. (e) WITHHOLDING OBLIGATIONS. To the extent provided by the terms of a Stock Award Agreement, the Participant may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of Common Stock under a Stock Award by any of the following means (in addition to the Company's right to withhold from any compensation paid to the Participant by the Company) or by a combination of such means: (i) tendering a cash payment; (ii) authorizing the Company to withhold shares of Common Stock from the shares of Common Stock otherwise issuable to the Participant as a result of the exercise or acquisition of Common Stock under the Stock Award; provided, however, that no shares of Common Stock are withheld with a value exceeding the minimum amount of tax required to be withheld by law (or such lesser amount as may be necessary to avoid variable award accounting); or (iii) delivering to the Company owned and unencumbered shares of Common Stock. 11. ADJUSTMENTS UPON CHANGES IN STOCK. (a) CAPITALIZATION ADJUSTMENTS. If, on or after the date the Plan is adopted by the Board, any change is made in, or other event occurs with respect to, the Common Stock subject to the Plan or subject to any Stock Award without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company (each a "Capitalization Adjustment"), the Plan will be appropriately adjusted in the class(es) and maximum number of securities subject to the Plan pursuant to Sections 4(a) and 4(b) and the maximum number of securities subject to award to any person pursuant to Section 5(c), and the outstanding Stock Awards will be appropriately adjusted 15. in the class(es) and number of securities and price per share of Common Stock subject to such outstanding Stock Awards. The Board shall make such adjustments, and its determination shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a transaction "without receipt of consideration" by the Company.) (b) DISSOLUTION OR LIQUIDATION. In the event of a dissolution or liquidation of the Company, then all outstanding Options shall terminate immediately prior to the completion of such dissolution or liquidation, and shares of Common Stock subject to the Company's repurchase option may be repurchased by the Company notwithstanding the fact that the holder of such stock is still in Continuous Service. (c) CORPORATE TRANSACTION. In the event of a Corporate Transaction, any surviving corporation or acquiring corporation may assume or continue any or all Stock Awards outstanding under the Plan or may substitute similar stock awards for Stock Awards outstanding under the Plan (it being understood that similar stock awards include, but are not limited to, awards to acquire the same consideration paid to the stockholders or the Company, as the case may be, pursuant to the Corporate Transaction), and any reacquisition or repurchase rights held by the Company in respect of Common Stock issued pursuant to Stock Awards may be assigned by the Company to the successor of the Company (or the successor's parent company), if any, in connection with such Corporate Transaction. In the event that any surviving corporation or acquiring corporation does not assume or continue any or all such outstanding Stock Awards or substitute similar stock awards for such outstanding Stock Awards, then with respect to Stock Awards that have been not assumed, continued or substituted and that are held by Participants whose Continuous Service has not terminated prior to the effective time of the Corporate Transaction, the vesting of such Stock Awards (and, if applicable, the time at which such Stock Awards may be exercised) shall (contingent upon the effectiveness of the Corporate Transaction) be accelerated in full to a date prior to the effective time of such Corporate Transaction as the Board shall determine (or, if the Board shall not determine such a date, to the date that is five (5) days prior to the effective time of the Corporate Transaction), the Stock Awards shall terminate if not exercised (if applicable) at or prior to such effective time, and any reacquisition or repurchase rights held by the Company with respect to such Stock Awards held by Participants whose Continuous Service has not terminated shall (contingent upon the effectiveness of the Corporate Transaction) lapse. With respect to any other Stock Awards outstanding under the Plan that have not been assumed, continued or substituted, the vesting of such Stock Awards (and, if applicable, the time at which such Stock Award may be exercised) shall not be accelerated, unless otherwise provided in a written agreement between the Company or any Affiliate and the holder of such Stock Award, and such Stock Awards shall terminate if not exercised (if applicable) prior to the effective time of the Corporate Transaction. (d) CHANGE IN CONTROL. A Stock Award held by any Participant whose Continuous Service has not terminated prior to the effective time of a Change in Control may be subject to additional acceleration of vesting and exercisability upon or after such event as may be provided in the Stock Award Agreement for such Stock Award or as may be provided in any other written agreement between the Company or any Affiliate and the Participant, but in the absence of such provision, no such acceleration shall occur. 16. 