UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14A INFORMATION

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BLUE NILE, INC.
705 Fifth Avenue South
Suite 900
Seattle, Washington 98104

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

To Be Held On May 20, 2008

 

Dear Stockholder:

 

You are cordially invited to attend the Annual Meeting of Stockholders of Blue Nile, Inc., a Delaware corporation (the “Company”). Notice is hereby given that the Annual Meeting will be held on Tuesday, May 20, 2008 at 11:00 AM Pacific Time at the Washington Athletic Club located at 1325 Sixth Avenue, Seattle, Washington 98101 for the following purposes:

 

 

3.  To approve our 2004 Equity Incentive Plan; and

 

4.  To conduct any other business properly brought before the Annual Meeting.

 

These items of business are more fully described in the Proxy Statement accompanying this notice.

 

The record date for the Annual Meeting is March 31, 2008. Only stockholders of record at the close of business on that date may vote at the Annual Meeting or any adjournment thereof. For ten days prior to the Annual Meeting, a complete list of stockholders entitled to vote at the Annual Meeting will be available for examination by any stockholder, for any purpose relating to the Annual Meeting, during ordinary business hours at our principal offices located at 705 Fifth Avenue South, Suite 900, Seattle, Washington 98104.

 

By Order of the Board of Directors,

 

 

Terri K. Maupin

Secretary

 

Seattle, Washington

April 18, 2008

 

 

Important notice regarding the availability of proxy materials for the Annual Meeting to be held on
May 20, 2008. The Company’s Proxy Statement and Annual Report to security holders for the fiscal
year ended December 30, 2007 is also available at http://investor.bluenile.com.

 

 

BLUE NILE, INC.
705 Fifth Avenue South
Suite 900
Seattle, Washington 98104

 

PROXY STATEMENT
FOR THE 2008 ANNUAL MEETING OF STOCKHOLDERS

 

Tuesday, May 20, 2008

 

QUESTIONS AND ANSWERS ABOUT THESE PROXY MATERIALS AND VOTING

 

Why am I receiving these materials?

 

We have sent you this proxy statement and the enclosed proxy card because the Board of Directors of Blue Nile, Inc. (sometimes referred to as “we”, the “Company” or “Blue Nile”) is soliciting your proxy to vote at the 2008 Annual Meeting of Stockholders. You are invited to attend the Annual Meeting to vote on the proposals described in this proxy statement. However, you do not need to attend the meeting to vote your shares. Instead, you may simply complete, sign and return the enclosed proxy card or follow the instructions below to submit your proxy over the telephone or on the Internet.

 

We intend to mail this proxy statement and accompanying proxy card on or about April 18, 2008 to all stockholders of record entitled to vote at the Annual Meeting.

 

Who can vote at the Annual Meeting?

 

Only stockholders of record at the close of business on March 31, 2008 will be entitled to vote at the Annual Meeting. On this record date, there were 15,006,791 shares of common stock outstanding and entitled to vote.

 

Stockholder of Record: Shares Registered in Your Name. If on March 31, 2008 your shares were registered directly in your name with our transfer agent, BNY Mellon Shareowner Services, then you are a stockholder of record. As a stockholder of record, you may vote in person at the Annual Meeting or vote by proxy. Whether or not you plan to attend the Annual Meeting, please fill out and return the enclosed proxy card or vote by proxy over the telephone or on the Internet as instructed below to ensure your vote is counted.

 

Beneficial Owner: Shares Registered in the Name of a Broker or Bank. If on March 31, 2008 your shares were held, not in your name, but rather in an account at a brokerage firm, bank, dealer, or other similar organization, then you are the beneficial owner of shares held in “street name” and these proxy materials are being forwarded to you by that organization. The organization holding your account is considered to be the stockholder of record for purposes of voting at the Annual Meeting. As a beneficial owner, you have the right to direct your broker or other agent regarding how to vote the shares in your account. You are also invited to attend the Annual Meeting. However, since you are not the stockholder of record, you may not vote your shares in person at the Annual Meeting, unless you request and obtain a valid proxy from your broker or other agent.

 

What am I voting on?

 

There are three matters scheduled for a vote:

 

1)  Election of three directors;

 

 

3)  Approval of our 2004 Equity Incentive Plan.

How do I vote?

 

For proposal number 1, you may either vote “For” all the nominees to the Board of Directors or you may “Withhold” your vote for any nominee you specify. For proposal numbers 2 and 3, you may vote “For” or “Against” or abstain from voting. The procedures for voting are as follows:

 

Stockholder of Record: Shares Registered in Your Name. If you are a stockholder of record, you may vote in person at the Annual Meeting, vote by proxy using the enclosed proxy card, vote by proxy over the telephone, or vote by proxy on the Internet. Whether or not you plan to attend the Annual Meeting, we urge you to vote by proxy to ensure your vote is counted. You may still attend the Annual Meeting and vote in person even if you have already voted by proxy.

 

 

 

 

Beneficial Owner: Shares Registered in the Name of Broker or Bank. If you are a beneficial owner of shares registered in the name of your broker, bank, or other agent, you should have received a proxy card and voting instructions with these proxy materials from that organization rather than from Blue Nile. Simply complete and mail the proxy card to ensure that your vote is counted. Alternatively, you may vote by telephone or on the Internet as instructed by your broker, bank or other agent. To vote in person at the Annual Meeting, you must obtain a valid proxy from your broker, bank, or other agent. Follow the instructions from your broker, bank, or other agent included with these proxy materials, or contact your broker, bank, or other agent to request a proxy form.

 

How many votes do I have?

 

On each matter to be voted upon, you have one vote for each share of common stock you own as of March 31, 2008.

 

What if I return a proxy card but do not make specific choices?

 

If you return a signed and dated proxy card without marking any voting selections, your shares will be voted “For” the election of the nominees for director, “For” the ratification of Deloitte & Touche LLP as our independent auditors for the fiscal year ending January 4, 2009, and “For” the approval of our 2004 Equity Incentive Plan. If any other matter is properly presented at the Annual Meeting, your proxyholder (one of the individuals named on your proxy card) will vote your shares using his or her best judgment.

 

Who is paying for this proxy solicitation?

 

We will pay for the entire cost of soliciting proxies. In addition to these mailed proxy materials, our directors and employees may also solicit proxies in person, by telephone, or by other means of communication. Directors and

employees will not be paid any additional compensation for soliciting proxies. We may also reimburse brokerage firms, banks and other agents for the cost of forwarding proxy materials to beneficial owners.

 

What does it mean if I receive more than one proxy card?

 

If you receive more than one proxy card, your shares are registered in more than one name or are registered in different accounts. Please complete, sign and return each proxy card to ensure that all of your shares are voted.

 

Can I change my vote after submitting my proxy?

 

Yes. You can revoke your proxy at any time before the final vote at the Annual Meeting. If you are the record holder of your shares, you may revoke your proxy in any one of three ways:

 

 

If your shares are held by your broker or bank as a nominee or other agent, you should follow the instructions provided by your broker, bank or other agent.

 

When are stockholder proposals due for next year’s Annual Meeting?

 

To be considered for inclusion in next year’s proxy materials, your proposal must be submitted in writing by December 19, 2008 (120 calendar days prior to the anniversary of the mailing date of this proxy statement), to our Corporate Secretary at 705 Fifth Avenue South, Suite 900, Seattle, Washington 98104. In addition, stockholder proposals must otherwise comply with the requirements of Rule 14a-8 of the Securities and Exchange Act of 1934, as amended.

 

A stockholder proposal or nomination for director that will not be included in next year’s proxy materials, but that a stockholder intends to present in person at next year’s Annual Meeting, must comply with the notice, information and consent provisions contained in our Bylaws. In part, the Bylaws provide that to timely submit a proposal or nominate a director you must do so by submitting the proposal or nomination in writing, to our Corporate Secretary at our principal executive offices no later than the close of business on February 19, 2009 (90 days prior to the first anniversary of the 2008 Annual Meeting Date) nor earlier than the close of business on January 20, 2009 (120 days prior to the first anniversary of the 2008 Annual Meeting date). In the event that we set an Annual Meeting date for 2009 that is not within 30 days before or after the anniversary of the 2008 Annual Meeting date, notice by the stockholder must be received no earlier than the close of business on the 120th day prior to the 2009 Annual Meeting and no later than the close of business on the later of the 90th day prior to the 2009 Annual Meeting or the 10th day following the day on which public announcement of the date of the 2009 Annual Meeting is first made. Our Bylaws contain additional requirements to properly submit a proposal or nominate a director. If you plan to submit a proposal or nominate a director, please review our Bylaws carefully. You may obtain a copy of our Bylaws by mailing a request in writing to Blue Nile’s Corporate Secretary at 705 Fifth Avenue South, Suite 900, Seattle, Washington 98104.

 

How are votes counted?

 

Votes will be counted by the inspector of elections appointed for the Annual Meeting. With respect to the election of directors, the inspector of elections will count votes “For” and “Withheld” and the three directors who receive the greatest number of “For” votes (among votes properly cast in person or by proxy) will be elected to the Board of Directors. With respect to the ratification of the selection of independent auditors for fiscal year 2008 and the approval of our 2004 Equity Incentive Plan, the inspector of elections will count votes cast “For” and “Against” the proposals, along with any abstentions. Abstentions from voting on these proposals will be counted towards a quorum and will have the same effect as “Against” votes. The proposal to ratify the selection of independent auditors for fiscal year 2008 and

the proposal to approve our 2004 Equity Incentive Plan will be approved if the holders of a majority of shares present and entitled to vote either in person or by proxy vote “For” the proposal.

 

What are “broker non-votes”?

 

If you hold shares beneficially in street name and do not provide your broker with voting instructions, your shares may constitute “broker non-votes”. Generally, broker non-votes occur on a matter when a broker is not permitted to vote on that matter without instructions from the beneficial owner and instructions are not given. In tabulating the voting result for any particular proposal, shares that constitute broker non-votes are not considered votes cast on that proposal. Thus, broker non-votes will not affect the outcome of any matter being voted on at the meeting, assuming that a quorum is obtained.

 

How many votes are needed to approve each proposal?

 

 

What is the quorum requirement?

 

A quorum of stockholders is necessary to hold a valid Annual Meeting. A quorum will be present if stockholders holding at least a majority of the outstanding shares are present at the Annual Meeting or represented by proxy. On the record date, there were 15,006,791 shares of common stock outstanding and entitled to vote. Thus, the holders of 7,503,396 shares of common stock must be present in person or represented by proxy at the Annual Meeting to have a quorum.

 

Your shares will be counted towards the quorum only if you submit a valid proxy (or one is submitted on your behalf by your broker, bank or other nominee) or if you vote in person at the Annual Meeting. Abstentions will be counted towards the quorum requirement. In the absence of a quorum, the Annual Meeting may be adjourned either by the Chairman of the meeting or by vote of the holders of a majority of shares present at the meeting in person or represented by proxy.

 

How can I find out the results of the voting at the Annual Meeting?

 

Preliminary voting results will be announced at the Annual Meeting. Final voting results will be published in our quarterly report on Form 10-Q for the second quarter of the fiscal year ending January 4, 2009.

 

Proposal 1

 

Election Of Directors

 

Our Board of Directors is divided into three classes. Each class consists, as nearly as possible, of one-third of the total number of directors, and each class has a three-year term. Vacancies on the Board of Directors may be filled only by persons elected by a majority of the remaining directors. A director elected by the Board of Directors to fill a vacancy in a class, including a vacancy created by an increase in the number of directors, shall serve for the remainder of the full term of that class and until the director’s successor is elected and qualified.

