e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 2, 2006
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-50763
BLUE NILE, INC.
(Exact name of Registrant as specified in its charter)
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Delaware
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91-1963165 |
(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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705 Fifth Avenue South, Suite 900, Seattle, Washington
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98104 |
(Address of principal executive offices)
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(Zip code) |
(206) 336-6700
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer
in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of July 28, 2006, the registrant had 15,984,881 shares of common stock outstanding.
Cautionary Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements that involve many risks and
uncertainties. These statements relate to future events and our future performance that are based
on current expectations, estimates, forecasts and projections about the industries in which we
operate and the beliefs and assumptions of management as of the date of this filing. In
some cases, you can identify forward-looking statements by terms such as would, could, may,
will, should, expect, intend, plan, anticipate, believe, estimate, predict,
potential, targets, seek, or continue, the negative of these terms or other variations of
such terms. In addition, any statements that refer to projections of our future financial
performance, our anticipated growth and trends in our business and other characterizations of
future events or circumstances, are forward-looking statements. These statements are only
predictions based upon assumptions made that are believed to be reasonable at the time, and are
subject to risk and uncertainties. Therefore, actual events or results may differ materially and
adversely from those expressed in any forward-looking statement. In evaluating these statements,
you should specifically consider the risks described under the caption Item 1A Risk Factors and
elsewhere in this Form 10-Q. These factors, and other factors, may cause our actual results to
differ materially from any forward-looking statement. Except as required by law, we undertake no
obligation to publicly update or revise any forward-looking statement, whether as a result of new
information, future events or otherwise.
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
BLUE NILE, INC.
Consolidated Balance Sheets
(in thousands, except par value)
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July 2, |
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January 1, |
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2006 |
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2006 |
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(unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
41,317 |
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$ |
71,921 |
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Restricted cash |
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|
119 |
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119 |
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Marketable securities |
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14,934 |
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42,748 |
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Trade accounts receivable |
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638 |
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1,567 |
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Other accounts receivable |
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|
184 |
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|
310 |
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Inventories |
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11,211 |
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11,764 |
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Deferred income taxes |
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1,511 |
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|
3,223 |
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Prepaids and other current assets |
|
|
788 |
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|
844 |
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Total current assets |
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70,702 |
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132,496 |
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Property and equipment, net |
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3,540 |
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3,261 |
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Intangible assets, net |
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336 |
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352 |
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Deferred income taxes |
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1,545 |
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1,819 |
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Other assets |
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77 |
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77 |
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Total assets |
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$ |
76,200 |
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$ |
138,005 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Accounts payable |
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$ |
27,682 |
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$ |
50,157 |
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Accrued liabilities |
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3,342 |
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5,262 |
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Current portion of deferred rent |
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202 |
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208 |
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Total current liabilities |
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31,226 |
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55,627 |
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Deferred rent, less current portion |
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752 |
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863 |
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Commitments and contingencies |
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Stockholders equity: |
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Preferred stock, $0.001 par value; 5,000 shares authorized, none issued and
outstanding
Common stock, $0.001 par value; 300,000 shares authorized
18,963 shares and 18,646 shares issued, respectively
16,192 shares and 17,331 shares outstanding, respectively |
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19 |
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19 |
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Additional paid-in capital |
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109,778 |
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106,341 |
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Deferred compensation |
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(322 |
) |
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(480 |
) |
Accumulated other comprehensive income (loss) |
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(1 |
) |
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5 |
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Accumulated deficit |
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(875 |
) |
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(6,362 |
) |
Treasury stock, at cost; 2,771 shares and 1,315 shares outstanding, respectively |
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(64,377 |
) |
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(18,008 |
) |
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Total stockholders equity |
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44,222 |
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|
81,515 |
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Total liabilities and stockholders equity |
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$ |
76,200 |
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$ |
138,005 |
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The accompanying notes are an integral part of these consolidated financial statements
4
BLUE NILE, INC.
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
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Quarter Ended |
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Year To Date Ended |
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July 2, |
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July 3, |
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July 2, |
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July 3, |
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2006 |
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2005 |
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2006 |
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2005 |
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Net sales |
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$ |
56,916 |
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$ |
43,826 |
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$ |
107,610 |
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$ |
87,942 |
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Cost of sales |
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45,568 |
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33,836 |
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85,893 |
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68,265 |
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Gross profit |
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11,348 |
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9,990 |
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21,717 |
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19,677 |
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Selling, general and
administrative expenses |
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7,746 |
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6,184 |
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15,450 |
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12,307 |
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Operating income |
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3,602 |
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3,806 |
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6,267 |
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7,370 |
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Other income (expense), net: |
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Interest income |
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881 |
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559 |
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1,866 |
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1,060 |
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Other income |
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100 |
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100 |
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Total other income (expense), net |
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981 |
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559 |
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1,966 |
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1,060 |
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Income before income taxes |
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4,583 |
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4,365 |
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8,233 |
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8,430 |
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Income tax expense |
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1,451 |
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1,572 |
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2,746 |
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3,035 |
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Net income |
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$ |
3,132 |
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$ |
2,793 |
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$ |
5,487 |
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$ |
5,395 |
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Basic net income per share |
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$ |
0.19 |
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$ |
0.16 |
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$ |
0.32 |
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$ |
0.30 |
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Diluted net income per share |
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$ |
0.18 |
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$ |
0.15 |
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$ |
0.31 |
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$ |
0.29 |
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The accompanying notes are an integral part of these consolidated financial statements
5
BLUE NILE, INC.
Consolidated Statements of Changes in Stockholders Equity
(unaudited)
(in thousands)
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Additional |
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Accumulated |
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Total |
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Common Stock |
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Paid-in |
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Deferred |
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Accumulated |
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Other Comprehensive |
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Treasury Stock |
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Stockholders |
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Shares |
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Amount |
|
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Capital |
|
|
Compensation |
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Deficit |
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Income (Loss) |
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|
Shares |
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Amount |
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Equity |
|
Balance, January 1, 2006 |
|
|
18,646 |
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|
$ |
19 |
|
|
$ |
106,341 |
|
|
$ |
(480 |
) |
|
$ |
(6,362 |
) |
|
$ |
5 |
|
|
|
(1,315 |
) |
|
$ |
(18,008 |
) |
|
$ |
81,515 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,487 |
|
Other comprehensive income (loss): |
|
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|
|
|
|
|
|
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|
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|
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Unrealized loss on
marketable securities, net of tax |
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(6 |
) |
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(6 |
) |
Total comprehensive income |
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|
|
|
|
|
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|
5,481 |
|
Shares repurchased |
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|
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|
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|
|
|
|
|
|
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|
(1,456 |
) |
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|
(46,369 |
) |
|
|
(46,369 |
) |
Amortization of deferred stock compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138 |
|
|
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|
|
|
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|
|
|
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|
|
|
|
|
|
138 |
|
Reversal of deferred compensation
relating to forfeited options |
|
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|
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|
|
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|
(20 |
) |
|
|
20 |
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
1,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,738 |
|
Exercise of stock options |
|
|
316 |
|
|
|
|
|
|
|
1,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,087 |
|
Tax benefit from exercise of stock options |
|
|
|
|
|
|
|
|
|
|
612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
612 |
|
Issuance of common stock to directors |
|
|
1 |
|
|
|
|
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|
20 |
|
|
|
|
|
|
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|
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|
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|
|
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|
|
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|
20 |
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|
|
|
|
|
|
|
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|
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|
|
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|
|
Balance, July 2, 2006 |
|
|
18,963 |
|
|
$ |
19 |
|
|
$ |
109,778 |
|
|
$ |
(322 |
) |
|
$ |
(875 |
) |
|
$ |
(1 |
) |
|
|
(2,771 |
) |
|
$ |
(64,377 |
) |
|
$ |
44,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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The accompanying notes are an integral part of these consolidated financial statements
6
BLUE
NILE, INC.
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
|
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|
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|
Year To Date Ended |
|
|
|
July 2, |
|
|
July 3, |
|
|
|
2006 |
|
|
2005 |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,487 |
|
|
$ |
5,395 |
|
Adjustments to reconcile net income to net cash
used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
952 |
|
|
|
835 |
|
Loss on disposal of fixed assets |
|
|
2 |
|
|
|
10 |
|
Stock-based compensation |
|
|
1,859 |
|
|
|
169 |
|
Deferred income taxes |
|
|
2,009 |
|
|
|
2,424 |
|
Tax benefit from exercise of stock options |
|
|
592 |
|
|
|
459 |
|
Excess tax benefit from exercise of stock options |
|
|
(34 |
) |
|
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Receivables, net |
|
|
1,056 |
|
|
|
146 |
|
Inventories |
|
|
553 |
|
|
|
1,065 |
|
Prepaid expenses and other assets |
|
|
57 |
|
|
|
(193 |
) |
Accounts payable |
|
|
(22,475 |
) |
|
|
(19,625 |
) |
Accrued liabilities |
|
|
(1,919 |
) |
|
|
(2,958 |
) |
Deferred rent |
|
|
(118 |
) |
|
|
(114 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(11,979 |
) |
|
|
(12,387 |
) |
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(1,182 |
) |
|
|
(346 |
) |
Proceeds from the sale of property and equipment |
|
|
1 |
|
|
|
5 |
|
Purchases of marketable securities |
|
|
(25,195 |
) |
|
|
(71,955 |
) |
Proceeds from the sale of marketable securities |
|
|
53,000 |
|
|
|
64,000 |
|
Transfers of restricted cash |
|
|
|
|
|
|
(119 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
26,624 |
|
|
|
(8,415 |
) |
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Repurchase of common stock |
|
|
(46,370 |
) |
|
|
(7,406 |
) |
Proceeds from stock option exercises |
|
|
1,087 |
|
|
|
198 |
|
Excess tax benefit from exercise of stock options |
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(45,249 |
) |
|
|
(7,208 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(30,604 |
) |
|
|
(28,010 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
|
|
71,921 |
|
|
|
59,499 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
41,317 |
|
|
$ |
31,489 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements
7
BLUE NILE, INC.
Notes to Consolidated Financial Statements
Note 1. Description of the Company and Summary of Significant Accounting Policies
The Company
Blue Nile, Inc. (the Company) is a leading online retailer of high quality diamonds and fine
jewelry in the United States. In addition to sales of diamonds, fine jewelry and watches, the
Company provides guidance and support to enable customers to more effectively learn about and
purchase diamonds as well as classically styled fine jewelry. The Company, a Delaware corporation,
based in Seattle, Washington, was formed in March 1999. The Company maintains its primary website
at www.bluenile.com. The Company also operates the www.bluenile.co.uk and www.bluenile.ca websites.
Reclassifications
Certain reclassifications of prior period balances have been made for consistent presentation with
the current period. These reclassifications had no impact on net income, net cash used in operating
activities or stockholders equity as previously reported.
Basis of Presentation
The accompanying unaudited consolidated financial statements should be read in conjunction with the
Notes to Consolidated Financial Statements contained in the Companys annual report on Form 10-K
filed for the year ended January 1, 2006. The same accounting policies are followed for preparing
quarterly and annual financial statements. In the opinion of management, all adjustments necessary
for the fair presentation of the financial position, results of operations and cash flows for the
interim period have been included and are of a normal, recurring nature.