12. AMENDMENT OF THE PLAN AND STOCK AWARDS. (a) AMENDMENT OF PLAN. The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 11(a) relating to Capitalization Adjustments, no amendment shall be effective unless approved by the stockholders of the Company to the extent stockholder approval is necessary to satisfy the requirements of Section 422 of the Code. (b) STOCKHOLDER APPROVAL. The Board, in its sole discretion, may submit any other amendment to the Plan for stockholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to Covered Employees. (c) CONTEMPLATED AMENDMENTS. It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith. (d) NO IMPAIRMENT OF RIGHTS. Rights under any Stock Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing. (e) AMENDMENT OF STOCK AWARDS. The Board at any time, and from time to time, may amend the terms of any one or more Stock Awards; provided, however, that the rights under any Stock Award shall not be impaired by any such amendment unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing. 13. TERMINATION OR SUSPENSION OF THE PLAN. (a) PLAN TERM. The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on the day before the tenth (10th) anniversary of the date the Plan is adopted by the Board or approved by the stockholders of the Company, whichever is earlier. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated. (b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan shall not impair rights and obligations under any Stock Award granted while the Plan is in effect except with the written consent of the Participant. 14. EFFECTIVE DATE OF PLAN. The Plan shall become effective as determined by the Board, but no Stock Award shall be exercised (or, in the case of a stock bonus, shall be granted) unless and until the Plan has been approved by the stockholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board. 17. 15. CHOICE OF LAW. The law of the State of Delaware shall govern all questions concerning the construction, validity and interpretation of this Plan, without regard to such state's conflict of laws rules. 18. EX-10.4.2 12 v97093orexv10w4w2.txt EXHIBIT 10.4.2 EXHIBIT 10.4.2 BLUE NILE, INC. 2004 EQUITY INCENTIVE PLAN STOCK OPTION AGREEMENT (NONSTATUTORY STOCK OPTION) Pursuant to your Stock Option Grant Notice ("Grant Notice") and this Stock Option Agreement, Blue Nile, Inc. (the "Company") has granted you an option under its 2004 Equity Incentive Plan (the "Plan") to purchase the number of shares of the Company's Common Stock indicated in your Grant Notice at the exercise price indicated in your Grant Notice. Defined terms not explicitly defined in this Stock Option Agreement but defined in the Plan shall have the same definitions as in the Plan. The details of your option are as follows: 1. VESTING. Subject to the limitations contained herein, your option will vest as provided in your Grant Notice, provided that vesting will cease upon the termination of your Continuous Service. 2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common Stock subject to your option and your exercise price per share referenced in your Grant Notice may be adjusted from time to time for Capitalization Adjustments. 3. METHOD OF PAYMENT. Payment of the exercise price is due in full upon exercise of all or any part of your option. You may elect to make payment of the exercise price in cash or by check or in any other manner PERMITTED BY YOUR GRANT NOTICE, which may include one or more of the following: (a) In the Company's sole discretion at the time your option is exercised and provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds. (b) Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, by delivery of already-owned shares of Common Stock either that you have held for the period required to avoid a charge to the Company's reported earnings (generally six (6) months) or that you did not acquire, directly or indirectly from the Company, that are owned free and clear of any liens, claims, encumbrances or security interests, and that are valued at Fair Market Value on the date of exercise. "Delivery" for these purposes, in the sole discretion of the Company at the time you exercise your option, shall include delivery to the Company of your attestation of ownership of such shares of 1. Common Stock in a form approved by the Company. Notwithstanding the foregoing, you may not exercise your option by tender to the Company of Common Stock to the extent such tender would violate the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. 4. WHOLE SHARES. You may exercise your option only for whole shares of Common Stock. 5. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, you may not exercise your option unless the shares of Common Stock issuable upon such exercise are then registered under the Securities Act or, if such shares of Common Stock are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. The exercise of your option also must comply with other applicable laws and regulations governing your option, and you may not exercise your option if the Company determines that such exercise would not be in material compliance with such laws and regulations. 6. TERM. You may not exercise your option before the commencement or after the expiration of its term. The term of your option commences on the Date of Grant and expires upon the earliest of the following: (a) three (3) months after the termination of your Continuous Service for any reason other than your Disability or death, provided that if during any part of such three (3) month period your option is not exercisable solely because of the condition set forth in Section 5, your option shall not expire until the earlier of the Expiration Date or until it shall have been exercisable for an aggregate period of three (3) months after the termination of your Continuous Service; (b) twelve (12) months after the termination of your Continuous Service due to your Disability; (c) eighteen (18) months after your death if you die either during your Continuous Service or within three (3) months after your Continuous Service terminates; (d) the Expiration Date indicated in your Grant Notice; or (e) the day before the tenth (10th) anniversary of the Date of Grant. 