 

Our Board of Directors presently has eight members.  There are three directors in the class whose term of office expires in 2008, Mark Vadon, Eric Carlborg and Joanna Strober. Each of these directors has been nominated by the Board of Directors and has agreed to stand for reelection. Mr. Vadon, Mr. Carlborg and Ms. Strober are current directors who were previously elected by the stockholders. On the recommendation of the Nominating and Corporate Governance Committee, the Board of Directors has nominated Mark Vadon, Eric Carlborg and Joanna Strober to stand for election at the 2008 Annual Meeting. If elected, Mr. Carlborg and Ms. Strober would be independent non-employee directors. If elected at the 2008 Annual Meeting, each of Mr. Vadon, Mr. Carlborg and Ms. Strober would serve until the 2011 Annual Meeting and until his or her successor is elected and qualified, or, if sooner, until the director’s death, resignation or removal. It is our policy to invite and encourage directors and nominees for director to attend the Annual Meeting. Mark Vadon and Diane Irvine attended the 2007 Annual Meeting.

 

For the election of directors, the three nominees receiving the most “For” votes (among votes properly cast in person or by proxy) will be elected. Only votes “For” or “Withheld” will affect the outcome. Shares represented by executed proxies will be voted, if authority to do so is not withheld, for the election of the nominees named below. In the event that the nominee should be unavailable for election as a result of an unexpected occurrence, such shares will be voted for the election of such substitute nominee as management may propose. Each person nominated for election has agreed to serve if elected, and we have no reason to believe that any nominee will be unable to serve.

 

The following is a brief biography of each nominee and each director whose term will continue after the Annual Meeting.

 

Nominees for Election for a Three-year Term Expiring at the 2011 Annual Meeting

 

Mark Vadon

Mark Vadon, age 38, co-founded Blue Nile and has served as Chairman of the Board of Directors since its inception in March 1999. He has served as the Company’s Executive Chairman since February 2008 and served as the Company’s Chief Executive Officer from March 1999 to February 2008. From March 1999 to February 2007, Mr. Vadon was also Blue Nile’s President. 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.

 

Eric Carlborg

Eric Carlborg, age 44, has served as a director since February 2005. Since April 2006, Mr. Carlborg has served as a partner at Continental Investors LLC, an investment company. From September 2005 to March 2006, Mr. Carlborg served as Chief Financial Officer of ProvideCommerce, Inc., an e-commerce company. From July 2001 to October 2004, Mr. Carlborg was a Managing Director of Investment Banking with Merrill Lynch & Co., a financial services company. Prior to his tenure at Merrill Lynch, Mr. Carlborg served in various executive financial positions, including Chief Financial Officer at Authorize.net, Inc. and Chief Strategy Officer at Go2Net, Inc., providers of Internet products and services. Mr. Carlborg also previously served as Chief Financial Officer for Einstein/Noah Bagel Corp., a food service company. Mr. Carlborg previously served as a member of the Board of Directors of Big Lots, Inc., a Fortune 500 retailer. Mr. Carlborg holds a B.A. from the University of Illinois and an M.B.A. from the University of Chicago.

 

Joanna Strober

Joanna Strober, age 39, has served as a director since May 1999. Ms. Strober has served as Managing Director of Private Equity at Sterling Stamos Capital Management, a registered investment advisor, since June 2007 and served as Director of Private Equity at Sterling Stamos Capital Management from August 2005 to June 2007. From June 2004 to August 2005, Ms. Strober served as Managing Director of Pacific Community Ventures, a private equity firm. From January

2003 until June 2004, Ms. Strober served as Managing Director at Symphony Technology Group, an enterprise software investment firm. 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.

 

The Board Of Directors Recommends
A Vote In Favor Of Each Named Nominee (Proposal 1).

 

Directors Continuing in Office Until the 2009 Annual Meeting

 

Mary Alice Taylor

Mary Alice Taylor, age 58, has served as a director since March 2000. Ms. Taylor has been an independent business executive since October 2000. 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 also served as Senior Vice President of Federal Express Corporation, a delivery services company, from September 1991 until December 1996. Ms. Taylor holds a B.S. in Finance from Mississippi State University. Ms. Taylor also serves on the Board of Directors of Allstate Corporation, an insurance company.

 

Michael Potter

Michael Potter, age 46, has served as a director since October 2007. Mr. Potter served as Chairman and Chief Executive Officer of Big Lots, Inc., a Fortune 500 retailer, from June 2000 to June 2005. Prior to serving as Chief Executive Officer, Mr. Potter served in various capacities at Big Lots, including the role of Chief Financial Officer. Prior to Big Lots, Mr. Potter held various positions at The Limited, Inc., May Department Stores, and Meier & Frank, all retail companies. Mr. Potter currently serves on the Board of Directors of Coldwater Creek, Inc., a triple channel retailer of women’s apparel, gifts and accessories. Mr. Potter holds an M.B.A. from Capital University in Ohio and a B.S. in Finance and Management from the University of Oregon.

 

Steve Scheid

Steve Scheid, age 54, has served as a director since October 2007. Mr. Scheid currently serves as Chairman of the Board of Janus Capital Group, Inc. (“Janus”). From April 2004 until December 2005, Mr. Scheid served as Chief Executive Officer and Chairman of the Board of Janus. Scheid joined the Janus Board in December 2002 and was appointed Chairman in January 2004. Scheid served as Vice Chairman of The Charles Schwab Corporation (“Schwab”) and President of Schwab’s retail group from 2000 to 2002. Prior thereto, Mr. Scheid headed Schwab’s financial products and services group and was the firm’s Chief Financial Officer from 1996 through 1999. From 2001 to 2002, Mr. Scheid served on the Federal Advisory Council, which provides oversight to the Federal Reserve Board in Washington, D.C. Mr. Scheid currently serves on the Board of Directors of PMI Group, Inc., an international provider of credit enhancement products. Mr. Scheid holds a B.S. from Michigan State University.

 

Directors Continuing in Office Until the 2010 Annual Meeting

 

Diane Irvine

Diane Irvine, age 49, has served as a director since May 2001, and has served as Blue Nile’s Chief Executive Officer since February 2008 and President since February 2007. She served as the Company’s Chief Financial Officer from December 1999 to September 2007. 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 serves on the Board of Directors of Davidson Companies, an investment banking and asset management company. Ms. Irvine holds a B.S. in Accounting from Illinois State University and an M.S. in Taxation from Golden Gate University.

Joseph Jimenez

Joseph Jimenez, age 48, has served as a director since March 2000. Mr. Jimenez has served as Chief Executive Officer of Novartis Pharma AG, a division of Novartis AG, a diversified pharmaceuticals company, since October 2007. From April 2007 to October 2007, Mr. Jimenez served as CEO of Novartis Consumer Health. From September 2001 to April 2006, Mr. Jimenez served as Executive Vice President of H.J. Heinz Company, a food products company. Mr. Jimenez also served as President and Chief Executive Officer of Heinz Europe from July 2002 to April 2006. 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.

 

Independence of The Board of Directors

 

As required under the NASDAQ Stock Market LLC (“Nasdaq”) listing standards, a majority of the members of a listed company’s Board of Directors must qualify as “independent,” as affirmatively determined by the Board of Directors. Our Board of Directors consults with our counsel to ensure that the Board of Directors’ determinations are consistent with all relevant securities and other laws and regulations regarding the definition of “independent,” including those set forth in pertinent listing standards of the Nasdaq, as in effect, from time to time.

 

Consistent with these considerations, after review of all relevant transactions and relationships between each director, or any of his or her family members, and us, our senior management and our independent auditors, the Board of Directors affirmatively determined that the following six directors are independent directors within the meaning of the applicable Nasdaq listing standards: Mary Alice Taylor, Eric Carlborg, Joseph Jimenez, Michael Potter, Steve Scheid and Joanna Strober. In making this determination, the Board of Directors found that none of these directors had a material or other disqualifying relationship with us. Mr. Vadon, our Executive Chairman, and Ms. Irvine, our Chief Executive Officer and President, are not independent directors by virtue of their employment with us.

 

Meetings of the Board of Directors

 

The Board of Directors met four times during the fiscal year 2007. Each Board member attended 75% or more of the aggregate of the meetings of the Board of Directors and meetings of the committees on which he or she served, held during the period for which he or she was a director or committee member, other than Mr. Jimenez who attended 68% (15 out of 22) of the aggregate number of the Board of Directors, Audit Committee and Compensation Committee meetings during the fiscal year 2007 because he was traveling during the meeting times.

 

As required under applicable Nasdaq listing standards, in fiscal year 2007, our independent directors met four times in regularly scheduled executive sessions at which only independent directors were present. The lead independent director, Mary Alice Taylor, presided over the executive sessions. Persons interested in communicating with the independent directors with their concerns or issues may address correspondence to a particular director or to the independent directors generally, in care of Blue Nile’s Corporate Secretary at 705 Fifth Avenue South, Suite 900, Seattle, Washington 98104. If no particular director is named, letters will be forwarded, depending on the subject matter, to the Chair of the Audit, Compensation or Nominating and Corporate Governance Committee, as applicable.

 

Information Regarding the Board of Directors and its Committees

 

In April 2004, our Board of Directors documented the governance practices followed by us and our Board of Directors by adopting the Corporate Governance Policies of the Board of Directors (the “Governance Policies”). The Governance Policies provide the Board of Directors with the necessary authority to review and evaluate our business operations, as needed, and they are designed to facilitate the Board of Directors’ independent decision making authority. The Governance Policies are intended to align the interests of directors and management with those of our stockholders. The Governance Policies, among other things, set forth the practices the Board of Directors will follow with respect to the selection of directors, the independence of the directors, meetings of the Board of Directors, committees of the Board of Directors and the responsibilities of the Board of Directors. The Governance Policies were adopted to, among other things, reflect changes to the Nasdaq listing standards and Securities and Exchange Commission rules adopted to implement provisions of the Sarbanes-Oxley Act of 2002. The Corporate Governance Policies of the Board of Directors, as well as the charters for each committee of the Board of Directors, may be viewed on our website at www.bluenile.com in the corporate governance section of our investor relations page.

The Board of Directors has three committees: an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. The following table provides membership and meeting information for fiscal year 2007 for each of the committees of the Board of Directors:

 

 

Below is a description of each committee of the Board of Directors. Each committee has authority to engage legal counsel or other experts or consultants, as it deems appropriate, to carry out its responsibilities. The Board of Directors has determined that each member of each committee meets the applicable rules and regulations regarding “independence” and that each member is free of any relationship that would interfere with his or her individual exercise of independent judgment with regard to us.

 

Audit Committee

 

The Audit Committee of the Board of Directors oversees our corporate accounting and financial reporting processes and audits of our financial statements. For this purpose, the Audit Committee performs several functions, including, among other things:

 

 

 

Three directors comprise the Audit Committee:  Mr. Carlborg, Mr. Potter and Ms. Taylor. The Audit Committee met eight times during fiscal year 2007. The Audit Committee has adopted a written charter that is available on our website, www.bluenile.com, in the corporate governance section of our investor relations page.

