S-4 1 v327631_s4.htm FORM S-4

 

As filed with the Securities and Exchange Commission on November 23, 2012

 

Registration No. 333-

 

UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C. 20549

 

FORM S-4

 

REGISTRATION STATEMENT

 

UNDER

 

THE SECURITIES ACT OF 1933

 

 

 

DOCUMENT SECURITY SYSTEMS, INC.

 

 

 

(Exact name of registrant as specified in its charter)

 

New York   7373   16-1229730
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
 

(I.R.S. Employer

Identification Number)

 

 

First Federal Plaza

28 Main Street, Suite 1525

Rochester, New York 14614

Telephone: (585) 325-3610

 

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

Robert B. Bzdick

President and Chief Operating Officer

Document Security Systems, Inc.

First Federal Plaza

28 Main Street East, Suite 1525 

Rochester, New York 14614

Telephone: (585) 325-3610

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

 
 

 

Copies to:

James Martin Kaplan, Esq.

Joseph Walsh, Esq.

Troutman Sanders LLP

The Chrysler Building

405 Lexington Avenue

New York, New York 10174

(212) 704-6030

Kenneth R. Koch, Esq.

Jeffrey P. Schultz, Esq.

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

Chrysler Center

666 Third Avenue

New York, New York 10017

(212) 935-3000

 

 

 

Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after the effectiveness of this registration statement and the satisfaction or waiver of all other conditions under the merger agreement described herein.

 

If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. ¨

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement number for the same offering. ¨

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x
    (Do not check if a smaller reporting company)  
 

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

 

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer) ¨

 

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer) ¨

 

 
 

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of
Securities
to be Registered
  Amount to be
Registered†
   Proposed
Maximum
Offering Price
Per Share
   Proposed Maximum
Aggregate
Offering Price
   Amount of
Registration Fee (3)
 
Common Stock, par value $0.02 per share   27,590,559 (1)   N/A   $1,065.88 (2)  $0.15 
Preferred Stock, par value $0.02 per share   5,195,073(4)   N/A   $597.12 (5)  $0.08 
Warrants to purchase Common Stock   4,859,894 (6)   N/A    N/A    N/A(7)
Common Stock issuable upon exercise of the Warrants   4,859,894 (8)  $4.80   $24,488,779.20 (9)  $3,340.27 
$.02 Warrants to purchase Common Stock   5,195,073 (10)   N/A    N/A    N/A(7)
Common Stock issuable upon exercise of the $.02 Warrants   5,195,073 (11)  $0.02   $103,861.46(12)  $14.17 
Common Stock issuable as compensation to Palladium Capital Advisors, LLC   786,678 (13)  $2.65   $2,084,696.70(14)  $284.35 

 

Pursuant to Rule 416, this registration statement also covers an indeterminate number of additional securities of Document Security Systems, Inc. (“DSS”) as may be issuable as a result of stock splits, stock dividends or similar transactions.
(1) Represents the maximum number of shares of DSS common stock, par value $0.02 per share, estimated to be issuable to holders of Lexington Technology Group, Inc. (“Lexington”) capital stock (including shares of DSS common stock issuable upon conversion of the DSS preferred stock) in the transactions described in the proxy statement/prospectus. If DSS effects a reverse stock split as described in the proxy statement/prospectus, all DSS common stock, including the securities covered by this Registration Statement, will be reclassified and combined by a reverse stock split into a lesser amount of DSS common stock, and the amount of undistributed common stock deemed to be covered by this Registration Statement shall be proportionately reduced.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(f)(2) under the Securities Act. As Lexington, the issuer of the securities to be acquired and cancelled in the proposed transaction, has an accumulated capital deficit of approximately $6,931,000 as of September 30, 2012, the offering price shown is calculated based on one-third of the aggregate $0.0001 par value per share of Lexington common stock to be cancelled in the Merger or underlying preferred stock to be exchanged in the Merger.
(3) Determined in accordance with Section 6(b) of the Securities Act of 1933 by multiplying 0.0001364 by the proposed maximum aggregate offering price.
(4) Represents the estimated maximum number of shares of DSS convertible preferred stock that may be issued by DSS at the completion of the Merger.
(5) The offering price shown is calculated based on one-third of the aggregate $0.0001 par value per share of Lexington preferred stock to be cancelled in the Merger.
(6) Represents the maximum number of warrants to purchase DSS common stock that may be issued by DSS at the completion of the Merger.
(7) In accordance with existing SEC interpretations, the entire registration fee for the warrants is allocated to the DSS common stock registered underlying the warrants, and no separate fee is recorded for the warrants to purchase shares of DSS common stock.
(8) Represents the maximum number of shares of DSS common stock issuable upon exercise of the warrants, to be issued by DSS in the Merger.
(9) The proposed maximum aggregate offering price of DSS’s warrants to purchase DSS common stock is calculated based on the $4.80 exercise price of the warrants.
(10)  The $.02 warrants will only be issued in the event that the DSS stockholders do not approve the proposal to create the series of preferred stock to be issued in the Merger.  The number of shares issuable upon exercise of such $0.02 warrants, if issued to Lexington stockholders in connection with the Merger, would be the same number of shares as are issuable upon conversion of the preferred stock to be issued in the Merger.  In accordance with existing SEC interpretations, the entire registration fee for the $.02 warrants is allocated to the DSS common stock registered underlying the $.02 warrants, and no separate fee is recorded for the $.02 warrants to purchase shares of DSS common stock.

 

 
 

 

(11)  Represents the maximum number of shares of DSS common stock issuable upon exercise of the $.02 warrants that may be issued by DSS in the Merger.
(12)  The proposed maximum aggregate offering price of DSS’s $.02 warrants to purchase DSS common stock is calculated based on the $0.02 exercise price of the $.02 warrants.

