SUMMARY

 

This proxy statement/prospectus is being sent to DSS and Lexington stockholders. This summary highlights selected information from this proxy statement/prospectus. It may not contain all of the information that is important to you with respect to the DSS Proposals or any other matter described in this proxy statement/prospectus. DSS urges you to carefully read this proxy statement/prospectus, as well as the documents attached to or referred to in this proxy statement/prospectus, to fully understand the Merger. In particular, you should read the Merger Agreement, which is described elsewhere in this proxy statement/prospectus and attached as Annex A . To understand the Merger fully, you should read carefully this entire document, including the business and financial information about DSS and Lexington, and the documents to which this proxy statement/prospectus refers, including the annexes attached hereto. See the section entitled “Where You Can Find Additional Information” beginning on page 224.

 

The Companies

 

Document Security Systems, Inc.

 

DSS is a developer and an integrator of cloud computing data security, RFID systems and security printing technologies which prevent counterfeiting, product diversion and brand fraud. DSS specializes in fraud and counterfeit protection for all forms of printed documents and digital information. DSS holds numerous patents for optical deterrent technologies that provide protection of printed information from unauthorized scanning and copying. DSS operates three production facilities, a security and commercial printing facility, a packaging facility and a plastic card facility where DSS produces secure and non-secure documents for our customers. DSS licenses its anti-counterfeiting technologies to printers and brand-owners. In addition, DSS has a digital division which provides cloud computing services for its customers, including disaster recovery, back-up and data security services.

 

Prior to 2006, DSS’s primary revenue source in its document security division was derived from the licensing of its technology. In 2006, DSS began a series of acquisitions designed to expand its ability to produce its products for end-user customers. In 2006, DSS acquired Plastic Printing Professionals, Inc. (“ P3 ” or “ DSS Plastics Group ”), a privately held plastic cards manufacturer located in the San Francisco, California area. In 2008, DSS acquired substantially all of the assets of DPI of Rochester, LLC, a privately held commercial printer located in Rochester, New York (“ Secuprint ” or “ DSS Printing Group ”). In 2010, DSS acquired Premier Packaging Corporation (“ Premier Packaging ” or “ DSS Packaging Group ”), a privately held packaging company located in the Rochester, New York area. In May 2011, DSS acquired all of the capital stock of ExtraDev, Inc. (“ ExtraDev ”), a privately held information technology and cloud computing company located in the Rochester, New York area, referred to herein as the DSS Digital Group.

 

In 2011, DSS integrated its corporate brand and now DSS operates in four operating segments as follows:

 

DSS Printing Group — Provides secure and commercial printing services for end-user customers along with technical support for the DSS’s technology licensees. The division produces a wide array of printed materials such as security paper, vital records, prescription paper, birth certificates, receipts, manuals, identification materials, entertainment tickets, secure coupons, parts tracking forms, brochures, direct mailing pieces, catalogs, business cards, etc. The division also provides the basis of research and development for its security printing technologies.

 

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DSS Plastics Group — Manufactures laminated and surface printed cards which can include magnetic stripes, bar codes, holograms, signature panels, invisible ink, micro fine printing, guilloche patterns, Biometric, Radio Frequency Identification (RFID) and watermarks for printed plastic documents such as ID cards, event badges, and driver’s licenses.

   

DSS Packaging Group — Produces custom paperboard packaging serving clients in the pharmaceutical, beverage, photo packaging, toy, specialty foods and direct marketing industries, among others. The division incorporates our security technologies into printed packaging to help companies prevent or deter brand and product counterfeiting.

 

DSS Digital Group — Provides data center centric solutions to businesses and governments delivered via the “cloud”. This division is also developing proprietary digital data security technologies based on the DSS’s optical deterrent technologies.  

 

DSS’s principal executive offices are located at 28 Main Street East, Suite 1525, Rochester, New York 14614 and its telephone number is (585) 325-3610.

 

DSS is headquartered in Rochester, New York and was incorporated in New York in 1984. DSS’s principal offices are located at 28 Main Street East, Suite 1525, Rochester, New York 14614 and its telephone number is (585) 325-3610. DSS’s principal website is www.dsssecure.com . The information on or that can be accessed through DSS’s website is not part of this proxy statement/prospectus. DSS Common Stock is listed on the NYSE MKT and trades under the symbol “DSS.” Additional information about DSS and its subsidiaries is included elsewhere in this proxy statement/prospectus. See the sections entitled “DSS’s Business,” “DSS’s Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “DSS’s Financial Statements” beginning on pages 135, 141, and F-1, respectively.

 

Lexington Technology Group Inc.

 

L exington is a private intellectual property monetization company that recently acquired a patent portfolio of six patents and four pending patent applications relating to technology invented by Thomas Bascom (the “ Bascom Portfolio ”). Lexington is focused on the economic benefits of intellectual property assets through acquiring or internally developing patents or other intellectual property assets (or interests therein) and then monetizing such assets through a variety of value enhancing initiatives, including, but not limited to:

 

·

licensing,

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customized technology solutions (such as applications for medical electronic health records),

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strategic partnerships, and

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litigation.