 

Our Board of Directors annually reviews the Nasdaq listing standards definition of independence for Audit Committee members and has determined that all members of our Audit Committee are independent (as independence is currently defined in Rule 4350(d)(2)(A)(i) and (ii) of the Nasdaq listing standards). The Board of Directors has also determined that each of our Audit Committee members, Mr. Carlborg, Mr. Potter and Ms. Taylor, qualifies as an “audit committee financial expert,” as defined in applicable Securities and Exchange Commission rules. In making this determination, the Board of Directors made a qualitative assessment of Mr. Carlborg, Mr. Potter and Ms. Taylor’s level of knowledge and experience based on a number of factors, including their respective formal education, experience, business acumen and independence.

 

Report of the Audit Committee of the Board of Directors⁽¹⁾

 

The Audit Committee reviewed and discussed the audited financial statements for fiscal year 2007 with management of Blue Nile. The Audit Committee has also discussed with Blue Nile’s independent auditors the matters required to be discussed by the Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1. AU section 380), as adopted by the Public Company Accounting Oversight Board (“PCAOB”) in Rule 3200T. The Audit Committee has also received the written disclosures and the letter from Blue Nile’s independent auditors required by the Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committee), as adopted by the PCAOB in Rule 3600T and has discussed with Blue Nile’s independent auditors the independent auditor’s independence. Based on the foregoing, the Audit Committee has recommended to the Board of Directors that the audited financial statements be included in Blue Nile’s Annual Report on Form 10-K for the fiscal year ended December 30, 2007.

 

Date: April 18, 2008

 

Respectfully submitted,

 

Eric Carlborg, Chairman

Michael Potter

Mary Alice Taylor

 

 

Compensation Committee

 

The Compensation Committee acts on behalf of the Board of Directors to review, adopt and oversee our compensation strategy, policies, plans and programs, including:

 

 

The Compensation Committee also reviews with management our Compensation Discussion and Analysis and considers whether to recommend that it be included in our Proxy Statement.

 

Three directors comprise the Compensation Committee:  Mr. Scheid, Mr. Jimenez and Ms. Strober. All members of our Compensation Committee are independent (as independence is currently defined in Rule 4200(a)(15) of the Nasdaq listing standards). The Compensation Committee met ten times during fiscal year 2007. The Compensation Committee has adopted a written Compensation Committee charter that is available on our website, www.bluenile.com, in the corporate governance section of our investor relations page.

 

The agenda for each Compensation Committee meeting is generally developed by the Chair of the Compensation Committee, in consultation with the Chief Executive Officer, the Executive Chairman, and the General Counsel, as appropriate. The Compensation Committee meets regularly in executive session. From time to time, various members of management as well as outside advisors or consultants may be invited by the Compensation Committee to make presentations, provide financial or other background information or advice or otherwise participate in the Compensation Committee meetings. The charter of the Compensation Committee grants the Compensation Committee full access to all of our books, records, facilities and personnel, as well as authority to obtain, at our expense, advice and assistance from internal and external legal, accounting or other advisors and consultants and other external resources that the Compensation Committee considers necessary or appropriate in the performance of its duties. In particular, the Compensation Committee has the sole authority to retain compensation consultants to assist it in its evaluation of executive and director compensation, including the authority to approve the consultant’s reasonable fees and other retention terms.

 

Under its charter, the Compensation Committee may form, and delegate authority to, subcommittees, as appropriate. In 2004, the Compensation Committee formed the Stock Award Committee, currently composed of Mr. Vadon and Ms. Irvine, to which it delegated authority to grant, without any further action required by the Compensation Committee, stock options to employees who are not executive officers of us within ranges determined by the Compensation Committee. The purpose of this delegation of authority is to enhance the flexibility of option administration within the Company and to facilitate the timely grant of options to non-management employees, particularly new employees, within specified limits approved by the Compensation Committee.

 

Compensation Committee Interlocks and Insider Participation

 

None of our Compensation Committee’s members has at any time been an officer or employee of Blue Nile. None of our executive officers serve, or in the past fiscal year has served, as a member of the board of directors or compensation committee of any entity that has one or more of its executive officers serving on our board of directors or Compensation Committee. None of our Compensation Committee’s members is or was a participant in a “related person transaction” in the past fiscal year (see “Transactions with Related Persons” included herein for a description of our policy on related person transactions).

 

Additional information about the Compensation Committee is set forth in the Compensation Discussion and Analysis section of this proxy statement.

Nominating and Corporate Governance Committee

 

The Nominating and Corporate Governance Committee of the Board of Directors is responsible for, among other things:

 

 

Three directors comprise the Nominating and Corporate Governance Committee: Ms. Taylor, Mr. Potter and Ms. Strober. All members of the Nominating and Corporate Governance Committee are independent (as independence is currently defined in Rule 4200(a)(15) of the Nasdaq listing standards). The Nominating and Corporate Governance Committee met five times during fiscal year 2007. The Nominating and Corporate Governance Committee has adopted a written charter that is available on our website, www.bluenile.com, in the corporate governance section of our investor relations page.

 

Criteria for Nominees.  The Nominating and Corporate Governance Committee reviews the experience and characteristics appropriate for members of the Board of Directors and director nominees in light of the Board of Directors’ composition at the time and skills and expertise needed at the Board of Directors and committee levels. The Nominating and Corporate Governance Committee also considers such factors as possessing relevant expertise upon which to be able to offer advice and guidance to management, having sufficient time to devote to our affairs, demonstrated excellence in his or her field, having the ability to exercise sound business judgment and having the commitment to rigorously represent the long-term interests of our stockholders. However, the Nominating and Corporate Governance Committee retains the right to modify these qualifications from time to time. In the case of incumbent directors whose terms of office are set to expire, the Nominating and Corporate Governance Committee reviews such directors’ overall service to us during their term, including the number of meetings attended, level of participation, quality of performance and any other relationships and transactions that might impair such directors’ independence. In the case of new director candidates, the Nominating and Corporate Governance Committee also determines whether the nominee must be “independent” under Nasdaq listing standards, applicable Securities and Exchange Commission rules and regulations and the advice of counsel, if necessary. The Nominating and Corporate Governance Committee uses its network of contacts to compile a list of potential candidates, but may also engage, if it deems appropriate, a professional search firm. The Nominating and Corporate Governance Committee conducts any appropriate and necessary inquiries into the backgrounds and qualifications of possible nominees after considering the function and needs of the Board of Directors. The Nominating and Corporate Governance Committee meets to discuss and consider the nominees and then selects a nominee or nominees for recommendation to the Board of Directors by majority vote.

To date, the Nominating and Corporate Governance Committee has not paid a fee to any third party to assist in the process of identifying or evaluating director nominees. To date, the Nominating and Corporate Governance Committee has not received a timely recommendation for a director nominee from a stockholder or stockholders holding more than 5% of our voting stock.

 

The Nominating and Corporate Governance Committee will consider properly submitted director nominees recommended by stockholders. The Nominating and Corporate Governance Committee does not intend to alter the manner in which it evaluates nominees based on whether or not the nominee was recommended by a stockholder. Stockholders who wish to recommend individuals for consideration by the Nominating and Corporate Governance Committee to become nominees for election to the Board of Directors may do so by delivering a written recommendation to the Nominating and Corporate Governance Committee at the following address: 705 Fifth Avenue South, Suite 900, Seattle, Washington 98104, Attention: Corporate Secretary, at least 120 days prior to the anniversary date of the mailing of our proxy statement for the last Annual Meeting of Stockholders. Recommendations must include the full name of the proposed nominee, a description of the proposed nominee’s business experience for at least the previous five years, complete biographical information, a description of the proposed nominee’s qualifications as a director and a representation that the recommending stockholder is a beneficial or record owner of our stock. Any such submission must be accompanied by the written consent of the proposed nominee to be named as a nominee and to serve as a director if elected. No such recommendation of a nominee to the Nominating and Corporate Governance Committee shall be deemed to satisfy the nomination requirements set forth in our Bylaws.

 

Stockholder Communications With The Board Of Directors

 

Our Board of Directors has adopted a formal process by which stockholders may communicate with the Board of Directors or any of our individual directors. Stockholders who wish to communicate with the Board of Directors may do so by sending written communications addressed to the Corporate Secretary of Blue Nile at 705 Fifth Avenue South, Suite 900, Seattle, Washington 98104. All communications will be compiled by our Corporate Secretary and submitted to the Board of Directors or the individual directors, as applicable, on a periodic basis.

 

Code Of Ethics

 

We have adopted the Blue Nile, Inc. Code of Ethics that applies to all officers, directors and employees, including our principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions. The Code of Ethics is available on our website at www.bluenile.com in the corporate governance section of our investor relations page. If we make any substantive amendments to the Code of Ethics or grant any waiver from a provision of the Code of Ethics to any executive officer or director, we will promptly disclose the nature of the amendment or waiver on our website and file a Current Report on Form 8-K to the extent required by law and the Nasdaq listing standards.

 

Proposal 2

 

Ratification Of Selection Of Independent Auditors

 

The Audit Committee of the Board of Directors has selected Deloitte & Touche LLP as our independent auditors for the fiscal year ending January 4, 2009 and has further directed that management submit the selection of independent auditors for ratification by the stockholders at the Annual Meeting. Deloitte & Touche LLP audited our financial statements for the years ended December 30, 2007 and December 31, 2006. Representatives of Deloitte & Touche LLP are expected to be present at the Annual Meeting. They will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions.

 

Neither our Bylaws nor other governing documents or law require stockholder ratification of the selection of Deloitte & Touche LLP as our independent auditors. The Audit Committee, however, is submitting the selection of Deloitte & Touche LLP to the stockholders for ratification as a matter of good corporate practice. If the stockholders fail to ratify the selection, the Audit Committee will reconsider whether or not to retain that firm. Even if the selection is ratified, the Audit Committee in its discretion may direct the appointment of different independent auditors at any time during the year if they determine that such a change would be in the best interest of us and our stockholders.

 

The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and entitled to vote at the Annual Meeting will be required to ratify the selection of Deloitte & Touche LLP. Abstentions will have the same effect as a vote against this proposal.

 

Principal Accountant Fees and Services

 

The following table represents aggregate fees billed to us for the fiscal years ended December 30, 2007 and December 31, 2006 by Deloitte & Touche LLP our principal accountant for each of these fiscal years. All fees described below were approved by the Audit Committee.

 

 

 

Pre-Approval Policies and Procedures

 

The Audit Committee has adopted policies and procedures for the pre-approval of audit and non-audit services rendered by our independent auditor. These policies generally provide for the pre-approval of specified services in the defined categories of audit services, audit-related services, and tax services up to specified amounts. Pre-approval may also be given as part of the Audit Committee’s approval of the scope of the engagement of the independent auditor or on an individual explicit case-by-case basis before the independent auditor is engaged to provide each service. The pre-approval of services may be delegated to one or more of the Audit Committee’s members, but the decision must be reported to and ratified by the full Audit Committee at its next scheduled meeting. As such, the engagement of

Deloitte & Touche LLP to render all of the services described in the categories above was approved by the Audit Committee in advance of rendering those services or approved by a delegate and subsequently ratified by the Audit Committee at its next scheduled meeting.

 

The Audit Committee has determined that the rendering of services other than audit services by Deloitte & Touche LLP is compatible with maintaining the principal accountant’s independence.

 

Change In Independent Public Accountant

 

On April 4, 2006, the Audit Committee of the Board of Directors approved the appointment of Deloitte & Touche LLP as our independent auditors to audit our financial statements for the fiscal year ending December 31, 2006 in place of PricewaterhouseCoopers LLP.

