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Vonage tells SEC bankruptcy is possible

While rumors swirl that the company may be on the auction block, Vonage admits to big trouble if legal problems persist.

Legal woes are forcing Vonage to look at its long-term options, which may include bankruptcy.

In a filing with the Securities and Exchange Commission Tuesday, the Internet phone service provider said the ongoing legal battles over patent disputes could eventually lead to liquidation of the company's assets under bankruptcy protection.

"We are, and may in the future be, subject to damaging and disruptive intellectual property litigation that could materially and adversely affect our business, results of operations and financial condition, as well as the continued viability of our company," Vonage said in the 10-K document.

In March, the company lost a patent infringement lawsuit to telecommunications giant Verizon. A Virginia jury ordered the company to pay $58 million in damages, and a judge granted an injunction that would force Vonage to stop marketing its service to new customers. A federal court of appeals granted a temporary stay to the injunction. Vonage will head to court again on April 24 to argue in favor of making the temporary stay permanent while it fights for an appeal.

Vonage has repeatedly said that it is confident that it will get the permanent stay and that eventually it will win its appeal in the patent case. The company has also said that it is working on an alternative technical solution to avoid infringing the Verizon patents. But court documents filed by the company's lawyers suggest that the company .

Vonage is also being sued by Sprint Nextel for infringing on its patents, but executives from the company said last week that a settlement is likely in that case.

All of this spells bad news for the Vonage, which was losing customers even before the Verizon decision was announced.

Analysts agree that bankruptcy could be on the horizon for Vonage. The company has $250 million in debt that will have to be paid in December 2008. If the company is unable to grow its subscriber base and revenues, it could have trouble paying down its debt, which could land it in financial trouble, said Clayton Moran, an analyst with the Stanford Group. But the company has about $420 million cash, which should help it stay out of trouble for the immediate future.

"They could be facing a liquidity issue within a year and a half," Moran said. "But I don't expect them filing for bankruptcy in the next few months. They have enough cash to survive."

The continued flow of bad news has spurred rumors that Vonage might be for sale. The Web site Light Reading reported Tuesday that Sprint Nextel is considering buying the company.

But several analysts, including Moran, say this is unlikely. For one, Sprint has an established relationship with cable operators that already are offering VoIP services. Sprint also has significant issues of its own in terms of the health of its wireless business. Even though Vonage could be sold pretty inexpensively, for around $1 billion, Sprint already is facing criticism from shareholders for building its new, 4G Wimax network.

"I have no faith in the rumors that Sprint is interested in buying Vonage," Moran said. "I don't think it makes strategic sense for Sprint right now. And with all their legal troubles, why would anyone want to jump into the middle of this battle? It just doesn't make sense."