 

On October 3, 2012, Lexington, through its wholly-owned subsidiary, Bascom Research, initiated patent infringement lawsuits in the United States District Court for the Eastern District of Virginia against five companies, including Facebook, Inc. and LinkedIn Corporation, for unlawfully using systems that incorporate features claimed in patents owned by Bascom Research. The patents-in-suit relate to the data structure used by social and business networking web sites and Web 2.0 corporate intranets.

 

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Lexington is headquartered in New York, New York with offices in Dallas, Texas and McLean, Virginia and was incorporated in Delaware in May 2012. Lexington’s principal offices are located at 375 Park Avenue, 26th Floor, New York, New York 10152 and its telephone number is (888) 862 9249. Lexington’s principal website is www.lex-tg.com. The information on or that can be accessed through Lexington’s website is not part of this proxy statement/prospectus. Lexington is a private company and shares of its capital stock are not publicly traded. Additional information about Lexington and its subsidiaries is included elsewhere in this proxy statement/prospectus. See the sections entitled “Lexington’s Business,” “Lexington’s Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Lexington’s financial statements” beginning on pages 160, 167, and F-50, respectively.

 

DSSIP, Inc.

 

Merger Sub is a wholly-owned subsidiary of DSS and was incorporated in Delaware on September 20, 2012, solely for the purpose of facilitating the Merger. Merger Sub has not carried on any activities to date, except for activities incidental to its formation and activities undertaken in connection with the transactions contemplated by the Merger Agreement.

 

The Merger

 

DSS, Lexington and Lexington Representative (solely for certain purposes (as described in the Merger Agreement)) have entered into the Merger Agreement, which provides that, subject to the terms and conditions of the Merger Agreement and in accordance with the DGCL, at the Effective Time, Merger Sub will merge with and into Lexington, with Lexington surviving as a wholly-owned subsidiary of DSS. The board of directors of DSS has approved the Merger Agreement and the Merger. The board of directors of Lexington has unanimously approved the Merger Agreement and the Merger.

 

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What Lexington Stockholders Will Receive in the Merger

 

Upon completion of the Merger, and subject to the Beneficial Ownership Condition, each share of then-issued and outstanding Lexington Common Stock and each share of then-issued and outstanding Lexington Preferred Stock (other than shares of Lexington Common Stock and Lexington Preferred Stock held in treasury or owned by DSS or any direct or indirect wholly-owned subsidiary of DSS or Lexington that will be canceled and retired at the Effective Time) will be automatically converted into (i) shares of DSS Common Stock, (ii) Warrants (as described below), and (iii) a pro rata portion of 7,100,000 Escrow Shares, as described in this proxy statement/prospectus, and, as applicable, shares of DSS Preferred Stock, determined by multiplying each of (x) 17,250,000 shares plus the number of Additional Shares, as described in this proxy statement/prospectus, and Exchanged Shares, as described in this proxy statement/prospectus, if any, (y) 4,859,894 warrants, and (z) 7,100,000 shares by the Common Stock Exchange Ratio. At the Effective Time of the Merger, DSS will issue to the holders of Lexington Common Stock and Lexington Preferred Stock (on a pro rata as-converted basis) an aggregate of 4,859,894 Warrants to purchase an aggregate of 4,859,894 shares of DSS Common Stock with an exercise price of $4.80 per share and a term of five years commencing upon the closing of the Merger. Upon the consummation of the Merger, only the holders of Lexington Preferred Stock who would, after giving effect to the Merger and receipt of the merger consideration, meet the Beneficial Ownership Condition shall receive for each share of Lexington Preferred Stock they hold the same merger consideration as outlined above except that such holders shall receive a combination of DSS Common Stock and DSS Preferred Stock that is convertible into (or if the proposal to authorize DSS Preferred Stock is not approved, $.02 Warrants exercisable for) that number of shares of DSS Common Stock they would have received if they had been a holder of Lexington Common Stock immediately prior to the Effective Time in such amounts that would enable such holders, after giving effect to the Merger, to beneficially own no more than 9.99% of DSS Common Stock upon consummation of the Merger. Those holders of Lexington Preferred Stock who do not meet the Beneficial Ownership Condition and will not receive DSS Preferred Stock or $.02 Warrants, will receive DSS Common Stock and the other types of merger consideration in exchange for their Lexington Preferred Stock based on the Common Stock Exchange Ratio. In the event DSS’s stockholders approve the issuance of the merger consideration, but do not approve the authorization of the DSS Preferred Stock, then the holders of Lexington Preferred Stock that satisfy the Beneficial Ownership Condition shall receive warrants to purchase DSS Common Stock with an exercise price of $.02 per share. Each $.02 Warrant is exercisable at any time after the date of issuance for a period of ten years. If at any time between the three month anniversary of the issuance date and the expiration date, there is no effective registration statement registering the resale of the shares issuable under the Warrants, then the holder may elect to exercise the Warrant, or a portion thereof, by way of a cashless exercise. Except under certain circumstances, no holder may exercise its Warrants if such exercise would result in such holder beneficially owning in excess of 9.99% of the number of shares of DSS Common Stock outstanding immediately after giving effect to the issuance of shares of common stock upon exercise of the Warrants. In addition, under certain circumstances, a holder of the Warrants will be entitled to participate in any distribution of DSS’s assets (or the right to acquire its assets) or any declared cash dividend, to the same extent such holder would have participated therein if such holder had held the shares of common stock acquirable upon complete exercise of the Warrants. Finally, at the Effective Time, up to an aggregate of 3,600,000 outstanding and unexercised options to purchase Lexington Common Stock will be assumed by DSS and each such option will convert into an option to purchase or acquire shares of DSS Common based on the Option Exchange Ratio, with an exercise price per share equal to the exercise price of the applicable option immediately prior to the Effective Time divided by the Option Exchange Ratio, with the number of shares in (i) and the price per share in (ii) rounded up or down to the next whole share number or tenth (0.1) of a cent, as the case may be, in a manner such that, after taking into account such rounding, both (A) the excess of the aggregate fair market value of the shares subject to the new option over the aggregate exercise price for such shares does not exceed the excess of the aggregate fair market value of the shares subject to the old option over the aggregate exercise price for such shares immediately prior to the Effective Time, and (B) the ratio on a per option basis of the exercise price to the fair market value of the shares subject to the option is not increased. Immediately following the completion of the Merger (without taking into account any shares of DSS Common Stock held by Lexington stockholders prior to the completion of the Merger), the former stockholders of Lexington are expected to own approximately 50% of the outstanding common stock of the combined company (or 56% of the outstanding common stock of the combined company calculated on a fully diluted basis) and the current stockholders of DSS are expected to own approximately 50% of the outstanding common stock of the combined company (or 44% of the outstanding common stock of the combined company calculated on a fully diluted basis).