 

In connection with our audits for the fiscal years ended January 2, 2005 and January 1, 2006, and in the subsequent period before PricewaterhouseCoopers LLP’s dismissal on April 4, 2006, there were no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, that would have caused PricewaterhouseCoopers LLP to report the disagreement if it had not been resolved to the satisfaction of PricewaterhouseCoopers LLP. PricewaterhouseCoopers LLP’s reports on the financial statements for the fiscal years ended January 2, 2005 and January 1, 2006 did not contain an adverse opinion or disclaimer of an opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. PricewaterhouseCoopers LLP’s letter to the Securities and Exchange Commission stating its agreement with the statements in this paragraph is filed as an exhibit to the Company’s Current Report on Form 8-K as filed with the SEC on April 10, 2006.

 

The Board Of Directors Recommends
A Vote In Favor Of Proposal 2.

 

Proposal 3

 

Approval of 2004 Equity Incentive Plan

 

The Board of Directors recommends that our stockholders approve the terms of our 2004 Equity Incentive Plan (referred to as the “Equity Incentive Plan”) to preserve the deductibility of certain compensation paid to “covered employees” subject to deductibility limits under Section 162(m) of the Internal Revenue Code of 1986, as amended (referred to as the “Code”). “Covered employees” include our Chief Executive Officer and our three next most highly compensated officers (other than our Chief Financial Officer).

 

Section 162(m) of the Code denies a deduction to any publicly held corporation for certain compensation paid to covered employees in a taxable year to the extent that compensation to a covered employee exceeds $1.0 million. However, some kinds of compensation, including qualified “performance-based compensation,” are not subject to this deduction limitation. For the grant of awards under a plan to qualify as “performance-based compensation” under Section 162(m), among other things, the plan must (i) describe the employees eligible to receive such awards, and (ii) provide a per-person limit on the number of shares subject to options granted to any employee under the plan in any year. Such terms must be approved by the stockholders and, accordingly, our stockholders are requested to approve the Equity Incentive Plan, which includes terms regarding eligibility for such awards and a per-person limit on such awards.

 

Prior to the 2008 Annual Meeting of Stockholders, option grants issued under the Equity Incentive Plan have not been subject to the deductibility limits under Section 162(m) because compensation plans that are in effect before a company becomes public may be subject to certain transition rules that defer the application of Section 162(m) for a period of time after the company goes public. For companies that become publicly held through an initial public offering, the transition period generally expires at the first meeting of the company’s stockholders at which the directors are to be elected that occurs after the close of the third calendar year following an initial public offering. This transition period, as it relates to us, expires at the 2008 Annual Meeting of Stockholders. This means that we need to submit our Equity Incentive Plan for stockholder approval to preserve the deductibility of options granted under the Equity Incentive Plan and otherwise comply with Section 162(m) in 2008.

 

A copy of the Equity Incentive Plan is attached to this Proxy Statement as Appendix A and is incorporated herein by reference. The following summary of the material terms of the Equity Incentive Plan does not purport to be a complete description. Please refer to the complete copy of the Equity Incentive Plan in Appendix A for more detailed information.

 

General

 

The Equity Incentive Plan provides for the grant or issuance of nonstatutory stock options, restricted stock awards, stock appreciation rights, restricted stock units and other forms of equity compensation, which may be granted to our employees (including executive officers), directors and consultants. Nonstatutory stock options granted under the Equity Incentive Plan are not intended to qualify as “incentive stock options” within the meaning of Section 422 of the Code. See “Federal Income Tax Information” below for a discussion of the tax treatment of the various awards included in the Equity Incentive Plan.

 

Purpose

 

The Equity Incentive Plan was adopted to provide a means by which selected employees and directors of and consultants to us and our affiliates could be given an opportunity to benefit from increases in the value of our common stock, to retain the services of the group of persons eligible to receive Stock Awards (as defined below), 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 us and our affiliates.

 

Stock Awards

 

The Equity Incentive Plan provides for nonstatutory stock options, restricted stock awards, stock appreciation rights, restricted stock units and other forms of equity compensation (collectively referred to herein as “Stock Awards”).

Administration

 

The Equity Incentive Plan is administered by the Board or by a committee of the Board. The Board has the power to construe and interpret the Equity Incentive Plan and Stock Awards and, subject to the provisions of the Equity Incentive Plan, to determine the persons to whom and the dates on which Stock Awards will be granted, to determine the type and terms of each Stock Award that will be granted, to amend the terms of the Equity Incentive Plan and outstanding Stock Awards, to accelerate the vesting or exercisability of Stock Awards, to cancel outstanding nonstatutory stock options in exchange for new Stock Awards, to terminate or suspend the Equity Incentive Plan and to exercise such powers and perform such acts that promote our best interests and that are not in conflict with the terms of the Plan. The Board is authorized to delegate administration of the Equity Incentive Plan to a committee composed of one or more members of the Board; provided, however, that with respect to grants of Stock Awards made to certain covered employees or persons who are subject to Section 16 of the Securities Exchange Act of 1934, such committee must be composed of two or more outside members of the Board. If administration is delegated to a committee, the committee has the power to delegate administrative powers to one or more subcommittees of one or more directors. As used herein with respect to the Equity Incentive Plan, the “Board” refers to any committee to which the Board delegates administration of the Equity Incentive Plan (and, if applicable, any subcommittee) as well as to the Board itself.

 

Shares Subject to the Plan

 

The Equity Incentive Plan provides that the common stock that may be issued pursuant to Stock Awards under the Equity Incentive Plan initially shall not exceed in the aggregate six million four hundred thousand (6,400,000) shares of our common stock (before giving effect to the 1-for-2.5 reverse stock split of our common stock on April 30, 2004, prior to our initial public offering). Each year on the first day of the Company’s fiscal year, beginning in 2005 and ending on the first day of the fiscal year in 2014, the number of shares of common stock reserved for issuance under the Equity Incentive Plan will increase by five percent (5%) of our shares of common stock outstanding on such date; provided, however, that the Board, in its discretion, may designate a smaller number by which the reserve will be increased. To date, the Board has not elected to decrease the amount of the increase.

 

If a Stock Award granted under the Equity Incentive Plan or our 1999 Equity Incentive Plan expires or otherwise terminates without being exercised in full, or if any shares of common stock issued pursuant to any such Stock Award are forfeited to or repurchased by us because of 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 will revert to and again become available for issuance under the Equity Incentive Plan. In addition, any shares withheld for the payment of taxes, used to “net exercise” a Stock Award, or acquired by us as consideration for the exercise of a Stock Award will again become available for issuance under the Equity Incentive Plan. Shares issued under the Equity Incentive Plan may be previously unissued shares or reacquired shares bought on the market or otherwise.

 

As of March 13, 2008, there were a total of 3,382,435 shares of common stock available for issuance pursuant to Stock Awards under the Equity Incentive Plan, and there were options to purchase 1,675,090 common stock outstanding under the Equity Incentive Plan.

 

Eligibility

 

Nonstatutory stock options, restricted stock awards, stock appreciation rights, restricted stock units and other forms of equity compensation may be granted to our employees (including executive officers), directors and consultants, and to the employees and consultants of any of our affiliates. All of the approximately 180 non-executive employees of and consultants to us and our affiliates, our seven executive officers, and our six non-employee directors are eligible to participate in the Equity Incentive Plan.

 

The Equity Incentive Plan provides that no employee is eligible to be granted options under the Equity Incentive Plan covering more than 2,500,000 shares of common stock (before giving effect to the 1-for-2.5 reverse stock split of our common stock on April 30, 2004, prior to our initial public offering) during any calendar year.

 

Term and Termination of Stock Awards

 

The Board shall determine the term of a Stock Award, provided that the maximum term of options granted under the Equity Incentive Plan is ten (10) years.

In the event an optionee’s continuous service as an employee, director or consultant of us or any affiliate is terminated other than for death or disability, the optionee may exercise his or her option (to the extent that such option was vested at the time of termination), but only within the period of time ending on the earlier of (i) the date three (3) months after the termination of the optionee’s continuous service as an employee, director or consultant (or such longer or shorter period as 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 optionee does not exercise his or her option within the time specified in the option agreement, such option terminates.

 

In the event an optionee’s continuous service as an employee, director or consultant of us or any affiliate terminates as a result of the optionee’s disability, the optionee may exercise his or her option (to the extent that such option was vested at the time of termination), but only within the period ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period as specified in the option agreement) or (ii) the expiration of the term of such option as set forth in the option agreement. In the event an optionee’s continuous service as an employee, director or consultant of us or any affiliate terminates as a result of the optionee’s death or the optionee dies within a specified period after termination of service, the optionee (or such optionee’s estate, heirs or beneficiaries) may exercise his or her option, but only within the period ending on the earlier of (a) eighteen (18) months following the optionee’s death (or such longer or shorter period as specified in the option agreement) or (b) the expiration of the term of the option as set forth in the option agreement. The term of an option may be extended in the event that exercise of the option following termination of service is prohibited by applicable securities laws. In no event, however, may an option be exercised beyond the expiration of its term. If the option is not exercised within the time specified in the option agreement, such option terminates.

 

In the event a stock appreciation right recipient’s continuous service as an employee, director or consultant of us or any affiliate terminates, the recipient’s unvested stock appreciation rights will be forfeited and any vested stock appreciation rights will be automatically redeemed.

 

In the event a restricted stock award recipient’s continuous service as an employee, director or consultant of us or any affiliate terminates, we may repurchase or otherwise reacquire any or all of the shares of common stock held by that person which have not vested as of the date of termination under the terms of the restricted stock award agreement between us and such person; provided, however, that we will not exercise our 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.

 

In the event a restricted stock unit award recipient’s continuous service as an employee, director or consultant of us or any affiliate terminates, any unvested restricted stock units will be forfeited, except as may be provided otherwise in the restricted stock unit award agreement.

 

Exercise/Purchase Price of Stock Awards

 

The exercise price of each nonstatutory stock option will be determined by the Board on the date of grant, provided that the exercise price may not be less than 50% of the fair market value of the stock underlying the option on the date of grant. The strike price of each stock appreciation right will be determined by the Board on the date of grant. The purchase price of a restricted stock award or a restricted stock unit award, if any, will be determined by the Board on the date such award is made and may not be less than any legally required purchase price for the stock. The terms of other equity awards, including any exercise or purchase price, will be determined by the Board.

 

On March 13, 2008, the last reported sales price of our common stock on the NASDAQ Global Select Market was $39.90 per share.

 

Consideration

 

The purchase price of stock acquired pursuant to a nonstatutory stock option will be determined by the Board and may include cash, common stock previously owned by the optionee, a deferred payment arrangement, a broker assisted exercise, a net exercise of the option or other legal consideration approved by the Board.

 

The purchase price for a restricted stock award, if any, will be determined by the Board and may include cash, the recipient’s past services, a deferred payment arrangement or other legal consideration approved by the Board.

The purchase price for a restricted stock unit award, if any, will be determined by the Board and may include any form permitted under applicable law.

 

Transferability

 

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

 

A stock appreciation right, a restricted stock award or a restricted stock unit award shall be transferable only to the extent provided in, and upon such terms and conditions as may be set forth in, the Stock Award agreement evidencing such Stock Award.

 

Vesting

 

The total number of shares of common stock subject to a nonstatutory stock option may vest 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 as the Board may deem appropriate. An option agreement may provide that an option may be exercised only to the extent vested or that an optionee may exercise the option prior to full vesting, provided that we may have a repurchase right with respect to any unvested shares.

 

Restricted stock awards may be subject to a repurchase option in favor of us in accordance with a vesting schedule determined by the Board.

