Enjoying the boom of what has proven to be a particularly vigorous boom/bust cycle,


(KEM) - Get Report

is on a roll. In fact, to hear its advocates tell it, the company's only challenge may be keeping up with all the orders flooding in from telecom and computer hardware manufacturers. We should all be so lucky.

But Kemet is more than just another

hot tech stock, it is also an insider sleuth's dream come true. Insider sales, accelerated options vesting schedules, zero-cost collars -- they're all here. In fact there are things afoot at Kemet that we've not seen before. But first the nuts and bolts.

In late October through the end of November, five Kemet insiders sold a combined 270,575 shares, at prices ranging from 30 11/16 per share to 37 per share. In his largest sale to date, Co-CFO D. Ray Cash sold 82,275 shares. President and COO Charles Culbertson II sold 36,000 shares, reducing his actionable position (exercisable options plus common stock) by more than 40%. Also among the sellers were Harris Crowley, senior vice president, technology & engineering, and David Maguire, chairman and CEO.

Now, it's no great surprise that Kemet insiders took some profits given the stock's dramatic and long-awaited run-up. It is a bit curious, perhaps, that they should have done so at year-end, rather than wait for the new year, but even this might be overlooked given the stock's performance. The insider sales are just the beginning, however.

This is the kind of thing you can see if you just cruise the


filings. But most of the insider activity at Kemet doesn't show up in a simple scan of the SEC filings. Take the case of the one insider who also entered into a zero-cost collar, effectively hedging 50,000 additional shares against downside risk. On Nov. 11, Co-CFO Cash wrote covered calls exercisable at 55 31/32 per share, and used the proceeds to purchase puts exercisable at about 32 19/64. Under the arrangement, Cash has essentially given up any appreciation above 55 31/32 in exchange for downside protection below 32 19/64 per share.

And this isn't the first time a Kemet insider has gone to such lengths to protect his position. Last August, with the stock trading in the 25 range, director Charles Volpe collared 50,000 shares of his common stock position in a similar fashion. In this case, the collar involved the sale of calls exercisable at 30 and the purchase of puts exercisable at 22 3/8. Too bad for him, perhaps, given the stock's torrid appreciation since; however, the European-style options involved will not be settled until expiration in 2001.

Sometimes, the more you look, the more you find. Also in August, Volpe entered into a rather exotic "liquidity contract" by which he effectively monetized 100,000 additional shares. The details of the agreement are cumbersome, but essentially Volpe received cash ($2.2 million), or 21 5/8 per share, covered under the contract. And like the collars mentioned above, the liquidity contract will be settled on expiration in August 2001, at which time Volpe will pay an amount per share determined by a complex formula involving the relationship of the stock price to a reference price of about 24 55/64 and a cap price of 28 37/64 per share. However it shakes out, the principle characteristic of the arrangement is that it has allowed Volpe to convert shares to cash without actually selling Kemet shares.

None of this has happened in a vacuum. I was taken, for example, by recent modifications to the company's executive options program. In July, the board voted to accelerate the date on which many executive options vested, allowing executives to exercise options a full year earlier than specified at the time of the original grant.

That was the second executive gift this year: On April 1, the company took the step of repricing three series of executive stock options originally granted back in 1995 and 1996. As a result, options originally exercisable at prices ranging from 19 1/4 to 32 1/8 per share are now exercisable at 12 per share.

Repricing is a controversial practice: Companies justify it by citing the fact that executive stock options which are "out-of-the-money" (i.e., worthless) pose major retention issues. But critics inevitably cry out that it "lowers the bar" for corporate performance.

All of this is perfectly legal, of course, and in Kemet's case, all accurately reported in SEC documents. Still, it seems like an awful lot of finagling to me.

Just as there are those who defend the practice of repricing, there are no doubt those who are perfectly comfortable with the notion of corporate insiders hedging their common stock positions. I can't say that I am among them, but it sure makes my job interesting.

Bob Gabele has been tracking and analyzing insider trading since 1978, most recently for First Call/Thomson Financial. This column is not meant as investment advice; it is instead meant to provide insight into the methods of insider trading. At time of publication, Gabele held no position in any of the companies discussed in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gabele appreciates your feedback at