 

No fractional shares of DSS Common Stock or DSS Preferred Stock will be issued in connection with the Merger. Instead, each Lexington stockholder who would be otherwise entitled to receive a fractional share will receive from DSS, in lieu thereof, the next highest whole number shares of DSS Common Stock or DSS Preferred Stock, as applicable.

 

For a more complete discussion of what Lexington stockholders will receive in connection with the Merger and the formula that will be used to calculate the Common Stock Exchange Ratio, see the sections entitled “The Merger—What Lexington Stockholders Will Receive in the Merger” and “The Merger Agreement—Merger Consideration” beginning on pages 74 and 97, respectively.

 

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Ownership of the Combined Company After the Completion of the Merger

 

Upon completion of the Merger and regardless of the exact Common Stock Exchange Ratio (or any reverse stock split), the former stockholders of Lexington (without taking into account any shares of DSS Common Stock held by Lexington stockholders prior to the completion of the Merger) are expected to own approximately 50% of the outstanding common stock of the combined company (or 56% of the outstanding common stock of the combined company calculated on a fully diluted basis) and the current stockholders of DSS are expected to own approximately 50% of the outstanding common stock of the combined company (or 44% of the outstanding common stock of the combined company calculated on a fully diluted basis).

 

Treatment of Lexington Stock Option

 

At the Effective Time, up to an aggregate of 3,600,000 outstanding and unexercised options to purchase Lexington Common Stock, will be assumed by DSS and each such option will convert into an option to purchase or acquire shares of DSS Common Stock (i) in a number equal to the number of shares of Lexington Common Stock subject to the option immediately prior to the Effective Time based on the Option Exchange Ratio and (ii) with an exercise price per share equal to the exercise price of the applicable option immediately prior to the Effective Time divided by the Option Exchange Ratio, with the number of shares in (i) and the price per share in (ii) rounded up or down to the next whole share number or tenth (0.1) of a cent, as the case may be, in a manner such that, after taking into account such rounding, both (A) the excess of the aggregate fair market value of the shares subject to the new option over the aggregate exercise price for such shares does not exceed the excess of the aggregate fair market value of the shares subject to the old option over the aggregate exercise price for such shares immediately prior to the Effective Time, and (B) the ratio on a per option basis of the exercise price to the fair market value of the shares subject to the option is not increased.

 

As of [∙], 2013, the latest practicable date before the printing of this proxy statement/prospectus, there were outstanding options to purchase 3,600,000 shares of Lexington common stock.

 

For a more complete discussion of the treatment of Lexington stock options, see the section entitled “The Merger — Treatment of Lexington Stock Options” beginning on page 76.

 

Treatment of DSS Stock Options; Change of Control Payments

 

Upon the change of control in connection with the consummation of the Merger, previous grants of options and restricted stock to DSS employees, consultants and directors will remain intact, and will not be accelerated, except for certain grants made to DSS executives and senior managers who have agreed to modifications to their existing employment agreements, or who have agreed to be subject to restrictive covenants, in connection with the Merger. Options to purchase an aggregate of 725,000 shares of DSS Common Stock at an exercise price of $3.00 per share for a term of five years granted to these DSS executives, board members and senior managers. In addition, an aggregate of $155,000 in bonus payments will be made to such executives and senior managers upon the closing of the Merger.

 

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Board of Directors and Executive Officers of the Combined Company After the Completion of the Merger

 

Upon completion of the Merger, the combined company will have a nine (9) member board of directors, comprised of Robert B. Fagenson, Ira A. Greenstein, Robert B. Bzdick and David Klein , all of whom are currently members of the DSS board of directors, and Jeffrey Ronaldi, Peter Hardigan and Warren Hurwitz , all of whom are designees of Lexington, and two other directors will be designated by Lexington (reasonably acceptable to DSS) on or prior to filing of the first amendment to this proxy statement/prospectus. However, if DSS’s stockholders do not approve the Staggered Board Proposal, then the board of directors of DSS following the Merger shall initially consist of eight (8) directors, four of whom are designated by Lexington and the other four are designated by DSS, as described above, provided that, prior to closing DSS and Lexington will jointly designate a ninth person to be nominated for a position on the board of directors of DSS following the Effective Time.