7. EXERCISE. (a) You may exercise the vested portion of your option during its term by delivering a Notice of Exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require. (b) By exercising your option you agree that, as a condition to any exercise of your option, the Company may require you to enter into an arrangement providing for the 2. payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of your option, (2) the lapse of any substantial risk of forfeiture to which the shares of Common Stock are subject at the time of exercise, or (3) the disposition of shares of Common Stock acquired upon such exercise. 8. TRANSFERABILITY. Your option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise your option. 9. OPTION NOT A SERVICE CONTRACT. Your option is not an employment or service contract, and nothing in your option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or of the Company or an Affiliate to continue your employment. In addition, nothing in your option shall obligate the Company or an Affiliate, their respective stockholders, Boards of Directors, Officers or Employees to continue any relationship that you might have as a Director or Consultant for the Company or an Affiliate. 10. WITHHOLDING OBLIGATIONS. (a) At the time you exercise your option, in whole or in part, or at any time thereafter as requested by the Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for (including by means of a "cashless exercise" pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if any, which arise in connection with the exercise of your option. (b) Upon your request and subject to approval by the Company, in its sole discretion, and compliance with any applicable legal conditions or restrictions, the Company may withhold from fully vested shares of Common Stock otherwise issuable to you upon the exercise of your option a number of whole shares of Common Stock having a Fair Market Value, determined by the Company as of the date of exercise, not in excess of the minimum amount of tax required to be withheld by law (or such lower amount as may be necessary to avoid variable award accounting). If the date of determination of any tax withholding obligation is deferred to a date later than the date of exercise of your option, share withholding pursuant to the preceding sentence shall not be permitted unless you make a proper and timely election under Section 83(b) of the Code, covering the aggregate number of shares of Common Stock acquired upon such exercise with respect to which such determination is otherwise deferred, to accelerate the determination of such tax withholding obligation to the date of exercise of your option. Notwithstanding the filing of such election, shares of Common Stock shall be withheld solely from fully vested shares of Common Stock determined as of the date of exercise of your option that are otherwise issuable to you upon such exercise. Any adverse consequences to you arising in connection with such share withholding procedure shall be your sole responsibility. 3. (c) You may not exercise your option unless the tax withholding obligations of the Company and/or any Affiliate are satisfied. Accordingly, you may not be able to exercise your option when desired even though your option is vested, and the Company shall have no obligation to issue a certificate for such shares of Common Stock or release such shares of Common Stock from any escrow provided for herein unless such obligations are satisfied. 11. NOTICES. Any notices provided for in your option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. 12. GOVERNING PLAN DOCUMENT. Your option is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your option, and is further subject to all interpretations, amendments, rules and regulations, which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your option and those of the Plan, the provisions of the Plan shall control. 4. EX-10.7 13 v97093orexv10w7.txt EXHIBIT 10.7 Exhibit 10.7 (BLUE NILE LETTERHEAD) December 1, 1999 Dear Diane, On behalf of Blue Nile, Inc. (the "Company"), I am pleased to offer you the position of CFO, reporting to Mark Vadon. The terms of your relationship with the Company will be as indicated herein. 1. Position. You will become CFO for the Company. As such, you will have responsibilities as determined by Mark Vadon. 2. Base Salary. You will be paid a base salary of $12,500 per month, less payroll deductions and all required withholdings, which represents an annualized rate of $150,000. Your salary will be payable in accordance with the Company's standard payroll policies. In addition to your base salary, you will be eligible for an annual performance bonus. The performance bonus is intended to reward individual performance against stated objectives. The bonus for executives consists of stock options & cash - stock options awarded with the guidance of the board and a cash target of 25%. There are 2 reviews annually, January and July, with the bonus paid in July. Your bonus would be prorated to reflect your time with the company at the time of bonus payout. 