 

The Board may impose restrictions or conditions on the vesting of stock appreciation rights and restricted stock unit awards as the Board may deem appropriate.

 

Tax Withholding

 

To the extent provided by a Stock Award Agreement, a participant may satisfy any tax withholding obligation relating to a Stock Award by tendering a cash payment, authorizing us to withhold a portion of the common stock otherwise issuable to the participant, or delivering shares of common stock already owned by the participant.

 

Adjustments upon Changes in Stock

 

If any change is made in the common stock subject to the Equity Incentive Plan or subject to any Stock Award without receipt of consideration by us (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise), the class(es) and maximum number of shares subject to the Equity Incentive Plan, including the number of shares subject to the automatic annual increase, the maximum per-person annual award limit applicable under the Equity Incentive Plan and the class(es) and number of shares and price per share of stock subject to outstanding Stock Awards will be appropriately adjusted. The Board shall make such adjustments, and its determination shall be final, binding and conclusive.

 

Corporate Transactions and Changes in Control

 

In the event of a Corporate Transaction (as defined in the Equity Incentive Plan), any surviving or acquiring corporation may assume or continue any Stock Awards outstanding under the Equity Incentive Plan or may substitute similar awards for those outstanding under the Equity Incentive Plan. In the event a surviving corporation does not assume or continue such Stock Awards or substitute similar awards, then, with respect to Stock Awards held by persons then performing services as employees, directors or consultants, the vesting of such Stock Awards (and, if applicable, the time during which such Stock Awards may be exercised) shall be accelerated in full prior to the completion of such transaction (and contingent upon its completion) and, if applicable, such Stock Awards shall terminate if not exercised at or prior to the effective time of such Corporate Transaction. Restricted stock awards may have their repurchase or forfeiture rights assigned to the surviving or acquiring corporation. If such repurchase or forfeiture rights are not assigned, then such awards held by awardholders whose service has not terminated will become fully vested. All other awards will terminate if not exercised prior to the Corporate Transaction.

For purposes of the Equity Incentive Plan, a “Corporate Transaction” means (i) a merger, consolidation, or similar transaction where we are not the surviving corporation, (ii) the sale or other disposition of all or substantially all, as determined by the Board in its discretion, of our assets, (iii) the sale or other disposition of at least fifty percent (50%) of our outstanding securities or (iv) a merger, consolidation or similar transaction in which we are the surviving corporation but the shares of our 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.

 

A Stock Award held by any participant whose continuous service has not terminated prior to certain specified change in control events (as defined in the Equity Incentive Plan) may be subject to additional acceleration of vesting and exercisability upon or after the event, as may be provided in the agreement for such Stock Award or as may be provided in any other written agreement between us or our affiliates and the participant, but in the absence of such provision, no such acceleration will occur.

 

The acceleration of vesting of a Stock Award in the event of a corporate transaction or a change in control event under the Equity Incentive Plan may be viewed as an anti-takeover provision, which may have the effect of discouraging a proposal to acquire or otherwise obtain control of us.

 

Amendment of the Equity Incentive Plan

 

The Board, at any time, and from time to time, may amend the Equity Incentive Plan. However, no amendment shall be effective unless approved by our stockholders where such amendment requires stockholder approval under applicable law or pursuant to the listing requirements of any exchange on which the shares are listed. The Board may in its sole discretion submit any other amendment to the Equity Incentive Plan for stockholder approval.

 

Duration, Termination and Suspension of the Equity Incentive Plan

 

The Board may suspend or terminate the Equity Incentive Plan at any time. Unless sooner terminated, the Equity Incentive Plan will terminate on March 8, 2014. No Stock Awards may be granted under the Equity Incentive Plan while the Equity Incentive Plan is suspended or after it is terminated.

 

Federal Income Tax Information

 

The following is a summary of the principal United States federal income taxation consequences to employees and us with respect to participation in the Equity Incentive Plan. This summary is not intended to be exhaustive, and does not discuss the income tax laws of any city, state or foreign jurisdiction in which a participant may reside.

 

Nonstatutory Stock Options. Nonstatutory stock options granted under the Equity Incentive Plan generally have the following federal income tax consequences:

 

There are no tax consequences to the optionee or us by reason of the grant of a nonstatutory stock option. Upon exercise of a nonstatutory stock option, the optionee normally will recognize taxable ordinary income equal to the excess of the stock’s fair market value on the date of exercise over the option exercise price. With respect to employees, we are generally required to withhold an amount based on the ordinary income recognized. Generally, we will be entitled to a business expense deduction equal to the taxable ordinary income realized by the optionee (subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code, and the satisfaction of a tax reporting obligation).

 

However, if the shares acquired upon exercise of the nonstatutory stock option are unvested and subject to repurchase by us in the event of the optionee’s termination of service prior to vesting in those shares, the optionee will not recognize any taxable income at the time of exercise, but will have to report as ordinary income, as and when our repurchase right lapses, an amount equal to the excess of (i) the fair market value of the shares on the date the repurchase right lapses, over (ii) the exercise price paid for the shares. The optionee may, however, elect under Section 83(b) of the Code to include as ordinary income in the year of exercise of the option an amount equal to the excess of (i) the fair market value of the purchased shares on the exercise date, over (ii) the exercise price paid for such shares. If the Section 83(b) election is made, the optionee will not recognize any additional income as and when the repurchase right lapses.

Upon disposition of the stock, the optionee will recognize a capital gain or loss equal to the difference between the selling price and the sum of the amount paid for such stock plus any amount recognized as ordinary income upon exercise of the option. Such gain or loss will be long-term or short-term depending on whether the stock was held for more than one (1) year.

 

Restricted Stock Awards. Restricted stock awards granted under the Equity Incentive Plan generally have the following federal income tax consequences:

 

Upon acquisition of the stock, the recipient normally will recognize taxable ordinary income equal to the excess of the stock’s fair market value over the purchase price, if any. However, to the extent the stock is subject to certain types of vesting restrictions, the taxable event will be delayed until the vesting restrictions lapse unless the recipient elects to be taxed on receipt of the stock by making a Section 83(b) election. With respect to employees, we are generally required to withhold an amount based on the ordinary income recognized. Generally, we will be entitled to a business expense deduction equal to the taxable ordinary income realized by the recipient (subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code, and the satisfaction of a tax reporting obligation). Upon disposition of the stock, the recipient will recognize a capital gain or loss equal to the difference between the selling price and the sum of the amount paid for such stock plus any amount recognized as ordinary income upon acquisition (or vesting) of the stock. Such gain or loss will be long-term or short-term depending on whether the stock was held for more than one (1) year.

 

Stock Appreciation Rights. Stock appreciation rights granted under the Equity Incentive Plan generally have the following federal income tax consequences:

 

There are no tax consequences to the recipient or us by reason of the grant of a stock appreciation right. Upon exercise of a stock appreciation right, the recipient normally will recognize taxable ordinary income equal to the excess of the stock’s fair market value on the date of exercise over the stock appreciation right’s strike price. However, if the stock (to the extent stock is received upon exercise of the stock appreciation right) is subject to certain types of vesting restrictions, the taxable event will be delayed until the vesting restrictions lapse unless the recipient elects to be taxed on receipt of the stock by making a Section 83(b) election. With respect to employees, we are generally required to withhold an amount based on the ordinary income recognized. Generally, we will be entitled to a business expense deduction equal to the taxable ordinary income realized by the recipient (subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code, and the satisfaction of a tax reporting obligation). Upon disposition of the stock (to the extent stock is received upon exercise of the stock appreciation right), the recipient will recognize a capital gain or loss equal to the difference between the selling price and the sum of the amount paid for such stock plus any amount recognized as ordinary income upon exercise of the stock appreciation right. Such gain or loss will be long-term or short-term depending on whether the stock was held for more than one (1) year.

 

Restricted Stock Unit Awards. Restricted stock unit awards granted under the Equity Incentive Plan generally have the following federal income tax consequences:

 

There are no tax consequences to the recipient or us by reason of the grant of a restricted stock unit award. Upon receipt of the stock (or cash), the recipient normally will recognize taxable ordinary income equal to the excess of the stock’s fair market value over the purchase price, if any. However, if the stock (to the extent stock is received upon exercise of the restricted stock unit award) is subject to certain types of vesting restrictions, the taxable event will be delayed until the vesting restrictions lapse unless the recipient elects to be taxed on receipt of the stock by making a Section 83(b) election. With respect to employees, we are generally required to withhold an amount based on the ordinary income recognized. Generally, we will be entitled to a business expense deduction equal to the taxable ordinary income realized by the recipient (subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code, and the satisfaction of a tax reporting obligation). Upon disposition of the stock (to the extent stock is received), the recipient will recognize a capital gain or loss equal to the difference between the selling price and the sum of the amount paid for such stock plus any amount recognized as ordinary income upon receipt of the stock. Such gain or loss will be long-term or short-term depending on whether the stock was held for more than one year.

 

Potential Limitation on Company Deductions. Section 162(m) of the Code denies a deduction to any publicly held company for compensation paid to certain covered employees in a taxable year to the extent that compensation exceeds $1.0 million for a covered employee. It is possible that compensation attributable to Stock Awards granted in the future

under the Equity Incentive Plan, when combined with all other types of compensation received by a covered employee from us, may cause this limitation to be exceeded in any particular year.

 

Certain kinds of compensation, including qualified “performance-based compensation,” are disregarded for purposes of the deduction limitation. In accordance with Treasury Regulations issued under Section 162(m) of the Code, compensation attributable to stock options will qualify as performance-based compensation if (i) such options are approved by a compensation committee comprised solely of “outside directors,” (ii) the plan contains a per-employee limitation on the number of shares for which such options may be granted during a specified period, (iii) the per-employee limitation is approved by the stockholders, and (iv) the exercise price of the option is no less than the fair market value of the stock on the date of grant.

 

2004 Equity Incentive Plan Benefits

 

We cannot currently determine the benefits or number of shares subject to stock awards that may be granted in the future to executive officers, directors and employees under the Equity Incentive Plan since awards under the Equity Incentive Plan are determined by the plan administrator in its discretion. The following table sets forth information about awards granted under the Equity Incentive Plan during the fiscal year ended December 30, 2007 to (i) our “named executive officers,” (ii) all current executive officers as a group (seven people), (iii) all current non-employee directors as a group (six people), and (iv) all non-executive employees (including all current officers who are not executive officers) as a group (approximately 180 people). On March 13, 2008, the last reported sales price of our common stock on the NASDAQ Global Select Market was $39.90.

 

 

 

Equity Compensation Plan Information

 

We currently maintain four compensation plans that provide for the issuance of our common stock to officers and other employees, directors and consultants. These plans consist of the 1999 Equity Incentive Plan, the 2004 Equity Incentive Plan, the 2004 Non-Employee Directors’ Stock Option Plan and the 2004 Employee Stock Purchase Plan. Each of these four plans has been approved by the Company’s stockholders. The following table sets forth information regarding outstanding options and shares reserved for future issuance under the foregoing plans as of December 30, 2007:

 

 

 

 

The Board Of Directors Recommends
A Vote In Favor Of Proposal 3.

 

Security Ownership of

Certain Beneficial Owners And Management

 

The following table sets forth certain information regarding the ownership of our common stock as of March 13, 2008, except as otherwise indicated, by: (i) each director and nominee for director; (ii) each of our named executive officers (as defined herein); (iii) all of our executive officers, directors and nominees for director as a group; and (iv) all those known by us to be beneficial owners of more than five percent of our common stock. Unless otherwise noted below, the address of each beneficial owner listed in the table is c/o Blue Nile, 705 Fifth Avenue South, Suite 900, Seattle, Washington 98104.