The financial information as of January 1, 2006 is derived from the Companys audited consolidated
financial statements and notes for the fiscal year ended January 1, 2006, included in Item 8 of the
annual report on Form 10-K for the year then ended.
Due to a number of factors, including the seasonal nature of the retail industry and other factors
described in this report, quarterly results are not necessarily indicative of the results for the
full fiscal year or any other subsequent interim period.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Some of the more significant estimates include the allowance for sales
returns and the estimated fair value of stock options granted. Actual results could differ
materially from those estimates.
Intangible Assets
Intangible assets represent the consideration paid for licenses and other similar agreements with
finite lives. Amortization is calculated on a straight-line basis over the estimated useful life of
the related assets, which range from 10 years to 17 years.
8
BLUE NILE, INC.
Notes to Consolidated Financial Statements
Stock-Based Compensation
The Company grants non-qualified stock options under its 2004 Equity Incentive Plan (the 2004
Plan) and its 2004 Non-Employee Directors Stock Option Plan (the Directors Plan).
Additionally, the Company has outstanding non-qualified and incentive stock options under its 1999
Equity Incentive Plan (the 1999 Plan). As of May 19, 2004, the effective date of the Companys
initial public offering, no additional stock options were granted under the 1999 Plan.
Prior to January 2, 2006, the Company accounted for options granted under its employee compensation
plans using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations including
Financial Accounting Standards Board (FASB) Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25. Under APB 25,
compensation expense was recognized for the difference between the market price of the Companys
stock on the date of grant and the exercise price of the stock option. As permitted by Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation (SFAS
123), stock-based compensation was included as a pro forma disclosure in the notes to the
consolidated financial statements.
Effective January 2, 2006, the Company adopted the provisions of SFAS No. 123R (Revised 2004),
Share-Based Payment (SFAS 123R) using the modified prospective transition method for all stock
options issued after becoming a public company. SFAS 123R requires measurement of compensation cost
for all options granted based on fair value on the date of grant and recognition of compensation
expense over the service period for those options expected to vest. Stock-based compensation
expense recorded for the quarter and year to date ended July 2, 2006 included the estimated expense
for stock options granted on or subsequent to January 2, 2006, based on the grant date fair value
estimated in accordance with the provisions of SFAS 123R, and the estimated expense for the portion
vesting in the period for options granted between March 11, 2004 (the date on which the Company was
considered to be a public company for accounting purposes) and January 2, 2006, based on the grant
date fair value estimated in accordance with the provisions of SFAS 123. Options granted prior to
March 11, 2004 have been accounted for using the prospective transition method, which requires that
those options continue to be accounted for under APB 25. In accordance with the requirements of APB
25, the Company has recorded deferred stock-based compensation for the difference between the
exercise price of the stock option and the deemed fair market value of the Companys stock at the
grant date. The deferred stock-based compensation is being amortized over the vesting period of the
awards, generally four years. As prescribed under the modified prospective and prospective
transition methods, results for the prior periods have not been restated.
We recognize compensation expense on a straight-line basis over the requisite service period for
each stock option grant. Total stock-based compensation expense recognized for the quarter and year
to date ended July 2, 2006 was approximately $959,000 and $1.8 million, respectively. Of this
amount, approximately $943,000 and $1.8 million, respectively, was recognized as selling, general
and administrative expense and approximately $16,000 and $31,000, respectively, was recognized as
cost of sales. The related total tax benefit was approximately $317,000 and $605,000, respectively.
In addition, approximately $22,000 and $37,000 of stock-based compensation costs that were recorded
for the quarter and year to date ended July 2, 2006, respectively, were capitalized and included in
property and equipment as a component of the cost capitalized for the development of software for
internal use.
Prior to the adoption of SFAS 123R, the Company presented all tax benefits resulting from the
exercise of stock options as operating cash inflows in the consolidated statements of cash flows,
in accordance with the provisions of Emerging Issues Task Force (EITF) Issue No. 00-15,
Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a Company upon
Exercise of a Nonqualified Employee Stock Option (EITF 00-15). The tax benefits resulting from
the exercise of stock options granted prior to March 11, 2004 will continue to be reported as cash
inflows in accordance with the prospective transition method. SFAS 123R requires the benefits of
tax deductions in excess of the compensation cost recognized for those options granted on or
subsequent to March 11, 2004 to be classified as financing cash inflows rather than operating cash
inflows, on a prospective basis. This amount is shown as Excess tax benefit from exercise of stock
options on the consolidated statement of cash flows and amounted to $34,000 for the year to date
ended July 2, 2006.
9
BLUE NILE, INC.
Notes to Consolidated Financial Statements
The following table shows the effect on net income and earnings per share had stock-based
compensation cost been recognized based upon the estimated fair value on the grant date of stock
options granted between March 11, 2004 and January 2, 2006 in accordance with SFAS 123 as amended
by SFAS No. 148 Accounting for Stock-Based Compensation Transition and Disclosure for the
comparable prior year periods (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year To Date |
|
|
|
Quarter Ended |
|
|
Ended |
|
|
|
July 3, |
|
|
July 3, |
|
|
|
2005 |
|
|
2005 |
|
Net income, as reported |
|
$ |
2,793 |
|
|
$ |
5,395 |
|
Deduct: Stock-based compensation expense determined
under fair-value-based method, net of tax |
|
|
(418 |
) |
|
|
(787 |
) |
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
2,375 |
|
|
$ |
4,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per share: |
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
0.16 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic pro forma |
|
$ |
0.13 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
0.15 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted pro forma |
|
$ |
0.13 |
|
|
$ |
0.25 |
|
|
|
|
|
|
|
|
Disclosures for the quarter and year to date ended July 2, 2006 are not presented as the amounts
are recognized in the consolidated financial statements.
The fair value of each option on the date of grant is estimated using the Black-Scholes-Merton
option valuation model. The following weighted-average assumptions were used for the valuation of
options granted during the periods ended July 2, 2006 and July 3, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
Year to Date Ended |
|
|
July 2, |
|
July 3, |
|
July 2, |
|
July 3, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Expected term |
|
4.5 years |
|
4 years |
|
4.5 years |
|
4 years |
Expected volatility |
|
|
36.0 |
% |
|
|
64.5 |
% |
|
|
36.0 |
% |
|
|
67.9 |
% |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Risk-free interest rate |
|
|
5.01 |
% |
|
|
3.73 |
% |
|
|
5.01 |
% |
|
|
3.72 |
% |
Estimated fair value per option granted |
|
$ |
11.07 |
|
|
$ |
15.66 |
|
|
$ |
11.09 |
|
|
$ |
15.79 |
|
|
|
|
Expected Term This is the estimated period of time until exercise and is based
primarily on historical experience for options with similar terms and conditions, giving
consideration to future expectations. We also considered the expected terms of other
companies that have contractual terms, expected stock volatility and employee demographics
similar to ours. |
|
|
|
|
Expected Volatility This is based on the Companys historical stock price volatility
in combination with the two-year implied volatility of its exchange traded options. |
|
|
|
|
Expected Dividend Yield The Company has not paid dividends in the past and does not
expect to pay dividends in the near future. |
|
|
|
|
Risk-Free Interest Rate This is the rate on Nominal U.S. Government Treasury Bills
with lives commensurate with the lives of the options on the date of grant. |
10
BLUE NILE, INC.
Notes to Consolidated Financial Statements
Recent Accounting Pronouncements
In November 2005, the FASB issued FASB Staff Position (FSP) FAS 115-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments (FSP FAS 115-1),
which provides guidance on determining when investments in certain debt and equity securities are
considered impaired, whether that impairment is other-than-temporary, and on measuring such
impairment loss. FSP FAS 115-1 also includes accounting considerations subsequent to the
recognition of an other-than temporary impairment and requires certain disclosures about unrealized
losses that have not been recognized as other-than-temporary impairments. FSP FAS 115-1 is required
to be applied to reporting periods beginning after December 15, 2005. We adopted FSP FAS 115-1 on
January 2, 2006. The adoption of this statement did not have a material impact on our consolidated
results of operations or financial condition.
In February 2006, the EITF reached a consensus on Issue No. 06-3 (EITF 06-3), How Sales Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross Versus Net Presentation). The EITF reached a consensus that a company
may adopt a policy for presenting taxes on a gross or net basis. If taxes are significant, the
accounting policy should be disclosed and if taxes are presented gross, the amounts included in
revenue should be disclosed. The consensus reached in this Issue is effective for periods beginning
after December 15, 2006 with early application permitted. We will apply this guidance to our first
quarter of fiscal 2007. We do not expect that the adoption of this statement will have a material
impact on our consolidated results of operations or financial condition.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48). FIN 48 is an interpretation of FASB Statement No. 109, Accounting for Income
Taxes. FIN 48 prescribes how a company should recognize, measure, present and disclose in its
financial statements uncertain tax positions that the company has taken or expects to take on a tax
return. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently
evaluating the implications of this statement and the impact on our consolidated results of
operations and financial condition.
Note 2. Stock-based Compensation
Stock options are granted at prices equal to the fair market value of the Companys common stock on
the date of grant. Stock options granted generally provide for 25% vesting on the first anniversary
from the date of grant with the remainder vesting monthly over three years, and expire 10 years
from the date of grant. As of July 2, 2006, the Company had four stock option plans. Additional
information regarding these plans is disclosed in Note 1 and in our annual report on Form 10-K for
the year ended January 1, 2006.
A summary of stock option activity for the year to date ended July 2, 2006 is as follows (in
thousands, except exercise price):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average |
|
|
|
|
|
|
|
|
|
|
Weighted average |
|
|
remaining contractual term |
|
|
Aggregate intrinsic |
|
|
|
Options |
|
|
exercise price |
|
|
(in years) |
|
|
value |
|
Balance, January 1, 2006 |
|
|
2,095 |
|
|
$ |
15.84 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
523 |
|
|
|
31.31 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(317 |
) |
|
|
3.43 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
(45 |
) |
|
|
26.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 2, 2006 |
|
|
2,256 |
|
|
$ |
20.97 |
|
|
|
8.02 |
|
|
$ |
25,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, July 2, 2006 |
|
|
994 |
|
|
$ |
10.05 |
|
|
|
6.67 |
|
|
$ |
22,004 |
|
Stock options granted during the year to date ended July 2, 2006 have a weighted average grant-date
fair value of $11.09. The total intrinsic value of options exercised during the year to date ended
July 2, 2006 was $9.6 million. As of July 2, 2006, the Company had total unrecognized compensation
costs related to unvested stock options accounted for using the modified prospective and
prospective methods under SFAS 123R of $11.6 million. We expect to recognize this cost over a
weighted average period of 1.5 years. The unrecognized compensation cost related to stock options
granted subsequent to March 11, 2004 will be adjusted for any future changes in the rate of
estimated forfeitures. The unrecognized compensation cost related
to stock options granted prior to March 11, 2004 and accounted for under the prospective
application method will be adjusted for actual forfeitures as they occur.
11
BLUE NILE, INC.
