Stamps.com gets stomped over pictures.

Stamps.com finally seemed on the verge of profitability--and then it got stuck.

A widely publicized prank by the muckraking Web site The Smoking Gun has unglued $72 million of the Los Angeles-based company's market value.

Last Wednesday, its stock was trading at $14.12 a share, down more than 20 percent since Stamps.com disclosed in mid-September that "the abusive actions of a few people" were playing havoc with its test of personalized stamps, the company's most important product to date.

On Sept. 30, the Postal Service halted its testing of the product for a 90-day review period. Gerald McKiernan, a Postal Service spokesman, said the agency has "a nucleus of people involved in the evaluation."

"We authorized them to do the test. We didn't want to prejudge it or put parameters around it," McKiernan said.

Consumers had been able to send their photos to Stamps.com, which would turn them into personalized postage stamps. But The Smoking Gun sent in photographs of several infamous personalities, including Unabomber Ted Kaczynski, Cold War spies Julius and Ethel Rosenberg, and presidential whistleblower Linda Tripp. Those images got through Stamps.com's approval process and onto official U.S. stamps, a prank that was reported by several news organizations.

For a week or so, the stock kept rising. Then Stamps.com announced it was curtailing access to the program, called PhotoStamps, limiting the photos it would accept to babies, animals and safe images such as landscapes and corporate logos. Meanwhile, Chief Executive Ken McBride canceled appearances at investor conferences and launched into discussions with Postal Service officials in an effort to save the program.

Last week, the usually accessible McBride declined to answer questions about the screening process and why Stamps.com's safeguards failed to prevent what could be considered "inappropriate" photos from making their way onto stamps.

But what exactly is an "inappropriate" stamp? By allowing users to personalize their stamps, the Postal Service broadened the notion of what's acceptable from the traditional stamp tare of statesmen, cultural icons heroes and cartoon characters.

Mike Crawford, an analyst at B. Riley & Co., said part of the problem is that no guidelines were set by the Postal Service, so Stamps.com's screeners were in uncharted territory.

They did reject pictures of Kaczynski in his prison jumpsuit, for example. (The Smoking Gun had to resort to earlier photographs from his high school yearbook.) But on what grounds would Linda Tripp be rejected if she sent in some family shots?

"I think it boils down to: What is the process the U.S. Postal Service is comfortable with?" Crawford said.

He suggested that, as a private contractor, Stamps.com can issue its own set of guidelines for what photos can be turned into stamps, whereas the Postal Service "doesn't want to get embroiled in First Amendment issues."

Bill Bastone, editor of The Smoking Gun, said that beyond embarrassing the company, the hoax proved a larger point--that Stamps.com is unprepared for the job.

"The bottom line is, they approved them. We had a feeling that if they were letting things like that through, the system was designed poorly," he said, adding that he had no contact with Stamps.com until the company called him last week and tried, unsuccessfully, to get the nine sheets of objectionable stamps returned. "We're not stamp purists here," he said. "We didn't do it to use them, or to put the stamps up for auction. The stamps are in a filing cabinet just like other material gathered in the reporting process."

Another question raised by the episode: Should the U.S. Postal Service be outsourcing stamps to a for-profit company without getting a cut of the profits?.

Several countries, including Ireland, Switzerland and Canada, allow consumers to submit personal photos to be made into stamps. Most of the programs are run by government agencies.

For years, the U.S. Postal Office pondered whether to start a personalized stamps program. The agency acted at the urging of a report issued last year by the Presidential Commission on the U.S. Postal Service.

(Avery Dennison Corp., based in Pasadena, launched a similar product called Creative Postage labels earlier this year. Unlike PhotoStamps, Creative Postage labels are not a U.S. Postal Service product. The customer's photo is attached next to a U.S. stamp. Avery's Web site says it will not accept pornographic or inappropriate images.)

Russell Hoss, an analyst at Roth Capital Partners, still thinks the Postal Service will approve some form of personalized stamps because of their popularity.

"We believe the negative press has resulted in heightened scrutiny of the company's image and quality control," Hoss wrote in a recent report, in which he upgraded the stock to a strong buy. "Although some inappropriate images were passed through the screening process, we give the company credit for placing restrictions on what type of images would be allowed on stamps."

But for the moment, that doesn't help McBride, who was counting on having the service up-and-running for the holidays and virtually guaranteeing that the company would finally turn a profit. In late August, he predicted that the program would be approved, as long as Stamps.com met the government's requirements for strong consumer demand, security and order processing.

"We feel that if we're able to show all those things to the Postal Service, we'll have similar results to what we've had before, and get full approval near the end of the test process," McBride told the Business Journal at the time.

Stamps.com Inc.

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Stock Prices

Oct. 7, 2003   $11.15
Oct. 7, 2004   $14.12

Note: Table made from line graph.

YEAR (Dec. 31)               2003      2002

Revenue (millions)          $21.2     $16.3
Total Expenses (millions)    33.8      28.1
Operating Loss (millions)   (12.6)    (11.8)
Net Loss (millions)          (9.3)     (6.8)
Loss Per Share              ($0.42)   ($0.28)

SUMMARY

Business: Online postage

Headquarters: Los Angeles

CEO: Kenneth McBride

Market Cap: $319 million Dividend Yield: None

Total Liabilities: $4.1 million P/E Ratio: N/A *

Long-Term Debt: $0

* Company is not profitable