 

 

 

* Less than one percent.

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own more than ten percent of a registered class of our equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Officers, directors and greater than ten percent stockholders are required by Securities and Exchange Commission regulation to furnish us with copies of all Section 16(a) forms they file.

 

To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, during the fiscal year ended December 30, 2007, all Section 16(a) filing requirements applicable to our officers, directors and greater than ten percent beneficial owners were complied with.

 

Executive Officers

 

Set forth below is information regarding our executive officers as of March 13, 2008.

 

 

Mark Vadon co-founded Blue Nile and has served as Chairman of the Board of Directors since its inception in March 1999. He has served as the Company’s Executive Chairman since February 2008 and served as the Company’s Chief Executive Officer from March 1999 to February 2008. From March 1999 to February 2007, Mr. Vadon was also Blue Nile’s President. 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.

 

Diane Irvine has served as a director since May 2001, and has served as Blue Nile’s Chief Executive Officer since February 2008 and President since February 2007. She served as the Company’s Chief Financial Officer from December 1999 to September 2007. 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 serves on the Board of Directors of Davidson Companies, an investment banking and asset management company. Ms. Irvine holds a B.S. in Accounting from Illinois State University and an M.S. in Taxation from Golden Gate University.

 

Darrell Cavens has served as Blue Nile’s Senior Vice President since June 2005. Mr. Cavens served as Vice President of Development from October 2003 through June 2005, and as Blue Nile’s Chief Technology Officer from November 2000 to June 2005. From September 1999 to November 2000, Mr. Cavens served as Blue Nile’s 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.

 

Robin Easton served as Blue Nile’s Chief Financial Officer from September 2007 to March 31, 2008. Mr. Easton resigned as the Company’s Chief Financial Officer effective March 31, 2008. From February 2007 to September 2007, Mr. Easton served as Treasurer of PACCAR Inc, a truck design, distribution and manufacturing company, and served as Assistant Treasurer of PACCAR Inc from September 2004 to January 2007. From August 2001 to August 2004, Mr. Easton served as Director of Global Treasury Operations at Applied Materials, Inc., a supplier of products and services to the semiconductor industry. From September 1998 to April 2001, Mr. Easton served as the Vice President and Global Treasury Services Consultant for Bank of America, NA, a financial institution. From 1992 to 1998, Mr. Easton served in various capacities at Inchcape PLC, an automotive retailer, most recently serving as the company’s Regional Treasurer for Asia Pacific. Mr. Easton holds a B.S. in Management Science from the London School of Economics and Political Science and an M.B.A. in Finance from the Cass Business School at the City University in London.

 

Susan Bell has served as Blue Nile’s Senior Vice President since June 2005. Ms. Bell has held executive level positions in both marketing and merchandising since she joined Blue Nile in September 2001. 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.

 

Dwight Gaston has served as Blue Nile’s Senior Vice President since September 2005. From July 2003 to March 2005, Mr. Gaston served as Vice President of Operations, and from May 1999 to July 2003, Mr. Gaston served as Blue Nile’s 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.

 

Terri Maupin has served as Blue Nile’s Vice President of Finance and Controller since July 2004 and as Corporate Secretary since October 2004. From September 2003 to July 2004, Ms. Maupin served as Blue Nile’s Controller. From February 2001 to September 2003, Ms. Maupin served as the Staff Vice President of Finance and Controller at Alaska Air Group, Inc., the parent company of airline companies Alaska Airlines, Inc. and Horizon Air Industries, Inc., and Staff Vice President of Finance and Controller at Alaska Airlines, Inc. Prior to Alaska, Ms. Maupin served as Director of Financial Reporting at Nordstrom, Inc., a clothing and merchandise retail company. Ms. Maupin holds a B.A. in Accounting from Western Washington University.

 

Compensation of Executive Officers

 

Compensation Discussion and Analysis

 

This compensation discussion and analysis provides information about the compensation paid to our executives. It also contains an analysis of our compensation package and the amounts shown in the compensation tables that follow. The term “named executive officers” refers to Mark Vadon, who served as our Principal Executive Officer until February 2008, when he was appointed as our Executive Chairman; Diane Irvine, who served as our Principal Financial Officer until September 2007 and was appointed as our Principal Executive Officer in February 2008; Robin Easton, who served as our Principal Financial Officer from September 2007 until his resignation effective March 31, 2008; and our three other most highly compensated executive officers, Darrell Cavens, Susan Bell and Dwight Gaston.

 

Compensation Objectives. Our compensation programs are designed to achieve the following key objectives:

 

 

To achieve these compensation objectives, our compensation package is comprised of three primary components – base salary, a yearly cash incentive bonus, and annual stock option awards. In addition, we provide our executives with benefits that are generally available to our full-time salaried employees.

 

Compensation Components and How Components Relate to Objectives. The three main components of our executive compensation include base salary, a yearly cash incentive bonus, and stock option awards under our 2004 Equity Incentive Plan. The Compensation Committee believes that the total compensation package provided through these components balances both the mix of cash and equity compensation and the mix of currently-paid and longer-term compensation in a way that furthers the compensation objectives discussed above. At least annually, the Compensation Committee reviews both the total compensation paid to each executive and each of the three individual components of our compensation package. While the Compensation Committee reviews market data, including data related to our peer group provided by our outside compensation consultant, as a guideline for allocating among the three main components of executive compensation, it generally believes that a significant component of executive compensation should be performance based. In addition, the Compensation Committee believes that relative to other employees, executives

should have a greater proportion of their compensation tied to longer-term performance because they are in a position to have greater influence on long-term results. As a result, a substantially greater percentage of our executives’ total compensation (relative to the total compensation of other employees) is derived from the value of annual option grants which vest over time and the achievement of performance objectives. We view our cash incentive bonus payments and annual option grants as performance based compensation. The chart below sets forth the percentage of each executive’s total compensation in fiscal year 2007 that we deem to be performance based.

 

 

 

Benchmarking. To attract and retain executives, we strive to provide a total compensation package that is competitive with compensation provided by companies that we compete with for executive talent. To assist in its review of our executive compensation, in 2007 the Compensation Committee engaged Milliman, Inc., an independent compensation consulting firm, to assess the competitiveness of our executive compensation package. Milliman performs work on behalf of our Compensation Committee with respect to compensation of our executive officers. We engage a different compensation firm to review and analyze our non-executive officer compensation. Milliman’s analysis of our executive officer compensation included data from proxy statements of a select peer group of publicly-traded companies and published survey data. The proxy data provided a focused comparison of the five most highly compensated executives within our peer group and provided the Compensation Committee with a comparison of a top leadership group within a company. With the exception of data relating to chief executive and financial positions, the proxy data provided by Milliman is not job specific. To conduct the proxy analysis, Milliman evaluated three years of data and averaged the three years to gain a picture of our peer companies’ compensation policies over time. Milliman provided job specific market information for all positions through several compensation survey sources.

 

Considerations when developing the peer group included line of business, financial size (as measured by revenue and market value), and employee size. Our peer group consists of:

 

On the basis of the proxy data and the survey data, Milliman provided the Compensation Committee with market total compensation data for the 25^th, 50^th and 75^th percentiles of the compensation data reviewed.

 

The Compensation Committee used the information provided by Milliman primarily to ensure that the executive compensation program as a whole is competitive in the marketplace. The Compensation Committee does not follow a rigid formula for determining where an executive’s compensation should fall within the market data provided by our outside consultant. Instead, the Compensation Committee uses the market compensation data as a check on the executive’s compensation, and generally targets total cash compensation around the 50^th percentile and total compensation around the 75^th percentile of the market compensation data. The Compensation Committee intends to retain the services of third party executive compensation specialists from time to time, as the Committee sees fit, in connection with the establishment of policies related to our components of compensation.

 

Determining Compensation. Our Compensation Committee is responsible for establishing and administering our executive compensation package. It determines, in its sole discretion, the compensation and other terms of employment of our executive officers and may form and delegate authority to subcommittees, as appropriate. Our Compensation Committee is comprised entirely of independent directors. The Compensation Committee meets outside the presence of all of our executive officers, except Mr. Vadon, our Executive Chairman, and Ms. Irvine, our Chief Executive Officer, collectively the Designated Officers, to formulate recommendations on matters of compensation philosophy, plan design, and specific compensation recommendations for the executive officers other than the Designated Officers. Our General Counsel, Lauren Neiswender, also attends meetings in her capacity as Secretary of the meetings.

 

When making compensation decisions, the Compensation Committee generally begins with recommendations and input from the Designated Officers, then it reviews the competitive market data, the individual’s expertise, duties and overall past and future expected value to the business. The Compensation Committee follows the same methodology for reviewing Ms. Irvine’s compensation, except that Mr. Vadon provides the recommendation to the Compensation Committee. For Mr. Vadon’s compensation, the Compensation Committee first starts with the market data, then reviews Mr. Vadon’s expertise, duties and overall past and future expected value to the business. The Compensation Committee meets outside the presence of all executive officers, including the Designated Officers, when determining Mr. Vadon’s compensation.

 

The information below provides more detailed analysis of how each of the components of our executive compensation package contributes to the objectives set forth above and the process by which the Compensation Committee determines each component of compensation and establishes the mix among the three components of compensation.

 

Base Salary. The primary objective of base salary is to attract and retain key talent whose knowledge, skills, experience and performance help us to achieve our business goals and objectives. Typically, our Compensation Committee reviews base salaries annually and at the time of hire, promotion or other change in responsibilities or market competitiveness. In determining whether to increase or decrease the base salary paid to an executive, including changes made to base salaries in fiscal year 2007, we take into account changes (if any) in the market pay levels, the contributions made by the executive, the performance of the executive, the increase or decrease in responsibilities and roles of the executive, the business needs for the executive, and the compensation of other executive officers within our company with similar responsibilities. Generally, we believe that executive base salaries should be near the median of the range of salaries for executives in similar positions and with similar responsibilities at comparable companies as measured by the market compensation data provided by Milliman. We believe maintaining market competitive salaries helps us to attract and retain executive talent.

 

Following the completion of Milliman’s executive compensation analysis, the Compensation Committee concluded that the base salaries of all of our named executive officers fall within a normal range of base salaries around the combined peer group and published market data median. The normal range is established by considering an 80 to 120 percent range around the market 50^th percentile. This range allows for variations in base salary due to market factors, experience and performance, job complexity and organizational values or strategies.

 

In connection with Ms. Irvine’s promotion to President in February 2007, the Compensation Committee increased her annualized base salary from $310,000 to $340,000. When making this adjustment, the Compensation Committee primarily considered her current salary and the increase in her duties and responsibilities arising from her new position. In February 2007, Mr. Cavens’s salary was increased from an annualized base salary of $200,000 to $240,000. This adjustment to Mr. Caven’s salary was based on his increased level of responsibility within our company.

In August 2007, the Compensation Committee increased Mr. Gaston’s annualized base salary from $200,000 to $210,000 to reflect the increase in his level of responsibilities within the company. The base salaries of the other named executives officers remained unchanged in 2007. Mr. Easton was hired as our Chief Financial Officer in September 2007. When determining his salary, the Designated Officers proposed a recommendation based upon the peer group and survey data, Mr. Easton’s level of experience, his potential value to the business and the compensation negotiations with Mr. Easton. The base salaries paid to our named executive officers in 2007 are set forth below in the Summary Compensation Table.