Notes to Consolidated Financial Statements
The following table summarizes information about stock options outstanding at July 2, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
Exercisable |
|
|
|
|
|
|
|
Weighted average |
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contractual |
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
|
life |
|
|
Exercise |
|
|
Options |
|
|
Weighted average |
|
Range of exercise price |
|
(in thousands) |
|
|
(in years) |
|
|
price |
|
|
(in thousands) |
|
|
exercise price |
|
$0.25 - $0.275 |
|
|
516 |
|
|
|
5.65 |
|
|
$ |
0.26 |
|
|
|
513 |
|
|
$ |
0.26 |
|
$0.50 - $30.00 |
|
|
811 |
|
|
|
7.79 |
|
|
|
21.48 |
|
|
|
443 |
|
|
|
19.50 |
|
$30.04 - $30.92 |
|
|
46 |
|
|
|
9.79 |
|
|
|
30.42 |
|
|
|
4 |
|
|
|
30.41 |
|
$31.26 - $31.26 |
|
|
455 |
|
|
|
9.91 |
|
|
|
31.26 |
|
|
|
|
|
|
|
|
|
$31.43 - $42.15 |
|
|
428 |
|
|
|
9.11 |
|
|
|
33.00 |
|
|
|
34 |
|
|
|
32.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,256 |
|
|
|
8.02 |
|
|
|
20.97 |
|
|
|
994 |
|
|
|
10.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 3. Inventories
Inventories are stated at cost and consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 2, |
|
|
January 1, |
|
|
|
2006 |
|
|
2006 |
|
Loose diamonds |
|
$ |
340 |
|
|
$ |
629 |
|
Fine jewelry, watches and other |
|
|
10,871 |
|
|
|
11,135 |
|
|
|
|
|
|
|
|
|
|
$ |
11,211 |
|
|
$ |
11,764 |
|
|
|
|
|
|
|
|
Note 4. Marketable Securities
The Companys marketable securities are classified as available-for-sale as defined by SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115). At July 2,
2006, marketable securities consisted of U.S. government and agencies securities maturing within
one year. The securities are carried at fair value, with the unrealized gains and losses included
in accumulated other comprehensive income (loss). Realized gains or losses on the sale of
marketable securities are identified on a specific identification basis and are reflected as a
component of interest income or expense.
Marketable securities totaled $14.9 million and $42.7 million at July 2, 2006 and January 1, 2006,
respectively. There were no realized gains or losses on the sales of marketable securities for the
quarter ended July 2, 2006. Gross unrealized gains and losses at July 2, 2006 and January 1, 2006
were not significant.
Any unrealized losses are considered temporary as the duration of the decline in value has been
short, the extent of the decline is not severe and the Company has the ability to hold the
investments until it recovers substantially all of the cost of the investment.
Note 5. Net Income Per Share
Basic net income per share is based on the weighted average number of common shares outstanding.
Diluted net income per share is based on the weighted average number of common shares and common
share equivalents outstanding. Common share equivalents included in
the computation
represent common shares issuable upon assumed exercise of outstanding stock options, except when
the effect of their inclusion would be antidilutive.
12
BLUE NILE, INC.
Notes to Consolidated Financial Statements
The following tables set forth the computation of basic and diluted net income per share (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Year To Date Ended |
|
|
|
July 2, |
|
|
July 3, |
|
|
July 2, |
|
|
July 3, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net income |
|
$ |
3,132 |
|
|
$ |
2,793 |
|
|
$ |
5,487 |
|
|
$ |
5,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
16,874 |
|
|
|
17,625 |
|
|
|
17,114 |
|
|
|
17,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.19 |
|
|
$ |
0.16 |
|
|
$ |
0.32 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options |
|
|
688 |
|
|
|
1,025 |
|
|
|
784 |
|
|
|
1,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and common stock equivalents |
|
|
17,562 |
|
|
|
18,650 |
|
|
|
17,898 |
|
|
|
18,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
0.18 |
|
|
$ |
0.15 |
|
|
$ |
0.31 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter and year to date ended July 2, 2006, there were 1,049,167 and 959,197,
respectively, stock option shares excluded from the computation of net income per diluted share due
to their antidilutive effect. For the quarter and year to date ended July 3, 2005, there were
528,796 and 567,826, respectively, stock option shares excluded from the computation of net income
per diluted share due to their antidilutive effect.
Note 6. Subsequent Events
On July 27, 2006, the board of directors authorized the Company to repurchase up to an additional
$50.0 million of the Companys common stock during the subsequent 24 months. The shares may be
purchased from time to time in open market transactions. The timing and amount of any shares
repurchased will be determined by the Companys management based on its evaluation of market
conditions and other factors. Repurchases may also be made under a Rule 10b5-1 plan, which would
permit shares to be repurchased when the Company might otherwise be precluded from doing so under
insider trading laws.
13
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with our Consolidated Financial Statements
and the related Notes contained elsewhere in this quarterly report on Form 10-Q and the annual
report on Form 10-K filed for our fiscal year ended January 1, 2006.
Management Overview
During our second quarter ended July 2, 2006, net income increased 12.1% to $3.1 million from $2.8
million generated in the second quarter of 2005. Net sales increased 29.9% to $56.9 million from
$43.8 million during the second quarter of 2005. The increase in net sales is attributable to an
increase in sales volume. Gross profit of $11.3 million increased $1.4 million in the second
quarter ended July 2, 2006 compared to the same period in 2005. Operating income for the quarter
ended July 2, 2006 decreased 5.4% to $3.6 million from $3.8 million as a result of an increase in
selling, general and administrative expenses, primarily due to an increase in stock-based
compensation expense related to the implementation of SFAS 123R, as described below. Other factors
contributing to the increase in net income for the second quarter were higher interest income and
lower income tax expense as compared to the same period in 2005.
During the year to date ended July 2, 2006, net income increased 1.7% to $5.5 million from $5.4
million during the same period in 2005. Net sales increased 22.4% to $107.6 million compared to
$87.9 million in the year to date ended July 3, 2005. The increase in net sales is due to higher
sales volume. Gross profit increased $2.0 million to $21.7 million for the year to date ended July
2, 2006 compared to the same period in 2005. Operating income for the year to date ended July 2,
2006 decreased 15.0% to $6.3 million from $7.4 million, due to an increase in selling, general and
administrative expenses, resulting primarily from an increase in stock-based compensation expense
related to the implementation of SFAS 123R, as described below. Other factors contributing to the
increase in net income for the year to date ended July 2, 2006 were higher interest income and
lower income tax expense compared to the same period in 2005.
On January 2, 2006, we adopted SFAS 123R, which requires the fair value of stock options granted to
be included in our financial statements. Prior period financial statements are precluded from being
revised to reflect this change. Stock-based compensation expense during the second quarter of 2006
was $959,000 compared to $79,000 for the second quarter of 2005 and was $1.8 million during the
year to date ended July 2, 2006 compared to $154,000 during the corresponding period of 2005. The
accounting for stock-based compensation under SFAS 123R in the second quarter of 2006 and in the
year to date ended July 2, 2006 had an impact of reducing both basic and diluted earnings per share
by $0.03 and $0.06, respectively. We expect future stock-based compensation expense to be
significant. Actual expense will depend on the nature, timing, and amount of stock options granted
and the assumptions used in valuing these stock options. Our tax accounting may also be impacted by
actual exercise behavior and the relative market prices at exercise.
Critical Accounting Policies
The preparation of our consolidated financial statements requires that we make certain estimates
and judgments that affect amounts reported and disclosed in our consolidated financial statements
and related notes. We base our estimates on historical experience and on other assumptions that we
believe to be reasonable under the circumstances. Actual results may differ from those estimates.
We consider revenue recognition, stock-based compensation and income taxes to be the most critical
accounting policies in understanding the judgments that are involved in preparing the consolidated
financial statements. With the adoption of SFAS 123R on January 2, 2006, we have modified our
critical accounting policy relating to Stock-based Compensation.
Stock-based Compensation
We account for stock-based compensation in accordance with the fair value recognition provisions of
SFAS 123R. We use the Black-Scholes-Merton option valuation model, which requires the input of
highly subjective assumptions. These assumptions include estimating the length of time employees
will retain their vested stock options before exercising them (expected term), the estimated
volatility of the Companys common stock price over the expected term, and the number of options
that will ultimately not complete their vesting requirements (forfeitures). Changes in these
assumptions can materially affect the estimate of the fair value of employee stock options and
consequently, the related amount of stock-based compensation expense recognized in the consolidated
statements of operations.
14
Results of Operations
Comparison of the Quarter Ended July 2, 2006 to the Quarter Ended July 3, 2005
The following table presents our operating results for the quarters ended July 2, 2006 and July 3,
2005, respectively, including a comparison of the financial results for these periods (dollars in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Quarter Ended |
|
|
|
|
|
|
|
|
|
July 2, |
|
|
July 3, |
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
$ Change |
|
|
% Change |
|
Net sales |
|
$ |
56,916 |
|
|
$ |
43,826 |
|
|
$ |
13,090 |
|
|
|
29.9 |
% |
Cost of sales |
|
|
45,568 |
|
|
|
33,836 |
|
|
|
11,732 |
|
|
|
34.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
11,348 |
|
|
|
9,990 |
|
|
|
1,358 |
|
|
|
13.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses: |
|
|
7,746 |
|
|
|
6,184 |
|
|
|
1,562 |
|
|
|
25.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
3,602 |
|
|
|
3,806 |
|
|
|
(204 |
) |
|
|
-5.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
881 |
|
|
|
559 |
|
|
|
322 |
|
|
|
57.6 |
% |
Other income |
|
|
100 |
|
|
|
|
|
|
|
100 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net |
|
|
981 |
|
|
|
559 |
|
|
|
422 |
|
|
|
75.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
4,583 |
|
|
|
4,365 |
|
|
|
218 |
|
|
|
5.0 |
% |
Income tax expense |
|
|
1,451 |
|
|
|
1,572 |
|
|
|
(121 |
) |
|
|
-7.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,132 |
|
|
$ |
2,793 |
|
|
$ |
339 |
|
|
|
12.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.19 |
|
|
$ |
0.16 |
|
|
$ |
0.03 |
|
|
|
18.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
0.18 |
|
|
$ |
0.15 |
|
|
$ |
0.03 |
|
|
|
20.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
Net sales increased 29.9% to $56.9 million in the second quarter of 2006 from $43.8 million in the
second quarter of 2005. The increase in net sales in the second quarter of 2006 was primarily due
to higher net sales volume in all product categories.
Gross Profit
The increase in gross profit in the second quarter of 2006 resulted primarily from higher sales
volume, as discussed above. Gross profit as a percentage of net sales was 19.9% in the second
quarter of 2006 compared to 22.8% in the second quarter of 2005. The decrease in gross profit as a
percentage of net sales was primarily due to retail price reductions in diamonds that were
instituted in the first quarter of 2006 to optimize gross profit, and to a lesser extent, to cost
increases in gold, silver and platinum jewelry that were not fully passed on to our customers. We
expect that gross profit will fluctuate in the future based primarily on changes in product
acquisition costs, product mix and pricing decisions.
15
Selling, General and Administrative Expenses
The increase in selling, general and administrative expenses in the second quarter of 2006 was due
to several factors. Stock-based compensation increased approximately $867,000 as a result of the
adoption of SFAS 123R. Marketing costs increased approximately $538,000 due to higher sales volume
and increases in online marketing costs. Credit card processing fees increased approximately
$285,000 due to the increase in sales volume. These increases were partially offset by lower
contractor and consultant costs in the second quarter of 2006 as compared to the second quarter of
2005, which included costs related to the implementation of Sarbanes-Oxley 404. As a percentage of
net sales, selling, general and administrative expenses were 13.6% and 14.1% in the second quarter
of 2006 and the second quarter of 2005, respectively. The decrease in selling, general and
administrative expenses as a percentage of net sales in the second quarter of 2006 resulted
primarily from our ability to grow sales at a greater pace than selling, general and administrative
expenses, which included the addition of stock-based compensation expenses as a result of the
implementation of SFAS 123R. In the second quarter of 2006, selling, general and administrative
expenses included approximately $943,000 of stock-based compensation expense as compared to $76,000
in the second quarter of 2005.
We expect selling, general and administrative expenses to increase in absolute dollars in future
periods as a result of anticipated higher net sales, growth in our fulfillment and customer service
operations to support higher sales volumes, increases in credit card processing fees and other
variable expenses. We also expect selling, general and administrative expenses to fluctuate based
on the nature, amount and timing of stock options granted in the future.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest income. The increase in interest income
in the second quarter of 2006 is primarily due to an increase in interest rates partially offset by
a decrease in average balances of cash, cash equivalents and marketable securities during the
second quarter of 2006 as compared to the second quarter of 2005.
Income Tax Expense
Income tax expense as a percentage of income before income taxes was 31.7% (the effective income
tax rate), as compared to 36.0% in the prior year period. This change resulted from adjustments
arising from the final determination of our 2005 income tax expense and adjustments to deferred
taxes for the second quarter of 2006.
16
Comparison of the Year To Date Ended July 2, 2006 to the Year To Date Ended July 3, 2005
The following table presents our operating results for the year to date periods ended July 2, 2006
and July 3, 2005 respectively, including a comparison of the financial results for these periods
(dollars in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year To Date |
|
|
Year To Date |
|
|
|
|
|
|
|
|
|
Ended July 2, |
|
|
Ended July 3, |
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
$ Change |
|
|
% Change |
|
Net sales |
|
$ |
107,610 |
|
|
$ |
87,942 |
|
|
$ |
19,668 |
|
|
|
22.4 |
% |
Cost of sales |
|
|
85,893 |
|
|
|
68,265 |
|
|
|
17,628 |
|
|
|
25.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
21,717 |
|
|
|
19,677 |
|
|
|
2,040 |
|
|
|
10.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses: |
|
|
15,450 |
|
|
|
12,307 |
|
|
|
3,143 |
|
|
|
25.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
6,267 |
|
|
|
7,370 |
|
|
|
(1,103 |
) |
|
|
-15.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
1,866 |
|
|
|
1,060 |
|
|
|
806 |
|
|
|
76.0 |
% |
Other income |
|
|
100 |
|
|
|
|
|
|
|
100 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net |
|
|
1,966 |
|
|
|
1,060 |
|
|
|
906 |
|
|
|
85.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
8,233 |
|
|
|
8,430 |
|
|
|
(197 |
) |
|
|
-2.3 |
% |
Income tax expense |
|
|
2,746 |
|
|
|
3,035 |
|
|
|
(289 |
) |
|
|
-9.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,487 |
|
|
$ |
5,395 |
|
|
$ |
92 |
|
|
|
1.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.32 |
|
|
$ |
0.30 |
|
|
$ |
0.02 |
|
|
|
6.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
0.31 |
|
|
$ |
0.29 |
|
|
$ |
0.02 |
|
|
|
6.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
Net sales increased 22.4% to $107.6 million for the year to date ended July 2, 2006 from $87.9
million for the year to date ended July 3, 2005. The increase in net sales was primarily due to
higher net sales volume in our engagement ring, diamond jewelry, loose diamond and wedding band
merchandise categories.
Gross Profit
The increase in gross profit for the year to date ended July 2, 2006 resulted primarily from higher
sales volume, as discussed above. Gross profit as a percentage of net sales was 20.2% for the year
to date ended July 2, 2006 compared to 22.4% for the year to date ended July 3, 2005. The decrease
in gross profit as a percentage of net sales was primarily due to retail price reductions in
diamonds that were instituted in the first quarter of 2006 to optimize gross profit, and to a
lesser extent, to cost increases in gold, silver and platinum jewelry that were not fully passed on
to our customers. We expect that gross profit will fluctuate in the future based primarily on
changes in product acquisition costs, product mix and pricing decisions.
17
Selling, General and Administrative Expenses
The increase in selling, general and administrative expenses for the year to date ended July 2,
2006 was due to several factors. Stock-based compensation increased approximately $1.7 million as a
result of the adoption of SFAS 123R. Marketing costs increased approximately $1.2 million due to
higher sales volume and increases in online marketing costs. Credit card processing fees increased
approximately $497,000 due primarily to the increase in sales volume. Payroll and related costs
increased approximately $140,000 due primarily to the addition of new employees. These increases
were partially offset by lower contractor and consultant costs for the year to date ended July 2,
2006 as compared to the year to date ended July 3, 2005, which included costs related to the
implementation of Sarbanes-Oxley 404. As a percentage of net sales, selling, general and
administrative expenses were 14.4% for the year to date ended July 2, 2006 compared to 14.0% for
the year to date ended July 3, 2005. The increase in selling, general and administrative expenses
as a percentage of net sales for the year to date ended July 2, 2006 resulted primarily from the
addition of stock-based compensation expenses as a result of the implementation of SFAS 123R. For
the year to date ended July 2, 2006, selling, general and administrative expenses included
approximately $1.8 million of stock-based compensation expense as compared to $149,000 for the year
to date ended July 3, 2005.
We expect selling, general and administrative expenses to increase in absolute dollars in future
periods as a result of anticipated growth in net sales, growth in our fulfillment and customer
service operations to support higher sales volumes, increases in credit card processing fees and
other variable expenses. We also expect selling, general and administrative expenses to fluctuate
based on the nature, amount and timing of stock options granted in the future.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest income. The increase in interest income
for the year to date ended July 2, 2006 is primarily due to an increase in interest rates during
the year to date ended July 2, 2006 as compared to the same period in 2005.
Income Tax Expense
The effective income tax rate for the year to date ended July 2, 2006 was 33.4%, as compared to
36.0% for the prior year period. This change resulted from adjustments arising from the final
determination of our 2005 income tax expense and adjustments to deferred taxes for the year to date
ended July 2, 2006.
The Company currently estimates that its effective income tax rate for the second half of its
fiscal year 2006 is expected to be approximately 35.5%, as compared to 36.0% for fiscal year 2005.
Liquidity and Capital Resources
As of July 2, 2006, working capital totaled $39.5 million, including cash and cash equivalents of
$41.3 million and marketable securities of $14.9 million, partially offset by accounts payable of
$27.7 million. We believe that our current cash and cash equivalents and marketable securities as
well as cash flows from operations will be sufficient to continue our operations and meet our
capital needs for the foreseeable future.
Net cash of $12.0 million was used for operating activities for the year to date ended July 2,
2006, compared to cash used in operating activities of $12.4 million for the year to date ended
July 3, 2005. Cash was provided by earnings of $5.5 million and $5.4 million for the year to date
ended July 2, 2006 and the year to date ended July 3, 2005, respectively. This was primarily offset
by net payments of payables totaling $22.5 million for the year to date ended July 2, 2006 and
$19.6 million for the year to date ended July 3, 2005. The increase in net payments of payables in
2006 relates primarily to higher payments to suppliers in the first quarter of 2006 for inventory
sold in the fourth quarter of 2005. The volume of sales in the fourth quarter of 2005 was greater
than the volume of sales in the fourth quarter of 2004, resulting in an increase in the net payment
of payables in the first quarter of 2006 compared to the first quarter of 2005. This payment cycle
reflects what we believe to be the beneficial working capital characteristics of our business
model, wherein we collect cash from customers within several business days following a related sale
while we typically have longer payment terms with our suppliers.
18
Net cash provided by investing activities was $26.6 million for the year to date ended July 2,
2006. Cash provided in 2006 was primarily from net sales of marketable securities of $27.8 million
partially offset by capital expenditures for our technology system infrastructure, including
software. Cash used in investing activities was $8.4 million for the year to date ended July 3,
2005, which related primarily to net purchases of marketable securities of $8.0 million.
Net cash used in financing activities for the year to date ended July 2, 2006 was $45.2 million,
related primarily to repurchases of Blue Nile, Inc. common stock. In February 2006, our board of
directors authorized the repurchase of common stock with an aggregate total value of up to $100
million within the 24 month period following the approval date of such repurchase. The timing and
amount of any shares repurchased is determined by the Companys management based on its evaluation
of market conditions and other factors. Repurchases may also be made under a Rule 10b5-1 plan,
which permits shares to be repurchased when the Company might otherwise be precluded from doing so
under insider trading laws. During the second quarter of 2006, we purchased approximately
1.3 million shares of our common stock for approximately $40.3 million. Cash used in financing
activities for the year to date ended July 3, 2005 was $7.2 million related primarily to
repurchases of Blue Nile, Inc. common stock under a repurchase plan authorized by the board of
directors in February 2005. The increase in net cash used in financing activities in 2006 was
partially offset by an increase in proceeds from stock option exercises and excess tax benefits
from stock option exercises. In 2005, the excess tax benefits from stock option exercises were
presented as operating cash inflows in accordance with EITF 00-15.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Companys exposure to financial market risk results primarily from fluctuations in interest
rates. There have been no material changes to our market risks as disclosed in our annual report on
Form 10-K for the year ended January 1, 2006.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
During the quarter ended July 2, 2006, an evaluation was performed under the supervision and with
the participation of our management, including our chief executive officer and chief financial
officer (collectively, our certifying officers), of the effectiveness of the design and operation
of our disclosure controls and procedures. Disclosure controls and procedures are controls and
other procedures designed to ensure that information required to be disclosed by us in our periodic
reports filed with the Securities and Exchange Commission (SEC) is recorded, processed,
summarized and reported within the time periods specified by the SECs rules and SEC reports. Based
on their evaluation, our certifying officers concluded that as of the end of the period covered by
this report, these disclosure controls and procedures are effective in the timely recording,
processing, summarizing and reporting of material financial and non-financial information.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended
July 2, 2006, that our certifying officers concluded materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
19
PART II. OTHER INFORMATION
Item 1A. Risk Factors
You should carefully consider the risks described below and elsewhere in this report, which could
materially and adversely affect our business, results of operations or financial condition. In
those cases, the trading price of our common stock could decline and you may lose all or part of
your investment. For the current quarter there have been no material changes to the risk factors
disclosed below.
Our limited operating history makes it difficult for us to accurately forecast net sales and
appropriately plan our expenses.
We were incorporated in March 1999 and have a limited operating history. As a result, it is
difficult to accurately forecast our net sales and plan our operating expenses. We base our current
and future expense levels on our operating forecasts and estimates of future net sales. Net sales
and operating results are difficult to forecast because they generally depend on the volume and
timing of the orders we receive, which are uncertain. Some of our expenses are fixed, and, as a
result, we may be unable to adjust our spending in a timely manner to compensate for any unexpected
shortfall in net sales. This inability could cause our net income in a given quarter to be lower
than expected. We also make certain assumptions when forecasting the amount of expense we expect
related to our stock-based compensation including the expected volatility of our stock price, the
expected life of options granted and the expected rate of stock option forfeitures. These
assumptions are partly based on historical results. If actual results differ from our estimates,
our net income in a given quarter may be lower than expected.
We expect our quarterly financial results to fluctuate, which may lead to volatility in our stock
price.
We expect our net sales and operating results to vary significantly from quarter to quarter due to
a number of factors, including changes in:
|
|
|
demand for our products; |
|
|
|
|
the costs to acquire diamonds and precious metals; |
|
|
|
|
our ability to attract visitors to our websites and convert those visitors into customers; |
|
|
|
|
our ability to retain existing customers or encourage repeat purchases; |
|
|
|
|
our ability to manage our product mix and inventory; |
|
|
|
|
wholesale diamond prices; |
|
|
|
|
consumer tastes and preferences for diamonds and fine jewelry; |
|
|
|
|
our ability to manage our operations; |
|
|
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the extent to which we provide for and pay taxes; |
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stock-based compensation expense as a result of the nature, timing and amount of stock
options granted, the underlying assumptions used in valuing these options, the estimated
rate of stock option forfeitures and other factors; |
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advertising and other marketing costs; |
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our, or our competitors, pricing and marketing strategies; |
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general economic conditions; |
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conditions or trends in the diamond and fine jewelry industry; |
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conditions or trends in the Internet and e-commerce industry; and |
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costs of expanding or enhancing our technology or websites. |
As a result of the variability of these and other factors, our operating results in future quarters
may be below the expectations of public market analysts and investors. In this event, the price of
our common stock may decline.
20
As a result of seasonal fluctuations in our net sales, our quarterly results may fluctuate and
could be below expectations.
We have experienced and expect to continue to experience seasonal fluctuations in our net sales. In
particular, a disproportionate amount of our net sales has been realized during the fourth quarter
as a result of the December holiday season, and we expect this seasonality to continue in the
future. Approximately 36%, 38% and 38% of our net sales in 2005, 2004 and 2003, respectively, were
generated during the fourth quarter of each year. In anticipation of increased sales activity
during the fourth quarter, we may incur significant additional expenses, including higher inventory
of jewelry and additional staffing in our fulfillment and customer support operations. If we were
to experience lower than expected net sales during any future fourth quarter, it would have a
disproportionately large impact on our operating results and financial condition for that year. We
also experience considerable fluctuations in net sales in periods preceding other annual occasions
such as Valentines Day and Mothers Day. In the future, our seasonal sales patterns may become
more pronounced, may strain our personnel and fulfillment activities and may cause a shortfall in
net sales as compared to expenses in a given period, which would substantially harm our business
and results of operations.
Our failure to acquire quality diamonds and fine jewelry at commercially reasonable prices would
result in higher costs and lower net sales and damage our competitive position.
If we are unable to acquire quality diamonds and fine jewelry at commercially reasonable prices,
our costs may exceed our forecasts, our gross margins and operating results may suffer and our
competitive position could be damaged. The success of our business model depends, in part, on our
ability to offer quality products to customers at prices that are below those of traditional
jewelry retailers. A majority of the worlds supply of rough diamonds is controlled by a small
number of diamond mining firms. As a result, any decisions made to restrict the supply of rough
diamonds by these firms to our suppliers could substantially impair our ability to acquire diamonds
at commercially reasonable prices, if at all. We do not currently have any direct supply
relationship with these firms nor do we expect to enter into any such relationship in the
foreseeable future. Our ability to acquire diamonds and fine jewelry is also substantially
dependent on our relationships with various suppliers. Approximately 25%, 25% and 36% of our
payments to our diamond and fine jewelry suppliers in 2005, 2004 and 2003, respectively, were made
to our top three suppliers. Our inability to maintain and expand these and other future diamond and
fine jewelry supply relationships on commercially reasonable terms or the inability of our current
and future suppliers to maintain arrangements for the supply of products sold to us on commercially
reasonable terms would substantially harm our business and results of operations.
Suppliers and manufacturers of diamonds as well as retailers of diamonds and diamond jewelry are
vertically integrated and we expect they will continue to vertically integrate their operations
either by developing retail channels for the products they manufacture or acquiring sources of
supply, including, without limitation, diamond mining operations for the products that they sell.
To the extent such vertical integration efforts are successful, some of the fragmentation in the
existing diamond supply chain could be eliminated and our ability to obtain an adequate supply of
diamonds and fine jewelry from multiple sources could be limited and our competitors may be able to
obtain diamonds at lower prices.
Our failure to meet customer expectations with respect to price would adversely affect our business
and results of operations.
Demand for our products has been highly sensitive to pricing changes. Changes in our pricing
strategies have had and may continue to have a significant impact on our net sales, gross margins
and net income. In the past, we have instituted retail price changes as part of our strategy to
optimize gross profit. We may institute similar price changes in the future. Such price changes may
not result in the optimization of gross profits. In addition, many external factors, including the
costs to acquire diamonds and precious metals and our competitors pricing and marketing
strategies, can significantly impact our pricing strategies. If we fail to meet customer
expectations with respect to price in any given period, our business and results of operations
would suffer.
21
Purchasers of diamonds and fine jewelry may not choose to shop online, which would prevent us from
increasing net sales.
The online market for diamonds and fine jewelry is significantly less developed than the online
market for books, music, toys and other consumer products. If this market does not gain widespread
acceptance, our business may suffer. Our success will depend, in part, on our ability to attract
consumers who have historically purchased diamonds and fine jewelry through traditional retailers.
Furthermore, we may have to incur significantly higher and more sustained advertising and
promotional expenditures or price our products more competitively than we currently anticipate in
order to attract additional online consumers to our websites and convert them into purchasing
customers. Specific factors that could prevent consumers from purchasing diamonds and fine jewelry
from us include:
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concerns about buying luxury products such as diamonds and fine jewelry without a
physical storefront, face-to-face interaction with sales personnel and the ability to
physically handle and examine products; |
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delivery time associated with Internet orders; |
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product offerings that do not reflect consumer tastes and preferences; |
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pricing that does not meet consumer expectations; |
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concerns about the security of online transactions and the privacy of personal information; |
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delayed shipments or shipments of incorrect or damaged products; |
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inconvenience associated with returning or exchanging purchased items; and |
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usability, functions and features of our website. |
We may not succeed in continuing to establish the Blue Nile brand, which would prevent us from
acquiring customers and increasing our net sales.
A significant component of our business strategy is the continued establishment and promotion of
the Blue Nile brand. Due to the competitive nature of the online market for diamonds and fine
jewelry, if we do not continue to establish our brand and branded products, we may fail to build
the critical mass of customers required to substantially increase our net sales. Promoting and
positioning our brand will depend largely on the success of our marketing and merchandising efforts
and our ability to provide a consistent, high quality customer experience. To promote our brand and
branded products, we have incurred and will continue to incur substantial expense related to
advertising and other marketing efforts.
A critical component of our brand promotion strategy is establishing a relationship of trust with
our customers, which we believe can be achieved by providing a high quality customer experience. In
order to provide a high quality customer experience, we have invested and will continue to invest
substantial amounts of resources in our website development and functionality, technology
infrastructure, fulfillment operations and customer service operations. Our ability to provide a
high quality customer experience is also dependent, in large part, on external factors over which
we may have little or no control, including, without limitation, the reliability and performance of
our suppliers, third-party jewelry assemblers, third-party carriers and networking vendors. During
our peak seasons, we rely on temporary employees to supplement our full-time customer service and
fulfillment employees. Temporary employees may not have the same level of commitment to our
customers as our full-time employees. If our customers are dissatisfied with the quality of the
products or the customer service they receive, or if we are unable to deliver products to our
customers in a timely manner or at all, our customers may stop purchasing products from us. We also
rely on third parties for information, including product characteristics and availability that we
present to consumers on our websites, which may, on occasion, be inaccurate. Our failure to provide
our customers with high quality customer experiences for any reason could substantially harm our
reputation and adversely impact our efforts to develop Blue Nile as a trusted brand. The failure of
our brand promotion activities could adversely affect our ability to attract new customers and
maintain customer relationships, and, as a result, substantially harm our business and results of
operations.
22
We face significant competition and may be unsuccessful in competing against current and future
competitors.
The retail jewelry industry is intensely competitive, and we expect competition in the sale of
diamonds and fine jewelry to increase and intensify in the future. Increased competition may result
in price pressure, reduced gross margins and loss of market share, any of which could substantially
harm our business and results of operations. Current and potential competitors include:
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independent jewelry stores; |
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retail jewelry store chains, such as Tiffany & Co. and Bailey Banks & Biddle; |
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other online retailers that sell jewelry, such as Amazon.com; |
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department stores, chain stores and mass retailers, such as Nordstrom and Neiman Marcus; |
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online auction sites, such as eBay; |
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catalog and television shopping retailers, such as Home Shopping Network and QVC; and |
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discount superstores and wholesale clubs, such as Costco Wholesale and Wal-Mart. |
In addition to these competitors, we may face competition from suppliers of our products that
decide to sell directly to consumers, either through physical retail outlets or through an online
store.
Many of our current and potential competitors have advantages over us, including longer operating
histories, greater brand recognition, existing customer and supplier relationships, and
significantly greater financial, marketing and other resources. In addition, traditional
store-based retailers offer consumers the ability to physically handle and examine products in a
manner that is not possible over the Internet as well as a more convenient means of returning and
exchanging purchased products.
Some of our competitors seeking to establish an online presence may be able to devote substantially
more resources to website systems development and exert more leverage over the supply chain for
diamonds and fine jewelry than we can. In addition, larger, more established and better capitalized
entities may acquire, invest or partner with traditional and online competitors as use of the
Internet and other online services increases. Our online competitors can duplicate many of the
products, services and content we offer, which could harm our business and results of operations.
In order to increase net sales and to sustain or increase profitability, we must attract customers
in a cost-effective manner.
Our success depends on our ability to attract customers in a cost-effective manner. We have
relationships with providers of online services, search engines, directories and other websites and
e-commerce businesses to provide content, advertising banners and other links that direct customers
to our websites. We rely on these relationships as significant sources of traffic to our websites.
Our agreements with these providers generally have terms of one year or less. If we are unable to
develop or maintain these relationships on acceptable terms, our ability to attract new customers
would be harmed. In addition, many of the parties with which we have online-advertising
arrangements could provide advertising services to other online or traditional retailers, including
retailers with whom we compete. As competition for online advertising has increased, the cost for
these services has also increased. A significant increase in the cost of the marketing vehicles
upon which we rely could adversely impact our ability to attract customers in a cost-effective
manner.
We rely exclusively on the sale of diamonds and fine jewelry for our net sales, and demand for
these products could decline.
Luxury products, such as diamonds and fine jewelry, are discretionary purchases for consumers. The
volume and dollar value of such purchases may significantly decrease during economic downturns. The
success of our business depends in part on many macroeconomic factors, including employment levels,
salary levels, tax rates and credit availability, all of which affect consumer spending and
disposable income. Any reduction in consumer spending or disposable income may affect us more
significantly than companies in other industries.
Our net sales and results of operations are highly dependent on the demand for diamonds and diamond
jewelry, particularly engagement rings. Should prevailing consumer tastes for diamonds decline or
customs with respect to engagement shift away from the presentation of diamond jewelry, demand for
our products would decline and our business and results of operations would be substantially
harmed.
23
The significant cost of diamonds results in large part from their scarcity. From time to time,
attempts have been made to develop and market synthetic stones and gems to compete in the market
for diamonds and diamond jewelry. We expect such efforts to continue in the future. If any such
efforts are successful in creating widespread demand for alternative diamond products, demand and
price levels for our products would decline and our business and results of operations would be
substantially harmed.
In recent years, increasing attention has been focused on conflict diamonds, which are diamonds
extracted from war-torn regions in Africa and sold by rebel forces to fund insurrection. Diamonds
are, in some cases, also believed to be used to fund terrorist activities in some regions. Blue
Nile supports the Kimberley Process, an international initiative intended to ensure diamonds are
not illegally traded to fund conflict. As part of this initiative, we require our diamond suppliers
to sign a statement acknowledging compliance with the Kimberley Process. In addition, Blue Nile
prohibits the use of its business or services for money laundering or terrorist financing in
accordance with the USA Patriot Act. Through these and other efforts, we believe that the suppliers
from whom we purchase our diamonds seek to exclude conflict diamonds from their inventories.
However, we cannot independently determine whether any diamond we offer was extracted from these
regions. Current efforts to increase consumer awareness of this issue and encourage legislative
response could adversely affect consumer demand for diamonds.
Consumer confidence is dependent, in part, on the certification of our diamonds by independent
laboratories. A decline in the quality of the certifications provided by these laboratories could
adversely impact demand for our products. Additionally, a decline in consumer confidence in the
credibility of independent diamond grading certifications could adversely impact demand for our
diamond products.
Our jewelry offerings must reflect the tastes and preferences of a wide range of consumers whose
preferences may change regularly. Our strategy has been to offer primarily what we consider to be
classic styles of fine jewelry, but there can be no assurance that these styles will continue to be
popular with consumers in the future. If the styles we offer become less popular with consumers and
we are not able to adjust our product offerings in a timely manner, our net sales may decline or
fail to meet expected levels.
We rely on our suppliers, third-party carriers and third-party jewelers as part of our fulfillment
process, and these third parties may fail to adequately serve our customers.
In general, we rely on our suppliers to promptly ship us diamonds ordered by our customers. Any
failure by our suppliers to sell and ship such products to us in a timely manner will have an
adverse effect on our ability to fulfill customer orders and harm our business and results of
operations. Our suppliers, in turn, rely on third-party carriers to ship diamonds to us, and in
some cases, directly to our customers. We also rely on third-party carriers for product shipments
to our customers. We and our suppliers are therefore subject to the risks, including employee
strikes and inclement weather, associated with such carriers abilities to provide delivery
services to meet our and our suppliers shipping needs. In addition, for some customer orders we
rely on third-party jewelers to assemble the product. Our suppliers, third-party carriers or
third-party jewelers failure to deliver products to us or our customers in a timely manner or to
otherwise adequately serve our customers would damage our reputation and brand and substantially
harm our business and results of operations.
If our fulfillment operations are interrupted for any significant period of time, our business and
results of operations would be substantially harmed.
Our success depends on our ability to successfully receive and fulfill orders and to promptly and
securely deliver our products to our customers. Most of our inventory management, jewelry assembly,
packaging, labeling and product return processes are performed in a single fulfillment center. This
facility is susceptible to damage or interruption from human error, fire, flood, power loss,
telecommunications failure, terrorist attacks, acts of war, break-ins, earthquake and similar
events. We do not presently have a formal disaster recovery plan and our business interruption
insurance may be insufficient to compensate us for losses that may occur in the event operations at
our fulfillment center are interrupted. We have expanded and may further expand our existing
fulfillment center in the near future. Any interruptions in our fulfillment center operations for
any significant period of time, including interruptions resulting from the expansion of our
existing facility, could damage our reputation and brand and substantially harm our business and
results of operations.
24
We face the risk of theft of our products from inventory or during shipment.
We may experience theft of our products while they are being held in our fulfillment center or
during the course of shipment to our customers by third-party shipping carriers. We have taken
steps to prevent such theft and we maintain insurance to cover losses resulting from theft.
However, if security measures fail, losses exceed our insurance coverage or we are not able to
maintain insurance at a reasonable cost, we could incur significant losses from theft, which would
substantially harm our business and results of operations.
Our failure to protect confidential information of our customers and our network against security
breaches could damage our reputation and brand and substantially harm our business and results of
operations.
A significant barrier to online commerce and communications is the secure transmission of
confidential information over public networks. Our failure to prevent these security breaches could
damage our reputation and brand and substantially harm our business and results of operations.
Currently, a majority of our sales are billed to our customers credit card accounts directly. We
rely on encryption and authentication technology licensed from third parties to effect secure
transmission of confidential information, including credit card numbers. Advances in computer
capabilities, human errors, new discoveries in the field of cryptography or other developments may
result in a compromise or breach of the technology used by us to protect customer transaction data.
Any such compromise of our security could damage our reputation and brand and expose us to a risk
of loss or litigation and possible liability, which would substantially harm our business, and
results of operations. In addition, anyone who is able to circumvent our security measures could
misappropriate proprietary information or cause interruptions in our operations. We may need to
expend significant resources to protect against security breaches or to address problems caused by
breaches.
Our failure to effectively manage the growth in our operations may prevent us from successfully
expanding our business.
We have experienced, and in the future may experience, rapid growth in operations, which has
placed, and could continue to place, a significant strain on our operations, services, internal
controls and other managerial, operational and financial resources. To effectively manage future
expansion, we will need to maintain our operational and financial systems and managerial controls
and procedures, which include the following processes:
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transaction-processing and fulfillment; |
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inventory management; |
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customer support; |
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management of multiple supplier relationships; |
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operational, financial and managerial controls; |
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reporting procedures; |
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recruitment, training, supervision, retention and management of our employees; and |
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technology operations. |
If we are unable to manage future expansion, our ability to provide a high quality customer
experience could be harmed, which would damage our reputation and brand and substantially harm our
business and results of operations.
The success of our business may depend on our ability to successfully expand our product offerings.
Our ability to significantly increase our net sales and maintain and increase our profitability may
depend on our ability to successfully expand our product lines beyond our current offerings. If we
offer a new product category that is not accepted by consumers, the Blue Nile brand and reputation
could be adversely affected, our net sales may fall short of expectations and we may incur
substantial expenses that are not offset by increased net sales. Expansion of our product lines may
also strain our management and operational resources.
25
If we are unable to accurately manage our inventory of fine jewelry, our reputation and results of
operations could suffer.
Except for loose diamonds, substantially all of the fine jewelry we sell is from our physical
inventory. Changes in consumer tastes for these products subject us to significant inventory risks.
The demand for specific products can change between the time we order an item and the date we
receive it. If we under-stock one or more of our products, we may not be able to obtain additional
units in a timely manner on terms favorable to us, if at all, which would damage our reputation and
substantially harm our business and results of operations. In addition, if demand for our products
increases over time, we may be forced to increase inventory levels. If one or more of our products
does not achieve widespread consumer acceptance, we may be required to take significant inventory
markdowns, or may not be able to sell the product at all, which would substantially harm our
results of operations.
If the single facility where substantially all of our computer and communications hardware is
located fails, our business, results of operations and financial condition would be harmed.
Our ability to successfully receive and fulfill orders and to provide high quality customer service
depends in part on the efficient and uninterrupted operation of our computer and communications
systems. Substantially all of the computer hardware necessary to operate our websites is located at
a single leased facility. Our systems and operations are vulnerable to damage or interruption from
human error, fire, flood, power loss, telecommunications failure, terrorist attacks, acts of war,
break-ins, earthquake and similar events. We do not presently have redundant systems in multiple
locations or a formal disaster recovery plan, and our business interruption insurance may be
insufficient to compensate us for losses that may occur. In addition, our servers are vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions, which could lead to
interruptions, delays, loss of critical data, the inability to accept and fulfill customer orders
or the unauthorized disclosure of confidential customer data. The occurrence of any of the
foregoing risks could substantially harm our business and results of operations.
Repurchases of our common stock may not prove to be the best use of our cash resources.
On February 2, 2006, our board of directors authorized the repurchase of up to $100 million of Blue
Nile, Inc. common stock during the subsequent 24 month period following the approval date of such
repurchases. On July 27, 2006, our board of directors authorized the repurchase of up to an
additional $50 million of Blue Nile, Inc. common stock during the subsequent 24 month period
following the approval date of such repurchase. During the second quarter of 2006, we repurchased
approximately 1.3 million shares of our common stock for approximately $40.3 million. These
repurchases and any repurchases we may make in the future may not prove to be at optimal prices and
our use of cash for the stock repurchase program may not prove to be the best use of our cash
resources.
We have incurred significant operating losses in the past and may not be able to sustain
profitability in the future.
We experienced significant operating losses in each quarter from our inception in 1999 through the
second quarter of 2002. As a result, our business has a limited record of profitability and may not
continue to be profitable or increase profitability. If we are unable to acquire diamonds and fine
jewelry at commercially reasonable prices, if net sales decline or if our expenses otherwise exceed
our expectations, we may not be able to sustain or increase profitability on a quarterly or annual
basis.
We rely on the services of our key personnel, any of whom would be difficult to replace.
We rely upon the continued service and performance of key technical, fulfillment and senior
management personnel. If we lose any of these personnel, our business could suffer. Competition for
qualified personnel in our industry is intense. We believe that our future success will depend on
our continued ability to attract, hire and retain key employees, including Mark Vadon, our Chief
Executive Officer, on whom we rely for management of our company, development of our business
strategy and management of our strategic relationships. Other than for Mr. Vadon, we do not have
key person life insurance policies covering any of our employees.
26
Failure to adequately protect our intellectual property could substantially harm our business and
results of operations.
We rely on a combination of patent, trademark, trade secret and copyright law and contractual
restrictions to protect our intellectual property. These afford only limited protection. Despite
our efforts to protect our proprietary rights, unauthorized parties have attempted and may in the
future attempt to copy aspects of our website features and functionality or to obtain and use
information that we consider as proprietary, such as the technology used to operate our websites,
our content and our trademarks. We have registered Blue Nile, bluenile.com, the BN logo and the
Blue Nile BN stylized logo as trademarks in the United States and in certain other countries. Our
competitors have, and other competitors may, adopt service names similar to ours, thereby impeding
our ability to build brand identity and possibly leading to customer confusion. In addition, there
could be potential trade name or trademark infringement claims brought by owners of other
registered trademarks or trademarks that incorporate variations of the term Blue Nile or our other
trademarks. Any claims or customer confusion related to our trademarks could damage our reputation
and brand and substantially harm our business and results of operations.
We currently hold the bluenile.com, bluenile.co.uk and bluenile.ca Internet domain names and
various other related domain names. Domain names generally are regulated by Internet regulatory
bodies. If we lose the ability to use a domain name in a particular country, we would be forced to
either incur significant additional expenses to market our products within that country, including
the development of a new brand and the creation of new promotional materials and packaging, or
elect not to sell products in that country. Either result could substantially harm our business and
results of operations. The regulation of domain names in the United States and in foreign countries
is subject to change. Regulatory bodies could establish additional top-level domains, appoint
additional domain name registrars or modify the requirements for holding domain names. As a result,
we may not be able to acquire or maintain the domain names that utilize the name Blue Nile in all
of the countries in which we currently or intend to conduct business.
Litigation or proceedings before the U.S. Patent and Trademark Office or similar international
regulatory agencies may be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets and domain names and to determine the validity and scope of the
proprietary rights of others. Any litigation or adverse priority proceeding could result in
substantial costs and diversion of resources and could substantially harm our business and results
of operations. We sell and intend to increasingly sell our products internationally, and the laws
of many countries do not protect our proprietary rights to as great an extent as do the laws of the
United States.
Assertions by third parties of infringement by us of their intellectual property rights could
result in significant costs and substantially harm our business and results of operations.
Third parties have, and may in the future, assert that we have infringed their technology or other
intellectual property rights. We cannot predict whether any such assertions or claims arising from
such assertions will substantially harm our business and results of operations. If we are forced to
defend against any infringement claims, whether they are with or without merit or are determined in
our favor, we may face costly litigation, diversion of technical and management personnel or
product shipment delays. Furthermore, the outcome of a dispute may be that we would need to develop
non-infringing technology or enter into royalty or licensing agreements. Royalty or licensing
agreements, if required, may be unavailable on terms acceptable to us, or at all.
Increased product returns and the failure to accurately predict product returns could substantially
harm our business and results of operations.
We offer our customers an unconditional 30-day return policy that allows our customers to return
most products if they are not satisfied for any reason. We make allowances for product returns in
our financial statements based on historical return rates. Actual merchandise returns are difficult
to predict and may differ from our allowances. Any significant increase in merchandise returns
above our allowances would substantially harm our business and results of operations.
27
Interruptions to our systems that impair customer access to our websites would damage our
reputation and brand and substantially harm our business and results of operations.
The satisfactory performance, reliability and availability of our websites, transaction processing
systems and network infrastructure are critical to our reputation and our ability to attract and
retain customers and to maintain adequate customer service levels. Any future systems interruptions
or downtime or technical difficulties that result in the unavailability of our websites or reduced
order fulfillment performance could result in negative publicity, damage our reputation and brand
and cause our business and results of operations to suffer. We may be susceptible to such
disruptions in the future. We may also experience temporary system interruptions for a variety of
other reasons in the future, including power failures, software or human errors or an overwhelming
number of visitors trying to reach our websites during periods of strong seasonal demand or
promotions. Because we are dependent in part on third parties for the implementation and
maintenance of certain aspects of our systems and because some of the causes of system
interruptions may be outside of our control, we may not be able to remedy such interruptions in a
timely manner, or at all.
We may be unsuccessful in further expanding our operations internationally.
To date, we have made limited international sales, but we have recently expanded our product
offerings and marketing and sales efforts in the United Kingdom and Canada and anticipate
continuing to expand our international sales and operations in the future either by expanding local
versions of our website for foreign markets or through acquisitions or alliances with third
parties. Any international expansion plans we choose to undertake will require management attention
and resources and may be unsuccessful. We have minimal experience in selling our products in
international markets and in conforming to the local cultures, standards or policies necessary to
successfully compete in those markets. We do not currently have any overseas fulfillment or
distribution or server facilities, and outside of the United Kingdom and Canada, we have very
limited web content localized for foreign markets and we cannot be certain that we will be able to
expand our global presence if we choose to further expand internationally. In addition, we may have
to compete with retailers that have more experience with local markets. Our ability to expand and
succeed internationally may also be limited by the demand for our products and the adoption of
electronic commerce in these markets. Different privacy, censorship and liability standards and
regulations and different intellectual property laws in foreign countries may prohibit expansion
into such markets or cause our business and results of operations to suffer.
Our current and future international operations may also fail to succeed due to other risks
inherent in foreign operations, including:
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the need to develop new supplier and jeweler relationships; |
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international regulatory requirements and tariffs; |
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difficulties in staffing and managing foreign operations; |
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longer payment cycles from credit card companies; |
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greater difficulty in accounts receivable collection; |
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our reliance on third-party carriers for product shipments to our customers; |
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risk of theft of our products during shipment; |
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potential adverse tax consequences; |
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foreign currency exchange risk; |
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lack of infrastructure to adequately conduct electronic commerce transactions or fulfillment operations; |
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price controls or other restrictions on foreign currency; |
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difficulties in obtaining export and import licenses; |
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increased payment risk and greater difficulty addressing credit card fraud; |
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consumer and data protection laws; |
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lower levels of adoption or use of the Internet; and |
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geopolitical events, including war and terrorism. |
Our failure to successfully expand our international operations may cause our business and results
of operations to suffer.
28
Our failure to rapidly respond to technological change could result in our services or systems
becoming obsolete and substantially harm our business and results of operations.
As the Internet and online commerce industries evolve, we may be required to license emerging
technologies useful in our business, enhance our existing services, develop new services and
technologies that address the increasingly sophisticated and varied needs of our prospective
customers and respond to technological advances and emerging industry standards and practices on a
cost-effective and timely basis. We may not be able to successfully implement new technologies or
adapt our websites, proprietary technologies and transaction-processing systems to customer
requirements or emerging industry standards. Our failure to do so would substantially harm our
business and results of operations. We may be required to upgrade existing technologies or business
applications, or implement new technologies or business applications. Our results of operations may
be affected by the timing, effectiveness, costs and successful implementation of any upgrades or
changes to our systems and infrastructure.
If use of the Internet, particularly with respect to online commerce, does not continue to increase
as rapidly as we anticipate, our business will be harmed.
Our future net sales and profits are substantially dependent upon the continued growth in the use
of the Internet as an effective medium of business and communication by our target customers.
Internet use may not continue to develop at historical rates and consumers may not continue to use
the Internet and other online services as a medium for commerce. Highly publicized failures by some
online retailers to meet consumer demands could result in consumer reluctance to adopt the Internet
as a means for commerce, and thereby damage our reputation and brand and substantially harm our
business and results of operations.
In addition, the Internet may not be accepted as a viable long-term commercial marketplace for a
number of reasons, including:
|
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|
actual or perceived lack of security of information or privacy protection; |
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|
possible disruptions, computer viruses, spyware, phishing, attacks or other damage to
the Internet servers, service providers, network carriers and Internet companies or to
users computers; and |
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|
excessive governmental regulation. |
Our success will depend, in large part, upon third parties maintaining the Internet infrastructure
to provide a reliable network backbone with the speed, data capacity, security and hardware
necessary for reliable Internet access and services. Our business, which relies on a contextually
rich website that requires the transmission of substantial data, is also significantly dependent
upon the availability and adoption of broadband Internet access and other high speed Internet
connectivity technologies.
We rely on our relationship with a third-party consumer credit company to offer financing for the
purchase of our products.
The purchase of the diamond and fine jewelry products we sell is a substantial expense for many of
our customers. We currently rely on our relationship with a single financial institution to provide
financing to our customers. If we are unable to maintain this or other similar arrangements, we may
not be able to offer financing alternatives to our customers, which may reduce demand for our
products and substantially harm our business and results of operations.
29
We may undertake acquisitions to expand our business, which may pose risks to our business and
dilute the ownership of our existing stockholders.
A key component of our business strategy includes strengthening our competitive position and
refining the customer experience on our websites through internal development. However, from time
to time, we may selectively pursue acquisitions of businesses, technologies or services.
Integrating any newly acquired businesses, technologies or services may be expensive and
time-consuming. To finance any acquisitions, it may be necessary for us to raise additional funds
through public or private financings. Additional funds may not be available on terms that are
favorable to us, and, in the case of equity financings, would result in dilution to our
stockholders. If we do complete any acquisitions, we may be unable to operate such acquired
businesses profitably or otherwise implement our strategy successfully. If we are unable to
integrate any newly acquired entities or technologies effectively, our business and results of
operations could suffer. The time and expense associated with finding suitable and compatible
businesses, technologies or services could also disrupt our ongoing business and divert our
managements attention. Future acquisitions by us could also result in large and immediate
write-offs or assumptions of debt and contingent liabilities, any of which could substantially harm
our business and results of operations. We have no current plans, agreements or commitments with
respect to any such acquisitions.
Our net sales may be negatively affected if we are required to charge taxes on purchases.
We do not collect or have imposed upon us sales or other taxes related to the products we sell,
except for certain corporate level taxes, sales taxes with respect to purchases by customers
located in the State of Washington, and certain taxes required to be collected on sales to
customers outside of the United States of America. However, one or more states or foreign countries
may seek to impose sales or other tax collection obligations on us in the future. A successful
assertion by one or more states or foreign countries that we should be collecting sales or other
taxes on the sale of our products could result in substantial tax liabilities for past sales,
discourage customers from purchasing products from us, decrease our ability to compete with
traditional retailers or otherwise substantially harm our business and results of operations.
Currently, decisions of the U.S. Supreme Court restrict the imposition of obligations to collect
state and local sales and use taxes with respect to sales made over the Internet. However,
implementation of the restrictions imposed by these Supreme Court decisions is subject to
interpretation by state and local taxing authorities. While we believe that these Supreme Court
decisions currently restrict state and local taxing authorities outside the State of Washington
from requiring us to collect sales and use taxes from purchasers located within their
jurisdictions, taxing authorities outside the State of Washington could disagree with our
interpretation of these decisions. Moreover, a number of states, as well as the U.S. Congress, have
been considering various initiatives that could limit or supersede the Supreme Courts position
regarding sales and use taxes on Internet sales. If any state or local taxing jurisdiction were to
disagree with our interpretation of the Supreme Courts current position regarding state and local
taxation of Internet sales, or if any of these initiatives were to address the Supreme Courts
constitutional concerns and result in a reversal of its current position, we could be required to
collect sales and use taxes from purchasers located in states other than Washington. The imposition
by state and local governments of various taxes upon Internet commerce could create administrative
burdens for us and could decrease our future net sales.
Government regulation of the Internet and e-commerce is evolving and unfavorable changes could
substantially harm our business and results of operations.
We are not currently subject to direct federal, state or local regulation other than regulations
applicable to businesses generally or directly applicable to retailing and online commerce.
However, as the Internet becomes increasingly popular, it is possible that laws and regulations may
be adopted with respect to the Internet, which may impede the growth of the Internet or other
online services. These regulations and laws may cover issues such as taxation, advertising,
intellectual property rights, freedom of expression, pricing, restrictions on imports and exports,
customs, tariffs, information security, privacy, data protection, content, distribution, electronic
contracts and other communications, the provision of online payment services, broadband residential
Internet access and the characteristics and quality of products and services. Further, the growth
of online commerce may prompt calls for more stringent consumer protection laws. Several states
have proposed legislation to limit the uses of personal user information gathered online or require
online companies to establish privacy policies. The Federal Trade Commission has also initiated
action against at least one online company regarding the manner in which personal information is
collected from users and provided to third parties. The adoption of additional privacy or consumer
protection laws could create uncertainty in Internet usage and reduce the demand for our products
and services.
30
We are not certain how our business may be affected by the application of existing laws governing
issues such as property ownership, copyrights, personal property, encryption and other intellectual
property issues, taxation, libel, obscenity, qualification to do business and export or import
matters. The vast majority of these laws were adopted prior to the advent of the Internet. As a
result, they do not contemplate or address the unique issues of the Internet and related
technologies. Changes in laws intended to address these issues could create uncertainty for those
conducting online commerce. This uncertainty could reduce demand for our products and services or
increase the cost of doing business as a result of litigation costs or increased fulfillment costs
and may substantially harm our business and results of operations.
Our failure to address risks associated with payment methods, credit card fraud and other consumer
fraud could damage our reputation and brand and may cause our business and results of operations to
suffer.
Under current credit card practices, we are liable for fraudulent credit card transactions because
we do not obtain a cardholders signature. We do not currently carry insurance against this risk.
To date, we have experienced minimal losses from credit card fraud, but we face the risk of
significant losses from this type of fraud as our net sales increase and as we expand
internationally. Our failure to adequately control fraudulent credit card transactions could damage
our reputation and brand and substantially harm our business and results of operations.
Additionally, for certain payment transactions, including credit and debit cards, we pay
interchange and other fees, which may increase over time and raise our operating costs and lower
our operating margins.
We may need to implement additional finance and accounting systems, procedures and controls as we
grow our business and organization and to satisfy new reporting requirements.
As a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002 and
the related rules and regulations of the SEC, including expanded disclosures and accelerated
reporting requirements and more complex accounting rules. Compliance with Section 404 of the
Sarbanes-Oxley Act of 2002 and other requirements may increase our costs and require additional
management time and resources. We may need to continue to implement additional finance and
accounting systems, procedures and controls to satisfy new reporting requirements. If our internal
control over financial reporting is determined to be ineffective, investors could lose confidence
in the reliability of our financial reporting, which could adversely affect our stock price.
31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Repurchases
Issuer Purchases of Equity Securities
(Dollars in thousands except per share amounts)
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|
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Approximate |
|
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Total Number of |
|
Dollar Value of |
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|
|
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Shares Purchased as |
|
Shares that May |
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Part of Publicly |
|
Yet Be Purchased |
|
|
Total Number of |
|
Average Price Paid |
|
Announced Plans or |
|
Under the Plans or |
|
|
Shares Purchased |
|
per Share |
|
Programs |
|
Programs |
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|
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|
(1) |
April 3, 2006 through April 30, 2006
|
|
|
47,300 |
|
|
$ |
34.22 |
|
|
|
47,300 |
|
|
$ |
92,888 |
|
May 1, 2006 through May 28, 2006
|
|
|
840,109 |
|
|
$ |
32.29 |
|
|
|
840,109 |
|
|
$ |
65,757 |
|
May 29, 2006 through July 2, 2006
|
|
|
380,838 |
|
|
$ |
30.32 |
|
|
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380,838 |
|
|
$ |
54,208 |
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(1) |
|
On February 2, 2006, the board of directors authorized the repurchase of up to $100 million
of the Companys common stock within the 24 month period following the approval date of such
repurchase. Such repurchase was announced on February 7, 2006. On July 27, 2006, the board of
directors authorized the repurchase of up to an additional $50 million of the Companys common
stock within the 24 month period following the approval date of such repurchase. Such
repurchase authorization was announced on August 1, 2006. The shares may be repurchased from
time to time in open market transactions or in negotiated transactions off the market. The
timing and amount of any shares repurchased is determined by the Companys management based on
its evaluation of market conditions and other factors. Repurchases may also be made under a
Rule 10b5-1 plan, which would permit shares to be repurchased when the Company might otherwise
be precluded from doing so under insider trading laws. |
32
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of the Company held on May 23, 2006, the stockholders elected
two directors to serve until the 2009 Annual Meeting of Stockholders and ratified the Audit
Committees selection of Deloitte & Touche LLP to serve as the Companys independent registered
public accounting firm for fiscal 2006. The terms of the other members of the Companys Board of
Directors, W. Eric Carlborg, Diane Irvine, Joseph Jimenez, Brian McAndrews, Joanna Strober and Mark
Vadon, continued after the Annual Meeting of Stockholders. Proxies for the meeting were solicited
pursuant to Section 14(a) of the Securities Exchange Act of 1934, as amended.
The table below shows the results of the stockholders voting:
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Votes Withheld/ |
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Votes in Favor |
|
Votes Against |
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Abstentions |
Proposal 1: |
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Election of two directors for
three-year terms expiring at
the 2009 annual meeting of
stockholders: |
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Mary Alice Taylor |
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16,707,391 |
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NA |
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278,511 |
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Anne Saunders |
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16,905,863 |
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NA |
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80,039 |
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Proposal 2: |
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Ratification of the
selection of Deloitte &
Touche LLP as the
Companys independent
registered public
accounting firm for the
fiscal year ending
December 31, 2006 |
|
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16,904,689 |
|
|
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77,155 |
|
|
|
4,058 |
|
33
Item 6. Exhibits
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|
Exhibit |
|
|
Number |
|
Description |
3.1(1)
|
|
Amended and Restated Certificate of Incorporation of Blue Nile, Inc. |
|
|
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3.2(2)
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Amended and Restated Bylaws of Blue Nile, Inc. |
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|
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4.1
|
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Reference is made to Exhibits 3.1 and 3.2. |
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4.2(3)
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Specimen Stock Certificate. |
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4.3(2)
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Amended and Restated Investor Rights Agreement dated June 29, 2001 by and between Blue
Nile, Inc. and certain holders of Blue Nile, Inc.s preferred stock. |
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10.1(4)
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Amended and Restated 2004 Non-Employee Directors Stock Option Plan. |
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10.2(5)
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Commercial Lease, dated July 21, 2006, between Blue Nile, Inc. and Gull Industries Inc. |
|
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10.3(6)
|
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Description of Executive Officer Cash Incentive Plan. |
|
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10.4(6)
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Description of Director Compensation. |
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|
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31.1(7)
|
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Certification of Chief Executive Officer Required Under Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended. |
|
|
|
31.2(7)
|
|
Certification of Principal Financial Officer Required Under Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended. |
|
|
|
32.1(7)*
|
|
Certification of Chief Executive Officer Required Under Rule 13a-14(b) or Rule
15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section
1350. |
|
|
|
32.2(7)*
|
|
Certification of Principal Financial Officer Required Under Rule 13a-14(b) or Rule
15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section
1350. |
|
|
|
(1) |
|
Previously filed as Exhibit 3.1 to Blue Nile, Inc.s Form 10-Q for the
quarterly period ended July 4, 2004 (No. 000-50763), as filed with the
Securities and Exchange Commission on August 6, 2004, and incorporated
by reference herein. |
|
(2) |
|
Previously filed as the like numbered exhibit to Blue Nile, Inc.s
Registration Statement on Form S-1 (No. 333-113494), as filed with the
Securities and Exchange Commission on March 11, 2004, as amended, and
incorporated by reference herein. |
|
(3) |
|
Previously filed as exhibit 4.2 to Blue Nile, Inc.s Registration
Statement on Form S-1/ A (No. 333-113494), as filed with the
Securities and Exchange Commission on May 4, 2004, as amended, and
incorporated by reference herein. |
|
(4) |
|
Previously filed as the like numbered exhibit to Blue Nile, Inc.s
Form 8-K, as filed with the Securities and Exchange Commission on June
19, 2006, and incorporated by reference herein. |
|
(5) |
|
Previously filed as Exhibit 10.1 to Blue Nile, Inc.s Form 8-K, as
filed with the Securities and Exchange Commission on July 27, 2006,
and incorporated by reference herein. |
|
(6) |
|
Previously described under Item 1.01 of Blue Nile, Inc.s Form 8-K as
filed with the Securities and Exchange Commission on June 19, 2006,
and incorporated by reference herein. |
|
(7) |
|
Filed herewith. |
|
* |
|
The certifications attached as Exhibits 32.1 and 32.2 accompany this
quarterly report on Form 10-Q pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by Blue
Nile, Inc. for purposes of Section 18 of the Securities Exchange Act
of 1934, as amended. |
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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BLUE NILE, INC. |
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Registrant |
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Date: August 9, 2006 |
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/s/ Diane M. Irvine |
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Diane M. Irvine |
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Chief Financial Officer |
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(Principal Financial Officer and Duly Authorized Officer) |
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35
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Description |
3.1(1)
|
|
Amended and Restated Certificate of Incorporation of Blue Nile, Inc. |
|
|
|
3.2(2)
|
|
Amended and Restated Bylaws of Blue Nile, Inc. |
|
|
|
4.1
|
|
Reference is made to Exhibits 3.1 and 3.2. |
|
|
|
4.2(3)
|
|
Specimen Stock Certificate. |
|
|
|
4.3(2)
|
|
Amended and Restated Investor Rights Agreement dated June 29, 2001 by and between Blue
Nile, Inc. and certain holders of Blue Nile, Inc.s preferred stock. |
|
|
|
10.1(4)
|
|
Amended and Restated 2004 Non-Employee Directors Stock Option Plan. |
|
|
|
10.2(5)
|
|
Commercial Lease, dated July 21, 2006, between Blue Nile, Inc. and Gull Industries Inc. |
|
|
|
10.3(6)
|
|
Description of Executive Officer Cash Incentive Plan. |
|
|
|
10.4(6)
|
|
Description of Director Compensation. |
|
|
|
31.1(7)
|
|
Certification of Chief Executive Officer Required Under Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended. |
|
|
|
31.2(7)
|
|
Certification of Principal Financial Officer Required Under Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended. |
|
|
|
32.1(7)*
|
|
Certification of Chief Executive Officer Required Under Rule 13a-14(b) or Rule
15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section
1350. |
|
|
|
32.2(7)*
|
|
Certification of Principal Financial Officer Required Under Rule 13a-14(b) or Rule
15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section
1350. |
|
|
|
(1) |
|
Previously filed as Exhibit 3.1 to Blue Nile, Inc.s Form 10-Q for the
quarterly period ended July 4, 2004 (No. 000-50763), as filed with the
Securities and Exchange Commission on August 6, 2004, and incorporated
by reference herein. |
|
(2) |
|
Previously filed as the like numbered exhibit to Blue Nile, Inc.s
Registration Statement on Form S-1 (No. 333-113494), as filed with the
Securities and Exchange Commission on March 11, 2004, as amended, and
incorporated by reference herein. |
|
(3) |
|
Previously filed as exhibit 4.2 to Blue Nile, Inc.s Registration
Statement on Form S-1/ A (No. 333-113494), as filed with the
Securities and Exchange Commission on May 4, 2004, as amended, and
incorporated by reference herein. |
|
(4) |
|
Previously filed as the like numbered exhibit to Blue Nile, Inc.s
Form 8-K, as filed with the Securities and Exchange Commission on June
19, 2006, and incorporated by reference herein. |
|
(5) |
|
Previously filed as Exhibit 10.1 to Blue Nile, Inc.s Form 8-K, as
filed with the Securities and Exchange Commission on July 27, 2006,
and incorporated by reference herein. |
|
(6) |
|
Previously described under Item 1.01 of Blue Nile, Inc.s Form 8-K as
filed with the Securities and Exchange Commission on June 19, 2006,
and incorporated by reference herein. |
|
(7) |
|
Filed herewith. |
|
* |
|
The certifications attached as Exhibits 32.1 and 32.2 accompany this
quarterly report on Form 10-Q pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by Blue
Nile, Inc. for purposes of Section 18 of the Securities Exchange Act
of 1934, as amended. |
36