3. Stock Options. We will recommend to the Board of Directors that you be granted an incentive stock option to purchase 300,000 shares of common stock of the Company. The exercise price will be the fair market value of the common stock as determined by the Board of Directors on the date of grant (as of Dec. 1, 1999 the exercise price is $1.50 per share). One fourth (1/4) of the shares subject to such option will vest on the one-year anniversary of your hire date and one forty-eighth (1/48) of the shares subject to such option will vest each month thereafter as long as your employment continues with the Company. In the event the Company is acquired, an additional one-fourth (1/4) of the shares will vest immediately. In the event the company is acquired (acquisition, sale of substantially all of the assets of the company, or a merger whereby more than 50% of the voting power is transferred away from the company), and then your employment is terminated without cause within 12 months following the acquisition date, any remaining unvested shares shall vest immediately upon termination. The Company's 1999 Equity Incentive Plan, the Grant Notice and the Stock Option Agreement shall govern the terms of this option grant in all respects. 1. (BLUE NILE LETTERHEAD) 4. Deferred Payment for Exercise. Your Stock Option Agreement will provide for an Early Exercise option, whereby you may elect to exercise your option for unvested shares. If you so elect, the Company will allow you to defer payment of such exercises, subject to interest payments on any balance deferred. Upon termination of employment, any deferred balance, plus associated interest, will be due. Furthermore, the company will maintain its right to repurchase unvested shares as specified in the Stock Option Agreement. 5. Benefits. You will be eligible to receive healthcare and dental benefits, life and disability insurance and enrollment in the Company 401k plan effective on the first of the month following your date of employment. 6. Standard Employee Agreement. Like all employees, you will be required to sign the Company's standard Employee Proprietary Information and Inventions Agreement relating to the protection of the Company's proprietary and confidential information and assignment of inventions. In addition, you will be required to abide by the company's strict policy that prohibits any new employee from using or bringing with him or her from any previous employer any confidential information, trade secrets, or proprietary materials or processes of such former employer. 7. Federal Immigration Law. For purposes of federal immigration law, you will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated. Documents that can satisfy these requirements are a United States passport or a valid driver's license and a social security card. 8. At-Will Employment. Your employment is at will, as defined under applicable law. This means you may voluntarily quit for any reason whatsoever simply by notifying the Company. Likewise, the Company may terminate your employment at any time and for any reason whatsoever with or without cause or advance notice. This at-will employment relationship cannot be changed except in a writing signed by a Company officer. 9. Entire Agreement. This Agreement, together with your Employee Proprietary Information and Inventions Agreement, constitutes the entire agreement between the parties and supersedes all other agreements or understandings. This agreement may be amended only by written agreement signed by you and the Company. 2. (Blue Nile Letterhead) 10. Start Date. As soon as possible. Again, let me indicate how pleased we all are to extend this offer, and how much we look forward to working together. Please indicate your acceptance by signing and returning the enclosed copy of this letter. This offer is valid until December 6, 1999 and will terminate if not accepted by such date. Very truly yours, BLUE NILE, INC. /s/ Mark Vadon - ----------------------------------------------------- The foregoing terms and conditions are hereby accepted: Signed: /s/ Diane Irvine --------------------------------------------- Diane Irvine Dated: December 6, 1999 ---------------------------------------------- 3. EX-10.8 14 v97093orexv10w8.txt EXHIBIT 10.8 Exhibit 10.8 (INTERNET DIAMONDS LETTERHEAD) September 7, 1999 Dear Bob, On behalf of Internet Diamonds, Inc. (the "Company"), I am pleased to offer you the position of Chief Operating Officer, reporting to Mark Vadon. The terms of your relationship with the Company will be as indicated herein. 1. Position. You will become Chief Operating Officer for the Company. As such, you will have responsibilities as determined by Mark Vadon. These responsibilities will include all information technology, call center, and fulfillment operations. In addition, you will be invited to attend meetings of the Board of Directors. 2. Signing Bonus. You will be paid a signing bonus of $75,000, less payroll deductions and all required deductions. 3. Base Salary. You will be paid a base salary of $16,667 per month, less payroll deductions and all required withholdings, which represents an annualized rate of $200,000. Your salary will be payable in accordance with the Company's standard payroll policies. In addition to your base salary, you will be eligible for an annual performance bonus. Your annual performance bonus will be guaranteed to be at least 25% of your base pay for your first three years of employment. 