 

Yearly Cash Incentive Bonus. The Compensation Committee has authority over our yearly cash incentive program, eligibility for participation in the program, and bonus amounts awarded to executives. In 2007, all of our named executive officers were eligible for participation in our yearly cash incentive bonus program. The objective of the yearly cash incentive bonus is to further incent and motivate executives to drive our annual objectives and initiatives and to reward the executives when those objectives and incentives are achieved. The objectives and initiatives are established early in the fiscal year and are designed to align executive compensation with the creation of shareholder value and best position us for sustainable long-term success. When designing the incentive bonus program, the Compensation Committee is careful to align the executive interests with the long-term interests of our business and seeks to design a program that encourages and promotes ethics throughout our company.

 

When establishing the target bonus awards for the executives, the Compensation Committee generally believes that total cash compensation (base salary and yearly cash incentive bonus) paid to executives should be near the median of the range of cash compensation paid to executives in similar positions and with similar responsibilities at comparable companies as measured by the market compensation data provided by Milliman. More importantly, however, the Compensation Committee focuses on the executive’s level of responsibility within the organization and the potential effect the executive may have on our ability to achieve our annual objectives and initiatives. As between base salary and bonus award, the Compensation Committee believes that the executives should have a significant portion of their total cash compensation tied to performance.

 

Target bonus awards are typically established in the first quarter of the year and may be adjusted if an executive is promoted, there is a change in the competitive environment or the responsibilities of the executive changes during the year. In 2007, all changes during the fiscal year were prorated based upon the timing of the adjustment. In February 2007, Ms. Irvine was promoted to President and her target bonus award was increased from $186,000 to $238,000 to reflect her additional responsibilities. Mr. Cavens’s target bonus award was increased in February 2007 in connection with an increase in his responsibilities and duties within the company. Following the compensation study performed by Milliman, the Compensation Committee increased Mr. Cavens, Ms. Bell and Mr. Gaston’s target bonus award by 7%, 28% and 10%, respectively, to position these executives near the median of the market compensation data for total cash compensation (base salary plus target bonus award). Mr. Vadon and Ms. Irvine’s total cash compensation were within the normal range of the median of the market compensation data for total cash compensation.

 

The 2007 bonus target award for Mr. Vadon, our Chief Executive Officer in 2007, was $289,000, which was 75 percent of his 2007 base salary. The 2007 individual bonus targets for Ms. Irvine, Mr. Cavens, Ms. Bell, and Mr. Gaston were 69%, 36%, 32% and 36% of their respective base salaries. These percentages are based on the base salary received by the executive during the fiscal 2007 and the target bonus award for the executive for fiscal year 2007 at the 100% level.

 

The aggregate bonus pool for fiscal year 2007 was established through the achievement of our objectives for Adjusted EBITDA (defined as net income before income taxes, other income, net, depreciation, amortization and stock-based compensation). The 2007 Adjusted EBITDA target was $26.8 million. The Compensation Committee also established a target bonus amount for each executive officer expressed as a percentage of the executive officer’s base salary. Upon the establishment of the bonus pool, the Compensation Committee had the authority to award the executive officers between zero and 200% of such executive officer’s bonus target amount based: (i) 50 percent on the achievement of certain financial performance objectives, including revenue growth, earnings per share and free cash flow generation, and (ii) 50 percent on the achievement of individual performance objectives based on the executive officer’s roles and responsibilities within our company. When establishing the financial objectives, the Compensation Committee reviews and considers our internal forecasts for Adjusted EBITDA, revenue growth, earnings per share and free cash flow with the recognition that its top executives play a large part in whether the Company achieves its goals. The 2007 revenue target was $300.0 million, the 2007 free cash flow target was $36.2 million and the earnings per diluted share target was $0.86. The financial targets are established such that their achievement is not guaranteed.

The individual performance objectives vary depending upon the executive’s duties and responsibilities within our company. Mr. Vadon’s performance objectives related to our strategic objectives, our organizational structure, our public relations efforts, international expansion, and the development of our brand. Ms. Irvine’s performance objectives related to her successful transition to the role of President, our financial performance and initiatives, our strategic objectives, and our team. Mr. Cavens’s performance objectives related to the successful implementation of our 2007 marketing plan, enhancements to our website, our technology initiatives, and our international expansion efforts. Ms. Bell’s individual performance objectives related to the development and enhancement of our products, sourcing, and consumer experience. Mr. Gaston’s performance objectives related to our international expansion efforts, build-out of our fulfillment center, and operational efficiencies.

 

Based on our Adjusted EBITDA performance for fiscal year 2007 as compared to our objective, the Compensation Committee established the bonus pool at 200 percent of the aggregate target bonus pool. Each executive officer was then measured against 200 percent of his/her individual target bonus award. When establishing the individual bonus awards, the Compensation Committee awarded each executive 50 percent of their respective bonus payment tied to revenue growth, earnings per share and free cash flow. Each of Mr. Vadon, Ms. Irvine, and Mr. Cavens also received the 50 percent of their respective bonus payment tied to the pre-established individual objectives. Ms. Bell and Mr. Gaston each received 40 percent of their bonus for achievement of their pre-established individual performance objectives. When assessing achievement against the pre-established individual performance goals, the Designated Officers report to the Compensation Committee their assessments and recommendations regarding each executive’s performance against his/her individual performance objectives. With respect to Ms. Irvine, Mr. Vadon reports and recommends to the Compensation Committee his assessment of Ms. Irvine’s performance against her individual performance objectives, and for Mr. Vadon, the Compensation Committee does an independent assessment of his performance against his pre-established individual performance objectives. The specific bonus awards for each named executive officer is set forth in the Summary Compensation Table below.

 

Mr. Easton’s bonus target award was established when he commenced employment with us in September 2007. In establishing Mr. Easton’s target bonus award, the Compensation Committee took into consideration the recommendation by the Designated Officers, the market compensation data, Mr. Easton’s experience, his expected value to the business and the compensation negotiations with Mr. Easton. Mr. Easton’s personal objectives related to his successful transition into the role of the Chief Financial Officer. When determining the bonus award he was awarded the full amount tied to the financial objectives and his individual objectives. When assessing the extent to which Mr. Easton achieved his individual performance objectives, the Compensation Committee took into consideration Mr. Easton’s short tenure prior to the end of the fiscal year.

 

We do not have any program, plan or obligation that requires us to include any executive officer in our bonus program. The authority to establish a bonus plan and the terms of the bonus plan rest entirely with our Compensation Committee. The Compensation Committee anticipates that the fiscal year 2008 executive bonus program will be structured similarly to the 2007 executive bonus program.

 

Stock Option Awards. The Compensation Committee believes in the importance of equity ownership for all executive officers to incent, retain, award and align executive interests with stockholders. Our long-term equity incentive awards are made pursuant to our 2004 Equity Incentive Plan. Currently, our equity incentive compensation for all executives is exclusively in the form of options to acquire our common stock. The exercise price of our stock option awards is equal to the latest known closing price of our common stock on the date the grant is approved by our Compensation Committee. Our policy is to make grants in open windows under our internal trading policy to provide for pricing of equity grants that reflects the dissemination of material information and a fair representation of the market’s collective view of our results and performance. Executives receive value from these grants only if the value of our common stock appreciates over the long-term. In general, the stock option awards granted to executive officers vest over a four-year period as follows: 1/4th of the shares vest one year after the vesting commencement date and 1/48th of the shares vest monthly thereafter. We believe this vesting period properly relates the value of this compensation component to the long-term success of our company and the individual. While our 2004 Equity Incentive Plan allows for other forms of equity compensation, the Compensation Committee and management currently believe that stock options are the appropriate vehicle to provide long-term incentive compensation to our executive officers.

 

The number of stock options awarded is based on a target total compensation package. The total compensation package is determined based on the value of total compensation for comparable positions at peer companies and factors such as the recipient’s level of responsibility, individual and company performance, and the individual’s anticipated level of future contributions to our success. When reviewing the entire compensation package for executives, the Compensation

Committee uses a Black-Scholes value to determine the value of the equity grant. When determining the number of stock options to issue to an executive, the Compensation Committee generally does not consider the value the executive has achieved or may achieve from prior stock option grants. The stock option grants awarded to executives are designed to award the executive for future shareholder return. The Compensation Committee does review prior grants to executives in its analysis of the executive’s entire compensation, for retention purposes and to ensure the executive’s interests are properly aligned with our stockholders. The grants awarded in 2007 were focused on ensuring that each executive’s total compensation package was competitive and that the amount of the award properly aligned executive interests with those of our shareholders.

 

In fiscal year 2007, the named executive officers were granted options to purchase between 17,000 and 60,000 shares of our common stock, which ranged from 5.4 percent to 19.0 percent of the total options granted to our employees. The amount of stock options awarded to our named executive officers in fiscal year 2007 are set forth below in the Summary Compensation Table.

 

Health and Welfare Benefits. All full-time regular employees, including our named executive officers, may participate in our health and welfare benefit programs, including medical, dental and vision care coverage, disability insurance and life insurance.

 

Retirement Savings Opportunity. All employees, including our named executive officers, may participate in our tax-qualified 401(k) defined contribution retirement savings plan, or 401(k) Plan. Each employee may make before tax contributions of their base salary up to the current Internal Revenue Service limits. We provide this plan to help our employees save some amount of their cash compensation for retirement in a tax efficient manner. All contributions to the 401(k) Plan are made in cash and are invested in funds as directed by the participant, with the participant being able to select from a variety of funds. We do not offer participants the opportunity to invest in shares of our stock through the 401(k) Plan. In 2007, we matched fifty percent of the amount contributed by each eligible employee up to four percent of such employee’s annual compensation. Our 2007 contribution has a four-year vesting period whereby twenty-five percent of such contribution vests annually.

 

Perquisites. All employees, including the named executive officers, receive an annual transportation allowance of $720. Additionally, all employees are eligible for an employee discount on certain of our products.

 

Employment, Severance and Change of Control Agreements. Each of our named executive officers, except for Mr. Vadon, has signed offer letters. These offer letters provide that the officer is an at-will employee. These offer letters also provide for an initial salary and an initial stock option grant as well as other customary benefits and terms.

 

We are not contractually obligated to pay severance to any of named executive officers. On March 18, 2008, we entered into a Severance Agreement with Robin Easton. Under the terms of this agreement, we agreed to pay Mr. Easton two months’ salary, payable in the form of salary continuation, from March 31, 2008, the effective date of his resignation.

 

We do not provide special change-in-control benefits to executives. Our only change-in-control arrangement, which applies to all employees, is accelerated vesting under certain circumstances under our 1999 Equity Incentive Plan and our 2004 Equity Incentive Plan.

 

Under the 1999 Equity Incentive Plan, in the event of a merger of the company with or into another corporation or a consolidation, acquisition of assets or other change-in-control transaction involving the company, if the surviving or acquiring entity does not assume or substitute the stock options, the vesting of each option issued under the 1999 Equity Incentive Plan will accelerate in full and the option will terminate if not exercised prior to the consummation of the transaction, and under the 1999 Equity Incentive Plan, if the surviving or acquiring entity assumes or substitutes the stock options, the vesting on each option shall accelerate as follows:

 

 

Additionally, under the 1999 Equity Incentive Plan, if 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 the company’s directors, other than in certain corporate transactions, the vesting of each option granted under the 1999 Equity Incentive Plan will accelerate in full for those whose service with the company or any of the company’s affiliates has not terminated.