 

If DSS’s stockholders approve the Staggered Board Proposal upon the completion of the Merger, the board of directors of DSS will be divided into three classes, Class I to be comprised of David Klein, Ira A. Greenstein and Jeffrey Ronaldi, Class II to be comprised of Robert B. Bzdick, Peter Hardigan and an additional member to be designated by Lexington and Class III to be comprised of Warren Hurwitz, Robert B. Fagenson and an additional member to be designated by Lexington. The three directors constituting the Class I directors would serve until the DSS annual meeting of stockholders for 2013; the three directors constituting the Class II directors would serve until the DSS annual meeting of stockholders for 2014; and the three directors constituting the Class III directors would serve until the DSS annual meeting of stockholders for 2015. At each annual meeting starting with the first annual meeting in 2013, directors would be elected to succeed those whose terms expire, with each newly elected director to serve for a three-year term. If DSS’s stockholders do not approve the Staggered Board Proposal, then the board of directors of DSS following the Merger shall initially consist of eight (8) directors, four of whom as designated by Lexington and the other four as designated by DSS, provided, that, prior to the closing of the Merger, DSS and Lexington will jointly identify a ninth person to be nominated as a member of the board of directors of DSS following the Effective Time. Approval of the Staggered Board Proposal, however, is not required to consummate the Merger and the transactions contemplated thereby.

 

The executive management team of the combined company is expected to be composed of the following individuals:

 

Name		Current Position		Position with the Combined Company
Jeffrey Ronaldi		Chief Executive Officer of Lexington		Chief Executive Officer
Peter Hardigan		Chief Operating Officer of Lexington		Chief Investment Officer
Philip Jones		Chief Financial Officer of DSS		Chief Financial Officer
Robert B. Bzdick		President and Chief Operating Officer of DSS		Executive Vice President

 

Recommendations of the DSS Special Committee and the DSS Board of Directors and Its Reasons for the Merger

 

An independent special committee of the DSS Board of Directors (the “ DSS Special Committee ”) unanimously determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are advisable and fair to, and in the best interests of, DSS and its stockholders, and recommended that the DSS Board of Directors approve and declare advisable the Merger Agreement and the transactions contemplated by the Merger Agreement, including the Merger. For a more complete discussion of the recommendations of the DSS Special Committee and its reasons for the Merger, see the section entitled “The Merger—Position of the DSS Board of Directors as to Fairness of the Merger and Recommendation of DSS Board of Directors” beginning on page 85.

 

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After carefully considering the unanimous recommendation of the DSS Special Committee and the other factors described in the section entitled “The Merger—Position of the DSS Board of Directors as to Fairness of the Merger and Recommendation of DSS Board of Directors” beginning on page 85, has unanimously approved the Merger Agreement and the transactions contemplated thereby, including the Merger. The DSS board of directors has determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are advisable and fair to, and in the best interests of, DSS and its stockholders, and therefore recommends that the DSS stockholders vote FOR the Securities Issuance Proposal, FOR the Preferred Stock Creation Proposal, FOR the Staggered Board Proposal, FOR the Reverse Stock Split Proposal, FOR the approval of the 2013 Equity Incentive Plan Proposal and FOR the adjournment of the DSS special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of the DSS Proposals. The DSS board of directors made its recommendations to the DSS stockholders after considering the factors described in this proxy statement/prospectus. For a more complete discussion of the recommendations of the DSS board of directors and its reasons for the Merger, see the section entitled “The Merger—Position of the DSS Board of Directors as to Fairness of the Merger and Recommendation of DSS Board of Directors” beginning on page 85.

 

Interests of DSS Directors and Executive Officers in the Merger

 

You should be aware that certain directors and executive officers of DSS have interests in the Merger that are different from, or in addition to, the interests of the stockholders of DSS generally.

 

Interests of DSS’s directors and executive officers in connection with the Merger relate to (i) the continuing service of each of Robert B. Fagenson, Ira A. Greenstein, David Klein and Robert B. Bzdick as directors of the combined company following the completion of the Merger, (ii) the fact that Philip Jones and Robert B. Bzd I ick are currently executive officers of DSS and will remain executive officers of the combined company following the completion of the Merger, and (iii) upon the change of control in connection with the consummation of the Merger, options to purchase an aggregate of 280,000 shares of DSS Common Stock at an exercise price of $3.00 per share for a term of five years that were granted to certain of DSS’s executives and senior managers will vest upon the closing of the Merger. In addition, an aggregate of $155,000 in bonus payments will be made to such executives and senior managers upon the closing of the Merger, and the right to continued indemnification for directors and executive officers of DSS following the completion of the Merger.

 

The following table sets forth the benefits to be made to DSS’s directors and executive officers in connection with the Merger, assuming a change of control occurs and termination of DSS’s directors as of November 19, 2012:

 

Name		Bonus ($)				Equity ($) (1)
Patrick A. White (2)		$	40,000			$	80,000
Robert B. Bzdick (2)		$	50,000			$	250,000
Philip Jones		$	25,000			$	-

 

(1)	Estimated grant date fair value of options calculated using the Black Scholes Merton option pricing model granted to executive that will vest upon the closing of the Merger.
(2)	Mr. White resigned from his position as Chief Executive Officer of DSS effective December 1, 2012 and will continue to serve as a consultant to DSS. Mr. Bzdick was appointed as the Chief Executive Officer of DSS effective December 1, 2012.

 

The DSS board of directors was aware of and considered these interests, among other matters, in evaluating and negotiating the Merger Agreement and in recommending that DSS stockholders approve the DSS Proposals.

 

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For a more complete discussion of the interests of the directors and executive officers of DSS in the Merger, see the section entitled “The Merger—Interests of DSS’s Directors and Executive Officers in the Merger” beginning on page 87.

 

Anticipated Accounting Treatment of the Merger

 

The Merger will be treated by DSS as a reverse merger under the acquisition method of accounting in accordance with United States generally accepted accounting principles (“ GAAP ”). For accounting purposes, Lexington is considered to be acquiring DSS in this transaction. For a more complete discussion of the anticipated accounting treatment of the Merger, see the section entitled “The Merger—Anticipated Accounting Treatment” beginning on page 90.

 

Material United States Federal Income Tax Consequences of the Merger

 

The Merger should constitute a “reorganization” within the meaning of Section 368(a) of the Code. Mintz Levin will render its written opinion regarding such qualification. As a result of the “reorganization,” Lexington stockholders generally should not recognize gain or loss for United States federal income tax purposes upon the exchange of their shares of Lexington capital stock for the equity securities of DSS in connection with the Merger. However, a Lexington stockholder who perfects appraisal rights and receives cash in exchange for such stockholder’s Lexington capital stock will recognize gain or loss measured by the difference between the amount of cash received and such stockholder’s adjusted tax basis in those shares. DSS stockholders generally will not recognize gain or loss for United States federal income tax purposes as a result of the Merger.

 

The opinion of counsel will rely on certain assumptions as well as representations made by DSS, Merger Sub and Lexington, including factual representations and certifications contained in officers’ certificates to be delivered at closing, and assume that these representations are true, correct and complete, without regard to any knowledge limitation. If any of these representations or assumptions are inconsistent with the actual facts, the opinion could become invalid as a result, and the United States federal income tax treatment of the merger could be adversely affected. An opinion of counsel represents counsel’s best legal judgment and is not binding on the IRS or any court. No ruling has been, or will be, sought from the IRS as to the tax consequences of the Merger.

 

One of the requirements for the Merger to constitute a “reorganization” within the meaning of Section 368(a) of the Code is that the Lexington stockholders receive at least 80% of the aggregate value of their merger consideration in the form of DSS Common Stock (the “ Control Requirement ”). The IRS has issued regulations addressing whether and when such requirement should be measured: by reference to the value of the merger consideration as of the signing date of the Merger Agreement, here October 1, 2012 (the “ Signing Date Rule ”), or on the Effective Date of the Merger. Counsel is of the opinion that the Signing Date Rule should apply to the Merger. In this regard, an independent valuation analysis obtained by Lexington concludes that the Control Requirement was met on October 1, 2012. However, the IRS may contend that the Control Requirement must instead be met on the Effective Date. If such contention prevails, then in order for the Merger to constitute a “reorganization” under Section 368(a) of the Code, the Lexington stockholders will need to receive DSS Common Stock (including the Additional Shares, if any) with a value measured on the Effective Date of at least 80% of the aggregate value of the Merger Consideration (it is not clear if only the Exchanged Shares may be included in such calculation, or if the Escrow Shares also may be included at the Effective Date or only when and to the extent released to the Lexington stockholders). If the Control Requirement must be determined on the Effective Date and, based on a valuation of the merger consideration, such requirement is not then met (or not met later when the Escrow Shares are released) because of change in the relative value of the DSS Common Stock, DSS Preferred Stock and the Warrants, then the Merger will not constitute a “reorganization” under Section 368(a) of the Code. In such case, a Lexington stockholder will recognize gain or loss measured by the difference between the value of the equity securities of DSS received in the Merger and such stockholder’s adjusted tax basis in the Lexington shares exchanged therefor.

 

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Tax matters are very complicated, and the tax consequences of the Merger to a particular DSS or Lexington stockholder will depend in part on such stockholder’s circumstances. Accordingly, DSS and Lexington urge you to consult your own tax advisor for a full understanding of the tax consequences of the Merger to you, including the applicability and effect of federal, state, local and foreign income and other tax laws. For a more complete discussion of the material United States federal income tax consequences of the Merger, see the section entitled “Material United States Federal Income Tax Consequences of the Merger” beginning on page 92 .

 

Restrictions on Sales of Shares of DSS Common Stock Received by Lexington Stockholders in the Merger

 

The shares of DSS Common Stock and DSS Preferred Stock received by Lexington stockholders in the Merger will not be subject to any transfer restrictions. However, shares of DSS Common Stock and DSS Preferred Stock received by Lexington stockholders who become affiliates of DSS for purposes of Rule 144 under the Securities Act of 1933, as amended (the “ Securities Act ”), may be resold by them only in transactions permitted by Rule 144 or as otherwise permitted under the Securities Act.

 

For a more complete discussion of the restrictions on sales of shares of DSS Common Stock and DSS Preferred Stock and Warrants received by the Lexington stockholders in the Merger, see the section entitled “The Merger — Restrictions on Sales of Shares of DSS Common Stock Received by Lexington Stockholders in the Merger” beginning on page 91.

 

Appraisal Rights

 

Under the NYBCL, holders of DSS Common Stock are not entitled to appraisal rights in connection with the Merger. Under the DGCL, however, holders of Lexington capital stock may be entitled to appraisal rights in connection with the Merger.

 

Regulatory Approvals

 

As of the date of this proxy statement/prospectus, neither DSS nor Lexington is required to make filings or to obtain approvals or clearances from any regulatory authorities in the United States or other countries to complete the Merger. In the United States, DSS must comply with applicable federal and state securities laws and the rules and regulations of the NYSE MKT in connection with the issuance of shares of DSS Common Stock and DSS Preferred Stock and what may possibly be deemed the resulting change in control of DSS and the filing of this proxy statement/prospectus with the SEC.

 

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Conditions to the Completion of the Merger

 

DSS and Lexington expect to complete the Merger as soon as possible following the approval of the Securities Issuance Proposal at the special meeting. Completion of the Merger will only be possible, however, after all closing conditions contained in the Merger Agreement are satisfied or waived, including after DSS receives stockholder approval at the special meeting. It is possible, therefore, that factors outside of each company’s control could require them to complete the Merger at a later time or not complete it at all.

 

The obligations of DSS and Lexington to consummate the Merger are each subject to the satisfaction or waiver (to the extent permitted under applicable law) of the following conditions, among others and subject, in some cases, to the exceptions or limitations contained in confidential disclosure schedules delivered to each party by the other:

 

	•	the stockholders of DSS have approved the issuance of DSS Common Stock and the stockholders of Lexington have approved the Merger and the Merger Agreement ;
	•	The registration statement of which this proxy statement/prospectus forms a part has become effective;
	•	the shares of DSS Common Stock shall have been approved for listing on the NYSE MKT ;
	•	the representations and warranties of the parties shall be true, complete and correct in all material respects on and as of the Effective Time, with the same force and effect as if made on and as of the Effective Time, except for those (x) representations and warranties that are qualified by materiality, which representations and warranties shall be true, complete and correct in all respects and (y) representations and warranties which address matters only as of a particular date;
	•	Lexington and its subsidiaries shall have at least $7,500,000 in cash on hand (which, for purposes of calculating such amount, shall include the amount, not to exceed $1,000,000, of professional fees paid or accrued prior to the Effective Time) and Lexington and its subsidiaries shall have no indebtedness for borrowed money;
	•	the parties shall have performed or complied in all material respects with all agreements and covenants required by the Merger Agreement to be performed or complied with by it on or prior to the Effective Time;
	•	since the date of the Merger Agreement there shall not have occurred, and no event or circumstance shall exist that has had or could reasonably be expected to have, a material adverse effect on DSS or Lexington, as applicable;
	•	None of Lexington’s intellectual property shall, as of the Effective Date, be held unpatentable, invalid or unenforceable by a court of competent jurisdiction;
	•	holders of no more than 10% of the issued and outstanding Lexington capital stock shall have demanded and perfected their right to an appraisal of Lexington capital stock under the DGCL;
	•	the voting and support agreements shall have been executed and delivered;

  

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	•	each of Lexington and its subsidiary shall be solvent, able to pay its indebtedness as it matures and have capital sufficient to carry on its businesses, and not be in default under any material agreement to which it is a party; and
	•	Lexington shall have received written resignations from all of the directors and officers of the DSS not elected as officers or directors in the Merger and the directors and officers to be designated by DSS and Lexington shall have been appointed.

 

For a more complete discussion of the conditions to the completion of the Merger, see the section entitled “The Merger Agreement—Conditions to the Completion of the Merger” beginning on page 105.

 

No Solicitation

 

Subject to certain exceptions described below, prior to the completion of the Merger or the earlier termination of the Merger Agreement, each of DSS and Lexington has agreed that it will not, and it will not authorize or permit its subsidiaries and/or their respective officers, directors, employees, investment bankers, attorneys, accountants and other advisors or representatives to directly or indirectly: (a) solicit, initiate, induce or take any action to facilitate, encourage, solicit, initiate or induce any action relating to, or the submission of any Lexington Acquisition Proposal (as defined below) or DSS Acquisition Proposal (as defined below), as the case may be; (b) enter into, participate or engage in discussions or negotiations in any way with any person concerning any Lexington Acquisition Proposal or DSS Acquisition Proposal, as the case may be; (c) furnish to any person (other than the other party) any information relating to the other party or its subsidiaries or afford to any person (other than the other party) access to the business, properties, assets, books, records or other information, or to any personnel of either party or its subsidiaries, with the intent to induce or solicit the making, submission or announcement of, or the intent to encourage or assist, a Lexington Acquisition Proposal or DSS Acquisition Proposal, as the case may be or the making of any proposal that would reasonably be expected to lead to a Lexington Acquisition Proposal or DSS Acquisition Proposal, as the case may be; (d) approve, enforce or recommend a Lexington Acquisition Proposal or DSS Acquisition Proposal, as the case may be; (e) enter into any agreement in principle, letter of intent, term sheet, merger agreement, acquisition agreement or other similar instrument or contract relating to a Lexington Acquisition Proposal or a DSS Acquisition Proposal, as the case may be, or requiring either party to abandon or terminate the Merger Agreement; or (f) grant any approval pursuant to any “moratorium,” “control share acquisition,” “business combination,” “fair price” or other form of anti-takeover law to any person or transaction (other than the Merger) or waiver or release any standstill or similar agreement with respect to the equity securities of either party. “Lexington Acquisition Proposal” means, in summary any offer, proposal, discussions, negotiations by any person in a transaction or series of related transactions relating to issuance, sale or other disposition of securities representing 20% or more of the voting power or economic interests of Lexington or its subsidiaries. “DSS Acquisition Proposal” means any offer, proposal, discussions, negotiations by any person in a transaction or series of related transactions relating to issuance, sale or other disposition of securities representing 20% or more of the voting power or economic interests of DSS or its subsidiaries. Notwithstanding the foregoing, in the event that either Lexington or DSS receives a Lexington Acquisition Proposal or a DSS Acquisition Proposal, the board of directors of each company may under certain circumstances change its recommendation for approval of the Merger if, after reviewing with outside counsel, either board determines that such Lexington Acquisition Proposal or DSS Acquisition Proposal, as the case may be, is a superior proposal or an event, development or change in circumstances that occurs or arises following the date of the Merger Agreement, and/or the failure to effect a board recommendation change would be inconsistent with such company’s board of directors’ fiduciary duties to its stockholders.

 

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For a more complete discussion of the prohibition on solicitation of acquisition proposals from third parties, see the section entitled “The Merger Agreement—No Solicitation” beginning on page 102.

 

Termination of the Merger Agreement

 

Generally and except as specified below, the Merger Agreement may be terminated and the Merger may be abandoned at any time prior to the completion of the Merger, including after the required DSS stockholder approval is obtained:

 

·

by mutual written consent of DSS, Merger Sub and Lexington; or

 

·

by either party, if:

 

o

the closing has not occurred on or before March 15, 2013;

 

o

any law enacted by a governmental authority prohibits the consummation of the Merger; or any governmental authority has issued an order or taken any other action which restrains, enjoins or otherwise prohibits the Merger;

 

o

the other party’s stockholders do not approve the Merger, unless the failure to obtain approval is attributable to a failure on the part of such party seeking to terminate the Agreement; or

 

·

by DSS, if:

 

o

the Lexington’s board of directors changes its recommendation for approval of the Merger;

 

o

the board of directors of Lexington or any authorized committee has failed to present or recommend the approval of the Merger Agreement and the Merger to the stockholders;

 

o

Lexington shall have entered or caused itself or its subsidiaries to enter, into any letter of intent, agreement in principle, term sheet, merger agreement, acquisition agreement or other similar agreement related to any Lexington Acquisition Proposal;

 

o

Lexington shall have breached any term of the non-solicitation provision of the Merger Agreement; or

 

·

by Lexington, if:

 

o

the DSS board of directors changes their recommendation for approval of the Merger;

 

o

the board of directors of DSS or any authorized committee has failed to present or recommend the approval of the Merger Agreement and the Merger to the stockholders;

 

o

DSS shall have entered or caused itself or its subsidiaries to enter, into any letter of intent, agreement in principle, term sheet, merger agreement, acquisition agreement or other similar agreement related to any DSS Acquisition Proposal;

 

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o

DSS shall have breached any term of the non-solicitation provision of the Merger Agreement; or

 

·

by either party, if the other party, or in the case of Lexington, DSS or Merger Sub, is in material breach of its obligations or representations or warranties under the Agreement;

 

·

by either DSS or Lexington, if prior to obtaining stockholder approval such party determines to enter into a definitive agreement relating to a superior proposal; or

 

·

by Lexington, at any time, upon payment to DSS of a termination fee equal to $5,000,000.

 

For a more complete discussion of termination of the Merger Agreement, see the section entitled “The Merger Agreement—Termination of the Merger Agreement” beginning on page 106.

 

Termination Fees and Expenses

 

Under certain circumstances, if the Merger is terminated by either DSS or Lexington, then DSS shall pay to Lexington a termination fee in cash equal to the sum of (i) $3,000,000 plus (ii) 5% of the consideration paid to all security holders of DSS in connection with a superior proposal in the same form as such consideration is paid to such security holders. In addition, under certain circumstances, if the Merger is terminated by Lexington, then Lexington shall pay DSS a termination fee equal to $5,000,000.

 

For a more complete discussion of termination fees and expenses, see the section entitled “The Merger Agreement—Termination Fees and Expenses” beginning on page 106.

 

Voting by DSS Directors and Executive Officers

 

As of [•], 2013, the latest practicable date before the printing of this proxy statement/prospectus, directors and executive officers of DSS beneficially owned and were entitled to vote [•] shares of DSS Common Stock, or approximately [•]% of the total outstanding voting power of DSS. It is expected that DSS’s directors and executive officers will vote their shares FOR the approval of the Merger Agreement and the Merger.

 

Voting and Support Agreements

 

On October 1, 2012, concurrently with the execution of the Merger Agreement, certain stockholders of DSS, including certain directors and officers, representing 10.86% of DSS’s shares of common stock issued and outstanding (collectively, the “ Key DSS Stockholders ”) entered into voting and support agreements (collectively, the “ DSS Voting Agreement ”), pursuant to which the Key DSS Stockholders have agreed, among other things, to vote all shares of common stock of DSS owned by them in favor of the adoption of the Merger Agreement, the approval of the Merger and the approval of the transactions contemplated by the Merger Agreement and any actions required in furtherance thereof, including approval of the amendments to the certificate of incorporation of DSS, the creation of a staggered board and the approval of the issuance of the merger consideration. The DSS Voting Agreement will terminate upon the earliest to occur of: (i) the mutual written consent of Lexington and the Key DSS Stockholder; (ii) the Effective Time; (iii) the date of termination of the Merger Agreement in accordance with its terms; and (iv) the date on which an amendment to the Merger Agreement to increase the merger consideration is effected without the consent of such Key DSS Stockholder.

 

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On October 1, 2012, concurrently with the execution of the Merger Agreement, certain stockholders of Lexington, representing 11.99% of Lexington’s capital stock issued and outstanding (collectively, the “ Key Lexington Stockholders ”) entered into voting agreements (collectively, the “ Lexington Voting Agreement ”), pursuant to which the Key Lexington Stockholders have agreed, among other things, to vote all shares of capital stock of Lexington owned by them in favor of the approval of the Merger Agreement, the approval of the Merger and the approval of the transactions contemplated by the Merger Agreement and any actions required in furtherance thereof. In addition, the Key Lexington Stockholders have agreed not to seek appraisal or dissenters’ rights under Delaware General Corporation Law. The Lexington Voting Agreement will terminate upon the earliest to occur of: (i) the mutual written consent of DSS, Merger Sub and the Key Lexington Stockholder; (ii) the Effective Time; (iii) the date of termination of the Merger Agreement in accordance with its terms; and (iv) the date on which an amendment to the Merger Agreement to decrease the merger consideration is effected without the consent of such Key Lexington Stockholder.

 

Rights of Lexington Stockholders Will Change as a Result of the Merger

 

Due to differences between the governing documents of DSS and Lexington, Lexington stockholders receiving DSS Common Stock and DSS Preferred Stock in connection with the Merger will have different rights once they become DSS stockholders. The material differences are described in detail under the section entitled “Comparison of Rights of DSS Stockholders and Lexington Stockholders” beginning on page 212.

 

Risk Factors

 

The Merger, including the possibility that the Merger may not be completed, poses a number of risks to each company and its respective stockholders, including the following:

 

	•		the issuance of shares of DSS Common Stock and Preferred Stock (or, if the Preferred Stock Creation Proposal is not approved, $.02 Warrants) and Warrants to Lexington stockholders in connection with the Merger will substantially dilute the voting power of current DSS stockholders;
	•		the announcement and pendency of the Merger could have an adverse effect on the DSS stock price and/or the business, financial condition, results of operations, or business prospects for DSS and/or Lexington;
	•		failure to complete the Merger or delays in completing the Merger could negatively impact DSS’s and Lexington’s respective businesses, financial condition, business prospects or results of operations or the DSS stock price;
	•		some of the directors and executive officers of DSS and Lexington have interests in the Merger that are different from, or in addition to, those of the other DSS and Lexington stockholders; and
	•		the Merger Agreement contains provisions that could discourage or make it difficult for a third party to acquire DSS or Lexington prior to the completion of the Merger.

 

In addition, each of DSS, Lexington, and the combined company is subject to various risks associated with its business. The risks are discussed in greater detail in the section entitled “Risk Factors” beginning on page 50. DSS encourages you to read and consider all of these risks carefully.

 

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Matters to Be Considered at the DSS Special Meeting

 

Date, Time and Place . The DSS special meeting will be held on [•], 2013 at [•]:[•][•].m., at [•].

 

Matters to be Considered at the DSS Special Meeting. At the DSS special meeting, and any adjournments or postponements thereof, DSS stockholders will be asked to: 

 

	•	approve the Securities Issuance Proposal;
	•	approve the Preferred Stock Creation Proposal;
	•	approve the Staggered Board Proposal;
	•	approve the Reverse Stock Split Proposal;
	•	approve the 2013 Equity Incentive Plan Proposal;
	•	approve the adjournment of the DSS special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of any of the DSS Proposals; and
	•	conduct any other business as may properly come before the DSS special meeting or any adjournment or postponement thereof.

 

Record Date. The DSS board of directors has fixed the close of business on [•] as the record date for determining the DSS stockholders entitled to notice of and to vote at the DSS special meeting and any adjournment or postponement thereof.

 

Required Vote. Approval of the Securities Issuance Proposal, the 2013 Equity Incentive Plan Proposal and any proposal to adjourn the DSS special meeting requires the affirmative vote of the holders of a majority of the shares of DSS Common Stock present and entitled to vote on the matter either in person or by proxy at the DSS special meeting. Approval of the Preferred Stock Creation Proposal, Staggered Board Proposal and the Reverse Stock Split Proposal requires the affirmative vote of the holders of a majority of the shares of DSS Common Stock outstanding and entitled to vote on the matter either in person or by proxy at the DSS special meeting. As of the close of business on the record date for the DSS special meeting, there were [•] shares of DSS Common Stock outstanding.

 

For additional information about the DSS special meeting, see the section entitled “The Special Meeting of DSS Stockholders” beginning on page 111.

 

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