4. Stock Options. We will recommend to the Board of Directors that you be granted an incentive stock option to purchase 560,000 shares of common stock of the Company (2.5% of outstanding shares). The exercise price will be the fair market value of the common stock as determined by the Board of Directors on the date of grant (approximately $0.50). One fourth (1/4) of the shares subject to such option will vest on the one-year anniversary of your hire date and one forty-eighth (1/48) of the shares subject to such option will vest each month thereafter as long as your employment continues with the Company. The Company's 1999 Equity Incentive Plan, the Grant Notice and the Stock Option Agreement shall govern the terms of this option grant in all respects. 5. Severance. If you are discharged by the Company without cause, you will vest in an additional number of option shares equal to the number in which you would have vested if your service had continued for an additional 6 months. In addition, you will continue to receive your base salary for 6 months. 1. 6. Benefits. You will be eligible to receive healthcare and dental benefits, life and disability insurance and enrollment in the Company 401k plan effective on the first of the month following your date of employment. You will also be given a paid parking space in the building. 7. Relocation. The Company will pay for relocation expenses, including moving costs, airfare, temporary housing for up to 4 months, closing costs (not including commissions) for both the sale of your current home and the purchase of your new home, and one-half the commission for the sale of your current home. 8. Standard Employee Agreement. Like all employees, you will be required to sign the Company's standard Employee Proprietary Information and Inventions Agreement relating to the protection of the Company's proprietary and confidential information and assignment of inventions. In addition, you will be required to abide by the company's strict policy that prohibits any new employee from using or bringing with him or her from any previous employer any confidential information, trade secrets, or proprietary materials or processes of such former employer. 9. Federal Immigration Law. For purposes of federal immigration law, you will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated. Documents that can satisfy these requirements are a United States passport or a valid driver's license and a social security card. 10. At-Will Employment. Your employment is at will, as defined under applicable law. This means you may voluntarily quit for any reason whatsoever simply by notifying the Company. Likewise, the Company may terminate your employment at any time and for any reason whatsoever with or without cause or advance notice. This at-will employment relationship cannot be changed except in a writing signed by a Company officer. 11. Entire Agreement. This Agreement, together with your Employee Proprietary Information and Inventions Agreement, constitutes the entire agreement between the parties and supersedes all other agreements or understandings. This agreement may be amended only by written agreement signed by you and the Company. 12. Start Date. To be determined. 2. Again, let me indicate how pleased we all are to extend this offer, and how much we look forward to working together. Please indicate your acceptance by signing and returning the enclosed copy of this letter. This offer is valid until September 10, 1999 and will terminate if not accepted by such date. Very truly yours, INTERNET DIAMONDS, INC. /s/ Mark Vadon - ----------------------------------------------------- The foregoing terms and conditions are hereby accepted: Signed: /s/ Robert L. Paquin --------------------------------------------- Robert L. Paquin Dated: September 8, 1999 ---------------------------------------------- 3. EX-10.9 15 v97093orexv10w9.txt EXHIBIT 10.9 Exhibit 10.9 May 14, 1999 Dear Dwight Gaston, On behalf of RockShop.com, Inc. (the "Company"), I am pleased to offer you the position of Director of Operations, reporting to Mark Vadon. The terms of your relationship with the Company will be as indicated herein. 1. Position. You will become a Director of Operations for the Company. As such, you will have responsibilities as determined by Mark Vadon. 2. Base Salary. You will be paid a base salary of $7,500 per month, less payroll deductions and all required withholdings, which represents an annualized rate of $90,000. Your salary will be payable in accordance with the Company's standard payroll policies. You will also be eligible for annual performance bonuses in amounts to be determined by the Company. 3. Stock Options. We will recommend to the Board of Directors that you be granted an incentive stock option to purchase 124,454 shares of common stock of the Company. The exercise price will be the fair market value of the common stock as determined by the Board of Directors on the date of grant. One fourth (1/4) of the shares subject to such option will vest on the first year anniversary of your hire date and one forty-eighth (1/48) of the shares subject to such option will vest each month thereafter as long as your employment continues with the Company. The Company's 1999 Equity Incentive Plan, the Grant Notice and the Stock Option Agreement shall govern the terms of this option grant in all respects. 4. Benefits. You will be eligible to receive healthcare and dental benefits, life and disability insurance effective on the first of the month following your date of employment. 5. Standard Employee Agreement. Like all employees, you will be required to sign the Company's standard Employee Proprietary Information and Inventions Agreement relating to the protection of the Company's proprietary and confidential information and assignment of inventions. In addition, you will be required to abide by the company's strict policy that prohibits any new employee from using or bringing with him or her from any previous employer any confidential information, trade secrets, or proprietary materials or processes of such former employer. 6. Federal Immigration Law. For purposes of federal immigration law, you will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated. Documents that can satisfy these requirements are a United States passport or a valid driver's license and a social security card. 1. 7. At-Will Employment. Your employment is at will, as defined under applicable law. This means you may voluntarily quit for any reason whatsoever simply by notifying the Company. Likewise, the Company may terminate your employment at any time and for any reason whatsoever with or without cause or advance notice. This at-will employment relationship cannot be changed except in a writing signed by a Company officer. 8. Entire Agreement. This Agreement, together with your Employee Proprietary Information and Inventions Agreement, constitutes the entire agreement between the parties and supersedes all other agreements or understandings. This agreement may be amended only by written agreement signed by you and the Company. 9. Start Date. May 17, 1999. Again, let me indicate how pleased we all are to extend this offer, and how much we look forward to working together. Please indicate your acceptance by signing and returning the enclosed copy of this letter. This offer is valid till May 17, 1999 and will terminate if not accepted by such date. Very truly yours, ROCKSHOP.COM, INC. /s/ Mark Vadon - ----------------------------------------------------- The foregoing terms and conditions are hereby accepted: Signed: /s/ Dwight Gaston --------------------------------------------- Dwight Gaston Dated: May 17, 1999 ---------------------------------------------- 2. EX-10.10 16 v97093orexv10w10.txt EXHIBIT 10.10 Exhibit 10.10 August 22, 2001 (BLUE NILE LETTERHEAD) Dear Susan, On behalf of Blue Nile, Inc. (the "Company"), I am pleased to offer you the position of Vice President, Marketing, reporting to Bob Paquin. The terms of your relationship with the Company will be as indicated herein. 1. Position. You will become Vice President, Marketing for the Company. As such, you will have responsibilities as determined by Bob Paquin. 2. Base Salary. You will be paid a base salary of $15,000 per month, less payroll deductions and all required withholdings, which represents an annualized rate of $180,000. Your salary will be payable in accordance with the Company's standard payroll policies. 3. Stock Options. We will recommend to the Board of Directors that you be granted an incentive stock option to purchase 315,000 shares of common stock of the Company. The exercise price will be the fair market value of the common stock as determined by the Board of Directors on the date of grant. One fourth (1/4) of the shares subject to such option will vest on the first year anniversary of your hire date and one forty-eighth (1/48) of the shares subject to such option will vest each month thereafter as long as your employment continues with the Company. In the event the Company is acquired, an additional one-eighth (1/8) of the shares will vest immediately. In the event the company is acquired, and then your employment is terminated without cause within 12 months following the acquisition date, any remaining unvested shares shall vest immediately upon termination. The Company's 1999 Equity Incentive Plan, the Grant Notice and the Stock Option Agreement shall govern the terms of this option grant in all respects. 4. Benefits. You will be eligible to receive healthcare and dental benefits, life and disability insurance and enrollment in the Company 401k plan effective on the first of the month following your date of employment. The Company agrees to pay one-half of the cost of extending healthcare and dental benefits to your spouse and children. 5. Standard Employee Agreement. Like all employees, you will be required to sign the Company's standard Employee Proprietary Information and Inventions Agreement relating to the protection of the Company's proprietary and confidential information and assignment of inventions. In addition, you will be required to abide by the company's strict policy that prohibits any new employee from using or bringing with him or her from any previous employer any confidential information, trade secrets, or proprietary materials or processes of such former employer. 1. (BLUE NILE LETTERHEAD) 6. Federal Immigration Law. For purposes of federal immigration law, you will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated. Documents that can satisfy these requirements are a United States passport or a valid driver's license and a social security card. 7. At-Will Employment. Your employment is at will, as defined under applicable law. This means you may voluntarily quit for any reason whatsoever simply by notifying the Company. Likewise, the Company may terminate your employment at any time and for any reason whatsoever with or without cause or advance notice. This at-will employment relationship cannot be changed except in a writing signed by a Company officer. 8. Entire Agreement. This Agreement, together with your Employee Proprietary Information and Inventions Agreement, constitutes the entire agreement between the parties and supersedes all other agreements or understandings. This agreement may be amended only by written agreement signed by you and the Company. 9. Start Date. September 17, 2001. Again, let me indicate how pleased we all are to extend this offer, and how much we look forward to working together. Please indicate your acceptance by signing and returning the enclosed copy of this letter. This offer is valid until August 28, 2001 and will terminate if not accepted by such date. Very truly yours, BLUE NILE, INC. /s/ Mark Vadon - ----------------------------------------------------- The foregoing terms and conditions are hereby accepted: Signed: /s/ Susan S. Bell --------------------------------------------- Susan S. Bell Dated: August 28, 2001 ---------------------------------------------- 2. EX-10.11 17 v97093orexv10w11.txt EXHIBIT 10.11 Exhibit 10.11 July 30, 1999 (INTERNET DIAMONDS, INC. LETTERHEAD) Dear Darrell, On behalf of Internet Diamonds, Inc. (the "Company"), I am extremely pleased to offer you a position with the Company. The terms of your relationship with the Company will be as indicated herein. 1. Position. You will become the Company's Director of Technology. 2. Salary. You will be paid a base salary of $9,583 per month, less payroll deductions and all required withholdings, which represents an annualized rate of $115,000. Your salary will be payable in accordance with the Company's standard payroll policies. 3. Stock Options. We will recommend to the Board of Directors that you be granted an incentive stock option to purchase 160,000 shares of common stock of the Company. The exercise price will be the fair market value of the common stock as determined by the Board of Directors on the date of grant. One fourth (1/4) of the shares subject to such option will vest on the one-year anniversary of your hire date and one forty-eighth (1/48) of the shares subject to such option will vest each month thereafter as long as your employment continues with the Company. The Company's 1999 Equity Incentive Plan, the Grant Notice and the Stock Option Agreement shall govern the terms of this option grant in all respects. 4. Benefits. You will be eligible to receive healthcare and dental benefits, life and disability insurance benefits effective on the first of the month following your date of employment. 5. Standard Employee Agreement. Like all employees, you will be required to sign the Company's standard Employee Proprietary Information and Inventions Agreement relating to the protection of the Company's proprietary and confidential information and assignment of inventions. In addition, you will be required to abide by the company's strict policy that prohibits any new employee from using or bringing with him or her from any previous employer any confidential information, trade secrets, or proprietary materials or processes of such former employer. 6. Federal Immigration Law. For purposes of federal immigration law, you will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated. Documents that can satisfy these requirements are a United States passport or a valid driver's license and a social security card. 1. 7. At-Will Employment. Your employment is at will, as defined under applicable law. This means you may voluntarily quit for any reason whatsoever simply by notifying the Company. Likewise, the Company may terminate your employment at any time and for any reason whatsoever with or without cause or advance notice. This at-will employment relationship cannot be changed except in a writing signed by a Company officer. 8. Entire Agreement. This Agreement, together with your Employee Proprietary Information and Inventions Agreement, constitutes the entire agreement between the parties and supersedes all other agreements or understandings. This agreement may be amended only by written agreement signed by you and the Company. 9. Start Date. As soon as possible. Again, let me indicate how pleased we all are to extend this offer, and how much we look forward to working together. Please indicate your acceptance by signing and returning the enclosed copy of this letter. This offer is valid until July 30, 1999 and will terminate if not accepted by such date. Very truly yours, INTERNET DIAMONDS, INC. /s/ Mark Vadon - ----------------------------------------------------- The foregoing terms and conditions are hereby accepted: Signed: /s/ Darrell Cavens --------------------------------------------- Darrell Cavens Dated: July 30, 1999 ---------------------------------------------- 2. EX-10.12 18 v97093orexv10w12.txt EXHIBIT 10.12 Exhibit 10.12 January 20, 2004 Dear Barbara, On behalf of Blue Nile, Inc. (the "Company"), I am pleased to offer you the position of Vice President, Marketing, reporting to Bob Paquin. The terms of your relationship with the Company will be as indicated herein. 1. Position. You will become Vice President, Marketing for the Company. As such, you will have responsibilities as determined by Bob Paquin. 2. Base Salary. You will be paid a base salary of $13,333 per month, less payroll deductions and all required withholdings, which represents an annualized rate of $160,000. Your salary will be payable in accordance with the Company's standard payroll policies. 3. Stock Options. We will recommend to the Board of Directors that you be granted an incentive stock option to purchase 120,000 shares of common stock of the Company. The exercise price will be the fair market value of the common stock as determined by the Board of Directors on the date of grant. One fourth (1/4) of the shares subject to such option will vest on the first year anniversary of your hire date and one forty-eighth (1/48) of the shares subject to such option will vest each month thereafter as long as your employment continues with the Company. The Company's 1999 Equity Incentive Plan, the Grant Notice and the Stock Option Agreement shall govern the terms of this option grant in all respects. 4. Benefits. You will be eligible to receive healthcare and dental benefits, life and disability insurance and enrollment in the Company 401k plan effective on the first of the month following your date of employment. You will begin accruing vacation time on your start date in the amount of 5 hours per pay period (3 weeks of vacation time per year). 5. Relocation. We will reimburse you for relocation and temporary housing expenses up to $10,000. 6. Standard Employee Agreement. Like all employees, you will be required to sign the Company's standard Employee Proprietary Information and Inventions Agreement relating to the protection of the Company's proprietary and confidential information and assignment of inventions. In addition, you will be required to abide by the Company's strict policy that prohibits any new employee from using or bringing with him or her from any previous employer any confidential information, trade secrets or proprietary materials or processes of such former employer. 1. 7. Federal Immigration Law. For purposes of federal immigration law, you will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated. Documents that can satisfy these requirements are a United States passport or a valid driver's license and a social security card. 8. At-Will Employment. Your employment is at will, as defined under applicable law. This means you may voluntarily quit for any reason whatsoever simply by notifying the Company. Likewise, the Company may terminate your employment at any time and for any reason whatsoever with or without cause or advance notice. This at-will employment relationship cannot be changed except in writing signed by a Company officer. 9. References. This offer is contingent upon successful positive reference checks by the Company. 10. Entire Agreement. This Agreement, together with your Employee Proprietary Information and Inventions Agreement, constitutes the entire agreement between the parties and supersedes all other agreements or understandings. This agreement may be amended only by written agreement signed by you and the Company. 11. Start Date. January 29, 2004. Again, let me indicate how pleased we all are to extend this offer, and how much we look forward to working together. Please indicate your acceptance by signing and returning the enclosed copy of this letter. This offer is valid until January 21, 2004 and will terminate if not accepted by such date. Very truly yours, BLUE NILE, INC. /s/ Mark Vadon - ---------------------------------------- The foregoing terms and conditions are hereby accepted: Signed: /s/ Barbara Rybka -------------------------------- Barbara Rybka Dated: January 20, 2004 -------------------------------- 2. EX-16.1 19 v97093orexv16w1.txt EXHIBIT 16.1 [KPMG LOGO] Exhibit 16.1 KPMG LLP Suite 900 Telephone 206 913 4000 801 Second Avenue Fax 206 913 4444 Seattle, WA 98104 March 10, 2004 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Ladies and Gentlemen: We were previously principal accountants for Blue Nile, Inc. and, under the date of February 14, 2003, we reported on the consolidated financial statements of Blue Nile, Inc. as of and for the year ended December 31, 2002. On October 9, 2003, our appointment as principal accountants was terminated. We have read Blue Nile, Inc.'s statements included in paragraph two of the Experts Section of its Form S-1, and we agree with such statements except we are not in a position to agree or disagree with Blue Nile, Inc.'s statement that the change was approved by the audit committee of the board of directors nor are we in a position to agree or disagree with Blue Nile, Inc.'s statement that PricewaterhouseCoopers LLP was not consulted on any financial or accounting reporting matters in the period before their appointment. Additionally, the Company has advised us that the 2002 consolidated financial statements as presented in the Form S-1 have been restated. However, nothing has come to our attention to cause us to believe that the Company's 2002 consolidated financial statements (before restatement) as audited by this firm did not fairly present, in all material respects, the financial position, results of operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Very truly yours, /s/ KPMG LLP EX-21.1 20 v97093orexv21w1.txt EXHIBIT 21.1 . . . Exhibit 21.1 Subsidiaries Name Jurisdiction - ---- ------------ Blue Nile, LLC Delaware limited liability company
EX-23.1 21 v97093orexv23w1.txt EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our report dated March 9, 2004 relating to the consolidated financial statements of Blue Nile, Inc., which appear in such Registration Statement. 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