 

Under our 2004 Equity Incentive Plan, in the event of certain corporate transactions, if the surviving or acquiring entity elects not to assume, continue or substitute for options granted under the 2004 Equity Incentive Plan, the vesting and exercisability of each option granted under the 2004 Equity Incentive Plan will accelerate in full for those whose service with the Company or any of the Company’s affiliates has not terminated and such options will be terminated if not exercised prior to the effective date of such corporate transaction.

 

Compensation of Named Executives in Relation to Each Other and to the Chief Executive Officer. Mr. Vadon’s salary relative to the other named executive officers reflects his level of responsibility and duties within the company, including his responsibility over the growth, health and strategic direction of the company. In February 2007, Ms. Irvine was promoted to President, and her salary was adjusted relative to Mr. Vadon to reflect her increased responsibilities over the day-to-day operations of the company. Ms. Irvine’s salary was increased in February 2008 to reflect her increased responsibilities as the newly appointed Chief Executive Officer, particularly her increased responsibilities with respect to our strategic direction. Mr. Vadon’s salary was adjusted in March 2008 to reflect the change in his day-to-day responsibilities as the Executive Chairman. The other named executive officers each received a similar mix and amount of compensation. Mr. Cavens’s was slightly higher due to the broad responsibilities he has over technology, website design, marketing and public relations.

 

Executive Equity Ownership Guidelines and Policy Against Hedging. As a guideline, executives are asked, but are not required, to maintain equity holdings equal to at least three to five years’ cash compensation. In making this determination, executives are asked to calculate the shares that they own outright and the value of their vested options as a percentage of such executive’s total cash compensation (base salary plus target annual bonus award).

 

No employee may engage in short sales, transactions in put or call options, margin loans with stock as collateral, certain hedging transactions or other inherently speculative transactions with respect to the Company’s stock at any time.

 

Tax Treatment of Compensation. We review compensation plans in light of applicable tax provisions, including Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code. Section 162(m) generally limits our deduction for federal income tax purposes to no more than $1.0 million of compensation paid to each of the named executive officers in a taxable year. Compensation above $1.0 million may be deducted if it is “performance-based compensation” within the meaning of the Code. To date, we have not faced the annual deduction limit, because bonus and base salary have not exceeded $1.0 million to any individual employee, and to-date our stock option grants have been exempt from the deduction limit because they have been granted during a “transition period,” which is a certain period following our initial public offering. This transition period ends following our 2008 Annual Meeting of Stockholders. Following the 2008 Annual Meeting of Stockholders, to qualify future stock options as “performance grants” (which are exempt from the deductibility limit), our equity plan must meet the requirements of 162(m). These requirements include an annual grant limitation and stockholder approval of the material terms of the plan. Our 2004 Equity Incentive Plan contains the grant limitation and was approved by our stockholders prior to our initial public offering in 2004. To qualify as performance grants, stockholder approval of our 2004 Equity Incentive Plan is required at this time. Under this Proxy Statement, we are seeking stockholder approval of our 2004 Equity Incentive Plan to qualify our stock option grants as “performance-based compensation” within the meaning of the Code.

Compensation of Executive Officers

 

The following table sets forth compensation earned by our named executive officers, for the year ended December 30, 2007.

 

2006 and 2007 Summary Compensation Table

 

 

 

 

All Other Compensation Table

 

 

 

The following table supplements the “Summary Compensation Table” by providing additional information about plan-based compensation earned by our named executive officers for the fiscal year ended December 30, 2007.

 

Grants of Plan-Based Awards for Fiscal 2007 Table

 

 

 

 

Stock Options Outstanding And Exercises

 

We grant stock options to executive officers under our 2004 Equity Incentive Plan. Prior to the adoption of the 2004 Equity Incentive Plan, we granted options to our executive officers under our 1999 Equity Incentive Plan. As of March 13, 2008, (i) options to purchase a total of 1,675,090 shares were outstanding under the 2004 Equity Incentive Plan and options to purchase 3,382,435 shares remained available for grant under the 2004 Equity Incentive Plan; and (ii) options to purchase a total of 479,721 shares were outstanding under the 1999 Equity Incentive Plan and options to purchase 0 shares remained available for grant under the 1999 Equity Incentive Plan. We have never granted any stock appreciation rights.

 

The following table provides information regarding unexercised stock options held by each of the named executive officers as of December 30, 2007.

Outstanding Equity Awards At Fiscal Year-End 2007

 

 

 

The vesting date of each option is listed in the table below by expiration date:

 

 

 

The following table shows the number of shares acquired pursuant to the exercise of options by each named executive officer during fiscal year 2007 and the aggregate dollar amount realized by the named executive officer upon exercise of the option. None of the named executive officers had any vesting of restricted stock awards during fiscal year 2007.

 

Option Exercises Table in 2007

 

 

Report of the Compensation Committee of the Board of Directors

 

As part of fulfilling its responsibilities, the Compensation Committee reviewed and discussed the Compensation Discussion and Analysis (“CD&A”) for the fiscal year ended December 30, 2007 with management. Based on the Compensation Committee’s review of the CD&A and its discussions with management, the Compensation Committee has recommended to the Board of Directors that the CD&A for the fiscal year ended December 30, 2007 be included in this proxy statement for filing with the Securities and Exchange Commission.

 

Date: April 18, 2008

 

Respectfully submitted,

 

Steve Scheid (Chairman)
Joseph Jimenez
Joanna Strober

 

 

(1) The material in this report is not “soliciting material,” is not deemed “filed” with the Securities and Exchange Commission, as amended, and is not to be incorporated by reference into any filing of Blue Nile, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

 

Compensation of Directors

 

Non-Employee Director Compensation

Only non-employee directors are compensated for serving as our directors. Our compensation policy for non-employee directors is established by the Board of Directors upon recommendation by our Compensation Committee and is designed to attract and retain the services of experienced executives with complementary skill sets, and to align the interests of our directors with that of our stockholders.

 

Cash Compensation.  The table below sets forth the cash compensation for which our non-employee directors are eligible:

 

 

 

Equity Compensation.  Non-employee directors are eligible for grants pursuant to our 2004 Non-Employee Directors’ Stock Option Plan, or Directors’ Plan. The table below sets forth the equity compensation for which our non-employee directors are eligible:

 

 

 

2007 Compensation for Non-Employee Directors.  The following table summarizes the compensation paid by us to our non-employee directors during the fiscal year ended December 30, 2007.

 

2007 Director Compensation Table

 

 

 

Change-in-Control. In the event of a merger with or into another corporation or a consolidation, acquisition of our assets or other change-in-control transaction, the vesting of options granted to non-employee directors under our 1999 Equity Incentive Plan and all options granted under our Directors’ Plan will accelerate in full for the directors who are then providing services to us or our affiliates.

 

Transactions with Related Persons

 

Related Person Transactions Policy and Procedures

 

In February 2007, the Audit Committee adopted a written Related Person Transactions Policy that sets forth our policies and procedures regarding the identification, review, consideration and approval or ratification of “related person transactions”. For purposes of this policy only, a “related person transaction” is a transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) in which we and any “related person” are, were or will be participants in which the amount involved exceeds $120,000. Transactions involving compensation for services provided to us as an employee or director shall not be considered related person transactions under the policy. A related person is any executive officer, director, or more than 5% stockholder of us, including any of their immediate family members, and any entity owned or controlled by such persons.

 

Under our Related Person Transactions Policy, where a transaction has been identified as a related person transaction, our management presents such related person transaction to the Audit Committee for review, consideration and approval or ratification. The presentation includes, to the extent reasonably available, (a) a description of (i) the parties thereto; (ii) the interests, direct or indirect, of any related person in the transaction in sufficient detail so as to enable the Audit Committee to assess such interests; and (iii) the material facts of the proposed related person transaction, including the proposed aggregate value of such transaction, or, in the case of indebtedness, that amount of principal that would be involved; (b) an assessment of (i) the benefits to us of the proposed related person transaction; and (ii) whether the proposed related person transaction is on terms that are comparable to the terms available to or from, as the case may be, an unrelated third party or to employees generally; and (c) management’s recommendation with respect to the proposed related person transaction. In the event the Audit Committee is asked to consider whether to ratify an ongoing related person transaction, in addition to the information identified above, the presentation includes a description of the extent of work performed and remaining to be performed in connection with the transaction and an assessment of the potential risks and costs of termination of the transaction.

 

The Audit Committee, in approving or rejecting the proposed related person transaction, considers all the relevant facts and circumstances deemed relevant by and available to the Audit Committee, including, but not limited to (a) the risks, costs and benefits to us, (b) the impact on a director’s independence in the event the related person is a director, immediate family member of a director or an entity with which a director is affiliated, (c) the terms of the transaction, (d) the availability of other sources for comparable services or products and (e) the terms available to or from, as the case may be, unrelated third parties or to or from employees generally. The Audit Committee approves only those related party transactions that, in light of known circumstances, are in, or are not inconsistent with, the best interests of us and our stockholders, as the Audit Committee determines in the good faith exercise of its discretion.

 

Certain Related-Person Transactions

 

We have entered into indemnity agreements with certain officers and directors which provide, among other things, that we will indemnify such officer or director, under the circumstances and to the extent provided for therein, for expenses, damages, judgments, fines and settlements he or she may be required to pay in actions or proceedings to which he or she is, or may be, made a party by reason of his or her position as our director, officer or other agent, and otherwise to the fullest extent permitted under Delaware law and our Bylaws.

 

Annual Report on Form 10-K

 

A copy of our Annual Report to the Securities and Exchange Commission on Form 10-K for the fiscal year ended December 30, 2007 is available on our website at http://investor.bluenile.com. A copy will be furnished without charge to stockholders of record upon request by mail to Investor Relations at Blue Nile, 705 Fifth Avenue South, Suite 900, Seattle Washington 98104.

 

Householding of Proxy Materials

 

The Securities and Exchange Commission has adopted rules that permit companies and intermediaries (e.g., brokers) to satisfy the delivery requirements for proxy statements and annual reports with respect to two or more stockholders sharing the same address by delivering a single proxy statement addressed to those stockholders. This process, which is commonly referred to as “householding,” potentially means extra convenience for stockholders and cost savings for companies.

 

This year, a number of brokers with account holders who are our stockholders will be “householding” our proxy materials. A single proxy statement will be delivered to multiple stockholders sharing an address unless contrary instructions have been received from the affected stockholders. Once you have received notice from your broker that they will be “householding” communications to your address, “householding” will continue until you are notified otherwise or until you revoke your consent. If, at any time, you no longer wish to participate in “householding” and would prefer to receive a separate proxy statement and annual report, please notify your broker, direct your written request to Blue Nile, Inc., Corporate Secretary, at 705 Fifth Avenue South, Suite 900, Seattle, Washington 98104 or contact Terri Maupin, our Corporate Secretary, at (206) 336-6700. Stockholders who currently receive multiple copies of the proxy statement at their address and would like to request “householding” of their communications should contact their broker.

 

Other Matters

 

The Board of Directors knows of no other matters that will be presented for consideration at the Annual Meeting. If any other matters are properly brought before the Annual Meeting, it is the intention of the persons named in the accompanying proxy to vote on such matters in accordance with their best judgment.

 

By Order of the Board of Directors,

 

 

Diane Irvine

Chief Executive Officer and President

 

Seattle, Washington

April 18, 2008

Appendix A

 

Blue Nile, Inc.

2004 Equity Incentive Plan

 

Adopted by the Board of Directors: March 9, 2004

Approved By Stockholders: April 27, 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: