Sometimes it pays to read.

In my last article on The Sportsman's Guide (NASDAQ:SGDE), I pointed out that one of my concerns was the number of stock options being granted. That number had been going down, which was good, but still bore watching. After the 2004 annual report was released, but before I had read it, a Foolish reader alerted me to the fact that my favorite company had granted 491,000 stock options in 2004, a 168% increase over the previous year. Well, I read the 10-K, cover to cover, followed by the proxy statement. He was right: 491,000 options.

For a company with 4.7 million shares outstanding.

Granted options were 10% of the total number of shares. Ten percent! (All numbers in this article discuss 2004 totals and thus are pre-split values, for comparability purposes. A 3-to-2 split occurred in mid-April.)

The company, which sells outdoors gear, also spent $5.7 million to buy back just under 290,000 shares. This covered the 194,000 options exercised in 2004 while leaving some shares in the treasury to cover further exercised options. That uses shareholders' money, by the way, because purchasing treasury stock restricts retained earnings, part of shareholder equity. The stock purchased is given right back out when options are exercised. The net result is a transfer of shareholder equity to option holders.

At the end of 2004, there were over 1.34 million total options outstanding, of which almost half were exercisable. All of these appear to be in the money -- exercising them would represent a 28% dilution.

What really bothers me, though, is that the company wants to grant more. The proxy statement proposes another stock option plan, the "2005 Plan," which would authorize 600,000 more stock options. If all of these are granted, along with the remaining options from the 2004 plan, there would be over 2,000,000 options outstanding for a total dilution of 43%!

One of any investor's major red flags about a company should be excessive granting of stock options. What happened in 2004 and will likely happen this year, assuming the 2005 plan is passed, should raise warnings in the mind of any serious investor in this company. It did in mine.

If you are a shareholder of this otherwise fine company, I strongly recommend that you vote against the 2005 plan and any other action to shift value away from shareholders. The annual meeting is May 6. Vote before then. Never imagine that the small shareholder cannot have a say in what happens at the company. If enough vote against it, management and the board might actually get the message.

In my previous article, CEO Greg Binkley was noted as saying he wanted to continue to improve shareholder value in 2005. With a potential 43% dilution of shareholder value on his hands from all the options granted or planned, he has a huge mountain to climb.

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Fool contributor Jim Mueller no longer owns shares of Sportsman's Guide.