(13)

 

 Based on the maximum number of shares of DSS common stock that may be issued to Palladium Capital Advisors, LLC as compensation for their services in connection with the transactions contemplated by the Merger Agreement. 
(14) Pursuant to Rule 457(c) under the Securities Act of 1933, as amended, and solely for purposes of calculating this registration fee, the proposed maximum aggregate offering price is equal to the product of (i) $2.65, the average of the high and low prices per share of DSS common stock on November 16, 2012 as reported on the NYSE MKT, and (ii) 786,678 (which is the maximum number of shares of DSS common stock that may be issued to Palladium Capital Advisors, LLC).

 

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

 

 
 

 

The information in this proxy statement/prospectus is not complete and may be changed. Document Security Systems, Inc. may not sell these securities until the registration statement filed with the Securities and Exchange Commission, of which this proxy statement/prospectus is a part, is declared effective. This proxy statement/prospectus is not an offer to sell these securities and it is not the solicitation of an offer to buy these securities in any jurisdiction where the offer, solicitation or sale is not permitted or would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. Any representation to the contrary is a criminal offense.

 

PRELIMINARY—SUBJECT TO COMPLETION—DATED NOVEMBER 23, 2012

 

 

PROPOSED MERGER—YOUR VOTE IS VERY IMPORTANT

 

Document Security Systems, Inc. (“DSS”), DSSIP, Inc., a wholly-owned subsidiary of DSS (“Merger Sub”), Lexington Technology Group, Inc. (“Lexington”) and Hudson Bay Master Fund Ltd., as representative of Lexington’s stockholders solely for certain purposes, entered into an Agreement and Plan of Merger on October 1, 2012 (as may be amended or modified, the “Merger Agreement”), pursuant to which Merger Sub will merge with and into Lexington, with Lexington surviving the merger as a wholly-owned subsidiary of DSS (the “Merger”). The board of directors of DSS has approved the Merger Agreement and the Merger. In addition, the board of directors of Lexington has unanimously approved the Merger Agreement and the Merger.

 

Pursuant to the terms of the Merger Agreement, upon completion of the Merger (the “Effective Time”) and subject to the Beneficial Ownership Condition (as defined below), each share of then-issued and outstanding common stock of Lexington, par value $0.0001 per share (“Lexington Common Stock”) and each share of then-issued and outstanding Series A Convertible Preferred Stock of Lexington, par value $0.0001 per share (“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, par value $0.02 per share (“DSS Common Stock”), (ii) Warrants (as described below) to purchase DSS Common Stock, and (iii) a pro rata portion of 7,100,000 shares of DSS Common Stock to be held in escrow (as described in this proxy statement/prospectus, the “Escrow Shares”) and, as applicable, shares of DSS’s Series A Convertible Preferred Stock (“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 a fraction, the numerator of which shall be one and the denominator of which shall be the sum of (A) the number of shares of Lexington Common Stock plus (B) the number of shares of Lexington Preferred Stock, in each case issued and outstanding immediately prior to the Effective Time (such fraction referred to as 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 (the “Warrants”). 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, beneficially own more than 9.99% of DSS Common Stock (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 by the DSS stockholders, $.02 Warrants, as described in this proxy statement/prospectus, 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 exceed the Beneficial Ownership Condition and accordingly will not receive DSS Preferred Stock or $.02 Warrants (as described in this proxy statement/prospectus) 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. 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 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 multiplied by 0.556 (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.

 

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).

 

DSS Common Stock is listed on the NYSE MKT and trades under the symbol “DSS.” On [•], 2013, the latest practicable date before the printing of this proxy statement/prospectus, the closing sale price of DSS Common Stock was $[•] per share. Lexington is a privately held intellectual property monetization company. Following the completion of the Merger, the combined company is expected to be publicly traded on the NYSE MKT.

 

 
 

 

DSS is soliciting proxies for use at a special meeting of its stockholders to consider and vote upon (i) a proposal to approve the Merger, including, but not limited to, the issuance of shares of DSS Common Stock and DSS Preferred Stock (or, if proposal (ii) below is not approved by the DSS stockholders, $.02 Warrants) and Warrants to purchase shares of DSS Common Stock (and the shares of DSS Common Stock issuable upon conversion of the DSS Preferred Stock or exercise of the $.02 Warrants, as applicable, and the shares of DSS Common Stock issuable upon the exercise of the Warrants) to the Lexington stockholders in connection with the Merger, (ii) a proposal to approve an amendment to DSS’s amended and restated certificate of incorporation to authorize a class of preferred stock and establish the associated rights and preferences thereof, (iii) a proposal to approve an amendment to DSS’s amended and restated certificate of incorporation to implement a staggered board of directors, (iv) a proposal to approve an amendment to DSS’s amended and restated certificate of incorporation to effect a reverse stock split of DSS Common Stock within the range of one-for-two to one-for-four (with the exact amount, if any, to be determined prior to the completion of the merger based on the requirements of the NYSE MKT), (v) a proposal to approve the Document Security Systems, Inc. 2013 Employee, Director and Consultant Equity Incentive Plan and (vi) a proposal to adjourn the DSS special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of any of proposals (i) through (v). The board of directors of DSS recommends that DSS stockholders vote FOR each of the foregoing proposals. Approval of the foregoing proposal (i) is necessary to complete the Merger.

 

Your vote is very important.  Whether or not you plan to attend the DSS special meeting of stockholders, please submit your proxy as promptly as possible (i) through the Internet, (ii) by telephone or (iii) by marking, signing and dating the enclosed proxy card and returning it by mail in the postage-paid envelope provided to make sure that your shares are represented at the special meeting.

 

This proxy statement/prospectus provides you with detailed information about the DSS special meeting, the Merger and the other business to be considered by DSS stockholders at the special meeting. In addition to being a proxy statement, this document is also a prospectus to be used by DSS when issuing DSS Common Stock and DSS Preferred Stock (or, if proposal (ii) above is not approved by the DSS stockholders, $.02 Warrants), the Warrants to purchase DSS Common Stock and the shares of common stock underlying such DSS Preferred Stock or $.02 Warrants, as applicable, and Warrants to be issued to the Lexington stockholders in connection with the Merger. DSS encourages you to read the entire document carefully.

 

Please pay particular attention to the section entitled “Risk Factors” beginning on page 50 for a discussion of the risks related to the Merger, the combined company following the completion of the Merger, and the business and operations of each of DSS and Lexington.

 

Robert B. Bzdick

 

President and Chief Operating Officer

Document Security Systems, Inc.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued in connection with the Merger or determined if this proxy statement/prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

 

This proxy statement/prospectus is dated ___________, 2013 and is first being mailed to the stockholders of DSS on or about __________, 2013.

 

 
 

 

REFERENCES TO ADDITIONAL INFORMATION

 

This proxy statement/prospectus references important business and financial information about DSS that is not included in or delivered with this proxy statement/prospectus. DSS and its proxy solicitor, [•], will provide you with copies of this information (excluding all exhibits) relating to DSS, without charge, upon written or oral request. You can obtain these documents, which are referred to in this proxy statement/prospectus, by requesting them in writing or by telephone from DSS or [•], DSS’s proxy solicitor, at the following address and telephone number, as applicable:

 

Document Security Systems, Inc.

First Federal Plaza

28 Main Street, Suite 1525

Rochester, New York 14614

Telephone: (585) 325-3610

[PROXY SOLICITOR]

 

In order for you to receive timely delivery of the documents in advance of the DSS special meeting you must request the information no later than __________, 2013.

 

ABOUT THIS PROXY STATEMENT/PROSPECTUS

 

This proxy statement/prospectus, which forms a part of a Registration Statement on Form S-4 filed with the Securities and Exchange Commission by DSS (File No. 333-___________), constitutes a prospectus of DSS under Section 5 of the Securities Act of 1933, as amended, with respect to the shares of DSS Common Stock and DSS Preferred Stock (or, if the proposal (ii) below is not approved by the DSS stockholders, $.02 Warrants) and the Warrants (and the shares of DSS Common Stock issuable upon conversion of the DSS Preferred Stock or the exercise of the $.02 Warrants, as applicable, and the shares of DSS Common Stock issuable upon the exercise of the Warrants) to be issued to the Lexington stockholders in connection with the merger.

 

This proxy statement/prospectus also constitutes a notice of meeting and a proxy statement under Section 14(a) of the Securities Exchange Act of 1934, as amended, with respect to a DSS special meeting, at which DSS stockholders will be asked to consider and vote upon certain proposals, including (i) a proposal to approve the Merger, including, but not limited to, the issuance of shares of DSS Common Stock and DSS Preferred Stock (or, if the proposal (ii) below is not approved by the DSS stockholders, $.02 Warrants) and Warrants (and the shares of DSS Common Stock issuable upon conversion of the DSS Preferred Stock or the exercise of the $.02 Warrants, as applicable, and the shares of DSS Common Stock issuable upon the exercise of the Warrants) to the Lexington stockholders in connection with the merger, (ii) a proposal to amend DSS’s amended and restated certificate of incorporation to authorize a class of preferred stock and establish the associated rights and preferences thereof, (iii) a proposal to amend DSS’s amended and restated certificate of incorporation to implement a staggered board of directors, (iv) a proposal to approve an amendment to DSS’s amended and restated certificate of incorporation to effect a reverse stock split of DSS Common Stock within the range of one-for-two to one-for-four (with the exact amount, if any, to be determined prior to the completion of the merger based on the requirements of the NYSE MKT), (v) a proposal to approve the Document Security Systems, Inc. 2013 Employee, Director and Consultant Equity Incentive Plan, and (vi) a proposal to adjourn the DSS special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of any of proposals (i) through (v).

 

 
 

 

 

Document Security Systems, Inc.

First Federal Plaza

28 Main Street, Suite 1525

Rochester, New York 14614

Telephone: (585) 325-3610

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON_________________, 2013

 

To the Stockholders of Document Security Systems, Inc.:

 

The special meeting of stockholders of Document Security Systems, Inc., a New York corporation, will be held on ____________, 2013, at [•]:[•] a.m., local time, at [             ], for the following purposes:

 

  1. To approve a merger, including, but not limited to, the issuance of shares of DSS common stock and preferred stock (or, if Proposal 2 below is not approved by the DSS stockholders, $.02 warrants) and warrants (and the shares of common stock issuable upon conversion of the preferred stock or exercise of the $.02 warrants, as applicable, and exercise of the warrants) to the Lexington stockholders in connection with the merger contemplated by the Agreement and Plan of Merger, dated as of October 1, 2012, by and among DSS, Lexington and DSSIP, Inc., a wholly-owned subsidiary of DSS;
  2. To amend DSS’s amended and restated certificate of incorporation to authorize a class of preferred stock and establish the associated rights and preferences thereof;
  3. To amend DSS’s amended and restated certificate of incorporation to implement a staggered board of directors;
  4. To amend DSS’s amended and restated certificate of incorporation to effect a reverse stock split of DSS’s issued and outstanding common stock within the range of one-for-two to one-for-four (with the exact amount, if any, to be determined prior to the completion of the merger based on the requirement of the NYSE MKT);
  5. To approve the Document Security Systems, Inc. 2013 Employee, Director and Consultant Equity Incentive Plan, as approved by the DSS board of directors on _____________;
  6. To 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 proposals referred to in (1) through (5) above; and
  7. To conduct any other business as may properly come before the DSS special meeting or any adjournment or postponement thereof.

 

 
 

 

The DSS board of directors has determined that the merger, upon the terms and conditions set forth in the merger agreement, and the other transactions contemplated by the merger agreement are advisable and fair to, and in the best interests of, DSS and its stockholders. The board of directors makes its recommendation to the DSS stockholders after consideration of the factors described in this proxy statement/prospectus. The DSS board of directors unanimously recommends that DSS stockholders vote FOR each of the foregoing proposals.

 

The DSS board of directors has fixed __________, 2013 as the record date for the determination of stockholders entitled to notice of, and to vote at, the DSS special meeting and any adjournment or postponement thereof. Only holders of record of shares of DSS common stock at the close of business on the record date are entitled to notice of, and to vote at, the DSS special meeting. At the close of business on the record date, DSS had ___________shares of common stock outstanding and entitled to vote.

 

By Order of the Board of Directors,

 

Robert B. Bzdick

 

President and Chief Operating Officer

_____________, 2013

 

Your vote is important.  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 is required for approval of DSS Proposal Nos. 1, 5 and 6. The affirmative vote of the holders of a majority of the outstanding shares of DSS common stock entitled to vote on the matter either in person or by proxy at the DSS special meeting is required for approval of DSS Proposal Nos. 2, 3 and 4.

 

All DSS stockholders of record are cordially invited to attend the DSS special meeting in person. However, even if you plan to attend the DSS special meeting in person, DSS urges you to submit your proxy as promptly as possible (i) through the Internet, (ii) by telephone or (iii) by marking, signing and dating the enclosed proxy card and returning it by mail in the postage-paid envelope as instructed on the enclosed proxy card to ensure that your shares of DSS common stock will be represented at the DSS special meeting if you are unable to attend. If you sign, date and mail your proxy card without indicating how you wish to vote, all of your shares will be voted FOR DSS Proposal Nos. 1, 2, 3, 4, 5 and 6. If you fail to submit your proxy as instructed on the enclosed proxy card, the effect will be that your shares will not be counted for purposes of determining whether a quorum is present at the DSS special meeting and will have the same effect as a vote against DSS Proposal Nos. 2, 3 and 4 but such failure will have no effect with respect to DSS Proposal Nos. 1, 5 and 6. If you do attend the DSS special meeting and wish to vote in person, you may withdraw your proxy and vote in person.

 

This proxy statement/prospectus provides you with detailed information about the merger and the other business to be considered by DSS stockholders at the special meeting. DSS encourages you to read the entire document carefully. Please pay particular attention to the section entitled “Risk Factors” beginning on page 50 for a discussion of the risks related to the merger, the combined company following the completion of the merger, and the business and operations of each of DSS and Lexington.

 

 
 

 

IMPORTANT

 

Your vote is important. Whether or not you expect to attend the DSS special meeting, please submit your proxy (i) through the Internet, (ii) by telephone or (iii) by marking, signing and dating the enclosed proxy card and returning it by mail in the postage-paid envelope provided, as instructed in these materials, as promptly as possible in order to ensure that your shares of DSS common stock will be represented at the DSS special meeting. Even if you have voted by proxy, you may still vote in person if you attend the DSS special meeting and revoke your proxy. Please note, however, that if your shares are held in “street name” by a broker or other nominee and you wish to vote at the DSS special meeting, you must obtain a proxy issued in your name from such record holder prior to the special meeting.

 

 
 

 

TABLE OF CONTENTS

 

QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE DSS SPECIAL MEETING 1
   
SUMMARY 14
The Companies 14
The Merger 16
What Lexington Stockholders Will Receive in the Merger 17
Ownership of the Combined Company After the Completion of the Merger 18
Treatment of Lexington Stock Options 18
Treatment of DSS Stock Options 18
Board of Directors and Executive Officers of the Combined Company After the Completion of the Merger 19
Recommendations of the DSS Special Committee and the DSS Board of Directors and its Reasons for the Merger 19
Interests of DSS Directors and Executive Officers in the Merger 20
Anticipated Accounting Treatment of the Merger 21
Material United States Federal Income Tax Consequences of the Merger 21
Restrictions on Sales of Shares of DSS Common Stock Received By Lexington Stockholders in the Merger 22
Appraisal Rights 22
Regulatory Approvals 22
Conditions to the Completion of the Merger 23
No Solicitation 24
Termination of the Merger Agreement 25
Termination Fees and Expenses 26
Voting by DSS Directors and Executive Officers 26
Voting and Support Agreements 26
Rights of Lexington Stockholders Will Change as a Result of the Merger 27
Risk Factors 27
Matters to Be Considered at the DSS Special Meeting 28
   
SELECTED HISTORICAL FINANCIAL DATA OF DSS 29
   
SELECTED HISTORICAL FINANCIAL DATA OF LEXINGTON 31
   
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA 33
   
MARKET PRICE DATA AND DIVIDEND INFORMATION 42
   
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 48
   
RISK FACTORS 50
Risks Related to the Merger 50
Risks Related to the Combined Company if the Merger Is Completed 54
Risks Related to DSS’s Business 59
Risks Related to Lexington’s Business 66

 

i
 

 

THE MERGER 74
Structure of the Merger 74
What Lexington Stockholders Will Receive in the Merger 74
Ownership of the Combined Company After the Completion of the Merger 76
Treatment of Lexington Stock Options 76
Background of the Merger 77
Merger 83
Position of the DSS Board of Directors as to Fairness of the Merger and Recommendation of the DSS Board of Directors 85
Board of Directors and Executive Officers of the Combined Company After the Completion of the Merger 86
Interests of DSS Directors and Executive Officers in the Merger 87
Anticipated Accounting Treatment 90
Tax Treatment of the Merger 91
Regulatory Approvals Required for the Merger 91
Restrictions on Sales of Shares of DSS Common Stock Received by Lexington Stockholders in the Merger 91
Appraisal Rights 91
NYSE MKT Listing of DSS Common Stock 91
   
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER 92
   
THE MERGER AGREEMENT 96
Terms of the Merger 96
Completion of the Merger 96
Certificate of Incorporation; Bylaws; Directors and Officers 97
Merger Consideration 97
Exchange of Lexington Stock Certificates 99
Representations and Warranties 99
Material Adverse Effect 99
Certain Covenants of the Parties 101
No Solicitation 102
Board Recommendations 104
Approval of Stockholders 104
Indemnification of Directors and Officers 104
Conditions to the Completion of the Merger 105
Termination of the Merger Agreement 106
Termination Fees and Expenses 106
Amendments 107
Governing Law 107
Escrow Agreement 108
Voting and Support Agreements 108
   
INFORMATION ABOUT THE COMPANIES 109
Document Security Systems, Inc. 109
Lexington Technology Group, Inc. 110
DSSIP, Inc. 110
   
THE SPECIAL MEETING OF DSS STOCKHOLDERS 111
Date, Time and Place 111

 

ii
 

 

Purpose of the DSS Special Meeting 111
DSS Record Date; Shares Entitled to Vote 111
Quorum 112
Required Vote 112
Counting of Votes; Treatment of Abstentions and Incomplete Proxies 113
Voting by DSS Directors and Executive Officers 113
Voting of Proxies by Registered Holders 113
Shares Held in Street Name 113
Revocability of Proxies and Changes to a DSS Stockholder’s Vote 114
Solicitation of Proxies 114
Delivery of Proxy Materials to Households Where Two or More DSS Stockholders Reside 115
Attending the DSS Special Meeting 115
   
DSS PROPOSALS 116
DSS Proposal No. 1: Approval of the Issuance of DSS Common Stock, Preferred Stock (or, if the Preferred Stock Creation Proposal is Not Approved, $.02 Warrants) and Warrants in Connection with the Merger 116
DSS Proposal No. 2: Approval of an Amendment to DSS’s Amended and Restated Certificate of Incorporation to Authorize a Class of Preferred Stock 118
DSS Proposal No. 3: Approval of an Amendment to DSS’s Amended and Restated Certificate of Incorporation to Implement a Staggered Board of Directors 120
DSS Proposal No. 4: Approval of an Amendment to DSS’s Amended and Restated Certificate of Incorporation to Effect a Reverse Stock Split of DSS Common Stock 122
DSS Proposal No. 5: Approval of Document Security Systems, Inc. 2013 Employee, Director and Consultant Equity Incentive Plan 129
DSS Proposal No. 6: Approval of 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 134
   
DSS’S BUSINESS 135
   
DSS’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 141
   
LEXINGTON’S BUSINESS 160
   
LEXINGTON’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 167
   
MANAGEMENT OF THE COMBINED COMPANY FOLLOWING THE MERGER 174
Executive Officers and Directors 174
Composition of the Board of Directors and Director Independence 177
Committees of the Board of Directors 178
Board Leadership Structure and Risk Oversight 180
Compensation Risk Assessment 180
Code of Ethics 180
Section 16(a) Beneficial Ownership Reporting Compliance 180
Related Person Transactions 180
Director Compensation 182
Executive Compensation 183

 

iii
 

 

DSS SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 191
   
LEXINGTON SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 193
   
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF THE COMBINED COMPANY FOLLOWING THE MERGER 195
   
DESCRIPTION OF CAPITAL STOCK 199
Common Stock 199
Preferred Stock 199
Warrants 200
New York Statutory Business Combination Provisions 201
   
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS 202
   
COMPARISON OF RIGHTS OF DSS STOCKHOLDERS AND LEXINGTON STOCKHOLDERS 212
   
LEGAL MATTERS 224
   
EXPERTS 224
   
FUTURE STOCKHOLDER PROPOSALS 224
   
WHERE YOU CAN FIND ADDITIONAL INFORMATION 224
   
DOCUMENT SECURITY SYSTEMS, INC. INDEX TO THE FINANCIAL STATEMENTS F-1
   
LEXINGTON TECHNOLOGY GROUP, INC. INDEX TO THE FINANCIAL STATEMENTS F-50

 

Annexes        
Annex A     The Merger Agreement
Annex B     Voting and Support Agreements
Annex C     Form of $.02 Warrant
Annex D     Form of Warrant
Annex E     Form of Certificate of Amendment to Authorize Preferred Stock
Annex F     Form of Certificate of Amendment to Effect a Reverse Stock Split
Annex G     Form of Certificate of Amendment to Implement a Staggered Board of Directors
Annex H     Document Security Systems, Inc. 2013 Employee, Director and Consultant Equity Incentive Plan

 

iv
 

 

QUESTIONS AND ANSWERS ABOUT THE MERGER AND
THE DSS SPECIAL MEETING

 

The following are some questions that you, as a stockholder of Document Security Systems, Inc. (“DSS”) may have regarding the Merger (as defined below) or the DSS special meeting, together with brief answers to those questions. DSS urges you to read carefully the remainder of this proxy statement/prospectus, including the annexes and other documents referred to in this proxy statement/prospectus, because the information in this section may not provide all of the information that might be important to you with respect to the Merger or the DSS special meeting.

 

When this proxy statement/prospectus refers to the combined company, it means DSS and its subsidiaries and Lexington Technology Group, Inc. (“Lexington”) and its subsidiaries, collectively.

 

 

Q: What is the Merger?
   
A: DSS, Lexington, DSSIP, Inc. and Hudson Bay Master Fund Ltd., as representative of Lexington’s stockholders (“Lexington Representative” or “Hudson Bay”) solely for certain purposes, entered into an Agreement and Plan of Merger, dated as of October 1, 2012 (as may be amended or modified, the “Merger Agreement”), that sets forth the terms and conditions of the proposed business combination of DSS and Lexington. Under the Merger Agreement, DSSIP, Inc., a wholly-owned subsidiary of DSS (“Merger Sub”) will merge with and into Lexington, with Lexington being the surviving corporation (the “Surviving Corporation”) as a wholly-owned subsidiary of DSS (the “Merger”). A complete copy of the Merger Agreement is attached to this proxy statement/prospectus as Annex A.
   
Q: Why is DSS proposing to effect the Merger?
   
A: The board of directors of DSS has approved the Merger Agreement and the Merger. The combination of the two companies will substantially increase DSS’s intellectual property portfolio, add significant talent in technological innovation and position DSS to enhance its opportunities for revenue generation through the monetization of the combined company’s assets, including a potential successful outcome of Lexington’s patent infringement litigation (the “Litigation”) against five companies, including Facebook, Inc. and LinkedIn Corporation, for unlawfully using systems that incorporate features claimed in patents owned by Lexington’s wholly-owned subsidiary, Bascom Research, LLC (“Bascom Research”).
   
Q: Why am I receiving these materials?
   
A: DSS is sending these materials to its stockholders to help them decide how to vote their shares of DSS common stock with respect to the Merger and the other matters to be considered at the special meeting. This document serves as both a proxy statement of DSS used to solicit proxies for its special meeting and as a prospectus of DSS used to offer shares of DSS common stock, DSS preferred stock (or, if Proposal 2 is not approved by the DSS stockholders, $.02 Warrants (as defined below) in lieu of such preferred stock), as applicable, and warrants to purchase DSS common stock (including the shares of DSS common stock issuable upon conversion of the DSS preferred stock or exercise of the $.02 Warrants, as applicable, and shares of DSS common stock issuable upon the exercise of the warrants) issuable to the Lexington stockholders in connection with the Merger. This proxy statement/prospectus contains important information about the Merger and the DSS special meeting and you should read it carefully.

 

 

1
 

 

 

Q: What will Lexington stockholders receive in the Merger?
   
A:

Pursuant to the terms of the Merger Agreement, upon completion of the Merger (the “Effective Time”) and subject to the Beneficial Ownership Condition (as defined below), each share of then-issued and outstanding common stock of Lexington, par value $0.0001 per share (“Lexington Common Stock”) and each share of then-issued and outstanding Series A Convertible Preferred Stock of Lexington, par value $0.0001 per share (“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, par value $0.02 per share (“DSS Common Stock”), (ii) Warrants (as described below), and (iii) a pro rata portion of 7,100,000 shares of DSS Common Stock to be held in escrow (as described below, the “Escrow Shares”) and, as applicable, shares of DSS’s Series A Convertible Preferred Stock (“DSS Preferred Stock”), determined by multiplying each of (x) 17,250,000 shares plus the number of Additional Shares (as defined below) and Exchanged Shares (as defined below), if any, (y) 4,859,894 warrants, and (z) 7,100,000 shares by a fraction, the numerator of which shall be one and the denominator of which shall be the sum of (A) the number of shares of Lexington Common Stock plus (B) the number of shares of Lexington Preferred Stock, in each case issued and outstanding immediately prior to the Effective Time (such fraction referred to as 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 (the “Warrants”). 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, beneficially own more than 9.99% of DSS Common Stock (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 by the DSS stockholders, $.02 Warrants (as defined below), 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 exceed the Beneficial Ownership Condition and accordingly will not receive DSS Preferred Stock or $.02 Warrants, as applicable, 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 $0.02 per share (the “$.02 Warrants”). 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 Warrants, or a portion thereof, by way of a cashless exercise. Except under certain circumstances, no holder may exercise its Warrants or $.02 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 $.02 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 $.02 Warrants.

 

 

2
 

 

 

 

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 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 multiplied by 0.556 (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.

 

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).

 

As a condition to the closing of the Merger, DSS, Lexington Representative and American Stock Transfer & Trust Company, LLC, as escrow agent, will enter into an escrow agreement (the “Escrow Agreement”). Pursuant to the Escrow Agreement, at the Effective Time, DSS shall deposit the Escrow Shares into an escrow account to be released to the holders of Lexington Common Stock (pro rata on a fully-diluted basis as of the Effective Time) if and when the closing price per share of DSS Common Stock exceeds $5.00 per share (as adjusted for stock splits, stock dividends and similar events) for 40 trading days within a continuous 90 trading day period following the closing of the Merger. If within one year following the closing of the Merger, such threshold is not achieved, the shares of DSS Common Stock held in escrow shall be cancelled and returned to the treasury of DSS.

 

In addition, if at the Effective Time Lexington has at least $7,500,000 in cash (including amounts paid or accrued for certain professional fees, not to exceed $1,000,000 in the aggregate) and it and its subsidiaries shall have no indebtedness for borrowed money, DSS shall issue a number of additional shares of DSS Common Stock to Lexington’s stockholders calculated by dividing any cash held by Lexington in excess of $7,500,000 (up to $1,500,000) by $3.00 (any such shares referred to as the “Additional Shares”).

 

 

3
 

 

 

 

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, see the sections entitled “The Merger — What Lexington Stockholders Will Receive in the Merger,” “The Merger — Ownership of the Combined Company After the Completion of the Merger” and “The Merger Agreement — Merger Consideration” beginning on pages 74, 76 and 97, respectively.

 

 

Q:

How will DSS stockholders be affected by the Merger?

 

  A:

The Merger will have no effect on the number of shares of DSS Common Stock held by current DSS stockholders as of immediately prior to the completion of the Merger (subject to any changes in outstanding shares of DSS Common Stock as a result of the proposed reverse stock split described in the Reverse Stock Split Proposal below). However, it is expected that upon completion of the Merger such shares will represent only an aggregate of approximately 44% of the outstanding shares of common stock of the combined company calculated on a fully diluted basis (without taking into account shares of DSS Common Stock held by Lexington stockholders prior to the completion of the Merger). For example, if you are a DSS stockholder and hold 5% of the outstanding shares of DSS Common Stock calculated on a fully diluted basis immediately prior to the completion of the Merger and do not also hold shares of Lexington capital stock then, upon completion of the Merger, you will hold an aggregate of approximately 2.20% of the outstanding shares of common stock of the combined company calculated on a fully diluted basis as of immediately following the completion of the Merger.

 

Q:

Is the Common Stock Exchange Ratio subject to adjustments based on fluctuations in the price of DSS Common Stock or value of Lexington capital stock?

 

  A:

No. The Common Stock Exchange Ratio is a fraction, the numerator of which shall be one and the denominator of which shall be the sum of (x) the number of shares of Lexington Common Stock plus (y) the number of shares of Lexington Preferred Stock, in each case issued and outstanding immediately prior to the Effective Time, which as of November 19, 2012 is 31,776,552. There will be no adjustments to the Common Stock Exchange Ratio based on fluctuations in the price of DSS Common Stock or the value of Lexington capital stock prior to the completion of the Merger. As a result of any such fluctuations in stock price or value, the aggregate market value of the shares of DSS Common Stock that the Lexington stockholders are entitled to receive at the time that the Merger is completed could vary significantly from the value of such shares on the date of this proxy statement/prospectus, the date of the DSS special meeting or the date on which the Lexington stockholders actually receive their shares of DSS Common Stock or DSS Preferred Stock.

 

On October 2, 2012, the first trading day following the announcement of the Merger, the last reported sale price of DSS Common Stock was $4.15, for an aggregate market value of DSS of $90,079,763, or $108,003,696 on a fully diluted basis. On [•], the latest practicable date before the printing of this proxy statement/prospectus, the last reported sale price of DSS Common Stock was $[•], for an aggregate market value of DSS of $[•] million, or $[•] million on a fully diluted basis. Assuming the issuance on such date of an aggregate of [•] shares of DSS Common Stock (including Escrow Shares) and an aggregate of [•] shares of DSS Preferred Stock, based on a Common Stock Exchange Ratio of [•], and an aggregate of 4,859,894 of Warrants, if the Merger was completed on such date, the market value attributable to the shares of DSS Common Stock to be issued to Lexington’s stockholders in the aggregate, or approximately [•]% of the outstanding shares of the combined company calculated on a fully diluted basis, would equal $[•] million. 

  

4
 

 

  For a more complete discussion of the Common Stock Exchange Ratio, see the section entitled “The Merger — What Lexington Stockholders Will Receive in the Merger” beginning on page 74.
   
Q:

What will holders of Lexington stock options receive in the Merger?

 

A:

At the Effective Time of the Merger, up to an aggregate of 3,600,000 Lexington stock options, whether vested or unvested, will be converted into and become options to purchase DSS Common Stock and DSS will assume such Lexington stock options in accordance with the terms of the existing non-qualified stock option agreements. After the Effective Time of the Merger, (a) each Lexington stock option assumed by DSS may be exercised solely for shares of DSS Common Stock and (b) the number of shares of DSS Common Stock and the exercise price subject to each Lexington stock option assumed by DSS shall be determined by the Option Exchange Ratio. As of November 19, 2012, the outstanding and unexercised Lexington stock options to purchase 3,600,000 shares of Lexington common stock, whether vested or unvested, would be converted into and become options to purchase an aggregate of 2,000,000 shares of DSS Common Stock at an exercise price of $3.00 per share.

 

For a more complete discussion of what holders of Lexington stock options will receive in connection with the Merger, see the section entitled “The Merger — Treatment of Lexington Stock Options” beginning on page 76.

 

Q:

How will the Merger affect DSS’s business?

 

A:

DSS will undergo changes in connection with the Merger. Currently, DSS is engaged in developing and integrating cloud computing data security, Radio Frequency Identification (“RFID”) systems and security printing technologies which prevent counterfeiting, product diversion and brand fraud (as more fully discussed in the section entitled “DSS’s Business — Overview” beginning on page 135). Following the Merger, DSS will pursue maximizing the economic benefits of its intellectual property portfolio, add significant talent in technological innovation, and potentially enhance its opportunities for revenue generation through the monetization of the combined company’s assets, including DSS’s patents and litigation, patents owned by Lexington and the outcome of its patent infringement litigation against five companies, including Facebook, Inc. and LinkedIn Corporation, for unlawfully using systems that incorporate features claimed in patents owned by Bascom Research. In addition, as a result of the Merger, former Lexington stockholders are expected to possess majority control of the combined company and designees of Lexington will possess majority control of the board of directors of the combined company.

 

Through the Merger, DSS will own patent assets acquired from Thomas Bascom. DSS intends to expand its intellectual property portfolio through both internal development and acquisition. The experience and liquidity of the combined company will enable DSS to expand on that portfolio as well as create additional intellectually property internally. DSS intends to monetize its intellectual property through:

  

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

 

5
 

 

  strategic partnerships, and
 

litigation.

 

  For a more complete discussion of the existing businesses of DSS and Lexington, see the sections entitled “DSS’s Business,” “DSS’s Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Lexington’s Business,” and “Lexington’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on pages 135, 141, 160 and 167, respectively. In addition, you should carefully review the section entitled “Risk Factors” beginning on page 50, which presents risks and uncertainties related to the Merger, the combined company following the completion of the Merger, and the business and operations of each of DSS and Lexington.
   
Q:

Will the shares of DSS Common Stock and DSS Preferred Stock received by Lexington stockholders in the Merger be subject to any transfer restrictions?

 

A:

No. 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 received by 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.

 

Q:

What was the role of the DSS special committee and the DSS board of directors in connection with the Merger?

 

A:

In addition to reviewing, evaluating and negotiating the terms and conditions of the Merger and considering the interests of DSS’s directors and executive officers in the Merger, the DSS board of directors conducted a review of all strategic alternatives for DSS in an effort to maximize stockholder value, including continuing DSS as a stand-alone publicly traded company and entering into strategic transactions with a number of other operating companies.

 

Following a recommendation from the DSS special committee, the DSS board of directors recommends that the Merger Agreement and the transactions contemplated thereby, including the Merger, be approved by the stockholders of DSS. The DSS board of directors made its recommendation to the DSS stockholders following a recommendation from the DSS special committee and after considering the factors described in the section entitled “The Merger — Recommendations of the DSS Board of Directors and its Reasons for the Merger.”

 

 

6
 

 

 

Q:

What proposals are DSS stockholders being asked to consider?

 

A:

As a condition to the completion of the Merger, DSS stockholders must approve the Merger, including, but not limited to, the issuance of shares of DSS Common Stock and DSS Preferred Stock (or, if the Preferred Stock Issuance Proposal described below is not approved, $.02 Warrants) and Warrants (including the shares of DSS Common Stock issuable upon conversion of the DSS Preferred Stock or exercise of the $.02 Warrants, as applicable, and the shares of DSS Common Stock issuable upon the exercise of the Warrants) to the Lexington stockholders in connection with the Merger (the “Securities Issuance Proposal”), which approval 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. DSS stockholders are also being asked to consider (i) an amendment to the DSS amended and restated certificate of incorporation (the “DSS’s Certificate”) to authorize a class of preferred stock and establish the associated rights and preferences thereof (the “Preferred Stock Creation Proposal”), (ii) an amendment to the DSS’s Certificate to implement a staggered board of directors (the “Staggered Board Proposal”), (iii) a reverse stock split of DSS issued and outstanding common stock within the range of one-for-two to one-for-four (with the exact amount, if any, to be determined by DSS prior to the completion of the Merger based on the requirements of the NYSE MKT) (the “Reverse Stock Split Proposal”), which approval for each of (i), (ii) and (iii) 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 and (iv) to approve the Document Security Systems, Inc. 2013 Employee, Director and Consultant Equity Incentive Plan (the “2013 Equity Incentive Plan,)” which is described in the section entitled “DSS Proposal No. 5: Approval of the 2013 Equity Incentive Plan” and attached to this proxy statement/prospectus as Annex H (the “2013 Equity Incentive Plan Proposal”), which approval 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, however, the approval of such proposals is not a condition to consummation of the Merger. The above proposals are collectively referred to herein as the “DSS Proposals.”

 

Q:

What stockholder approvals are required for 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?

 

A:

The holders of a majority of the shares of DSS Common Stock present and entitled to vote either in person or by proxy at the DSS special meeting must vote in favor of any adjournment of the DSS special meeting.

 

Q:

What conditions must be satisfied or waived to complete the Merger?

 

A: In order to complete the Merger, each of the closing conditions contained in the Merger Agreement must be satisfied or waived (to the extent permitted by applicable law). Among the closing conditions is the requirement that (i) 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; (ii) the registration statement on Form S-4 of which this proxy statement/prospectus forms a part has become effective; (iii) the shares of DSS Common Stock shall have been approved for listing on the NYSE MKT; (iv) the Escrow Agreement shall have been executed and delivered; (v) the representations and warranties of each party contained in the Merger Agreement are true and correct in all material respects; (vi) each party shall have performed or complied in all material respects with all agreements and covenants under the Merger Agreement; (vii) Lexington and its subsidiaries shall have at least $7,500,000 in cash (less professional fees, not to exceed $1,000,000 in the aggregate), shall have no liabilities or obligations required to be accrued under GAAP, shall have no indebtedness for borrowed money and shall be solvent, able to pay its indebtedness as it matures and have capital sufficient to carry on its businesses; (viii) the receipt of all necessary consents or approvals; (ix) the absence of a Material Adverse Effect (as defined in the Merger Agreement); (x) none of Lexington’s intellectual property shall be held unpatentable, invalid or unenforceable by a court of competent jurisdiction; (xi) Lexington shall have received written resignations from certain directors and officers of DSS and its subsidiaries; and (xii) the voting and support agreements shall have been executed and delivered.

 

 

7
 

 

 

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

What is the reverse stock split and why is it necessary?

 

A:

If necessary to continue to list DSS’s securities on the NYSE MKT, it is expected that immediately prior to the Effective Time, DSS will effect a reverse stock split within the range of one-for-two to one-for-four (with the exact ratio, if any, to be determined immediately prior to the completion of the Merger based on the requirements of the NYSE MKT). The DSS board of directors believes that stockholder approval of an amendment granting this discretion, rather than approval of a specified ratio, provides the appropriate flexibility to react to then-current market conditions and NYSE MKT’s requirements for continued listing therefore and is in the best interests of DSS and its stockholders. In addition, DSS may elect not to undertake a reverse stock split. The Merger may constitute a “reverse merger” under applicable rules and regulations established by the NYSE MKT, which requires the combined company to comply with the initial listing standards of the rules and regulations established by NYSE MKT to continue to be listed on such market following the Merger. DSS Common Stock is required to be listed on the NYSE MKT as a condition to closing the Merger. The NYSE MKT’s initial listing standards require a company to have, among other things, a $3.00 per share minimum bid price. Because the per share price of DSS Common Stock may be less than $3.00, the reverse stock split may be necessary to meet the minimum bid listing requirement. From June 5, 2012 to October 18, 2012, the DSS Common Stock had a closing price of $3.00 or above for each trading day. On November 19, 2012, the closing price of DSS Common Stock was $2.73. If the DSS Common Stock continues to trade at or above $3.00 at the time of the Merger, DSS does not anticipate that it will need to undertake a reverse stock split, even if DSS obtains stockholder approval to do so.

 

Q:

What is the proposal to amend DSS’s Certificate to implement a staggered board of directors?

 

A:

The Staggered Board Proposal to approve a classified board for DSS would result in DSS’s board of directors being divided into three classes of directors serving staggered terms. Staggering the terms of directors means that at the annual meeting in any given year, only a fraction (roughly one-third) of the directors are up for re-election. A classified board can increase the likelihood of continuity and stability in the policies formulated by the board of directors and increase a corporation’s ability to attract and retain desirable directors. A classified board may also prevent potential unsolicited acquirors from quickly obtaining control of DSS in certain circumstances and thereby discourage attempts to acquire DSS or remove management. The classification of directors would also have the effect of making it more difficult for stockholders to change the composition of DSS’s board of directors in a relatively short period of time. Approval of the Staggered Board Proposal, however, is not required to consummate the Merger and the transactions contemplated thereby. 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.

  

8
 

 

Q:

When does DSS expect to complete the Merger?

 

A:

DSS expects to complete the Merger as soon as possible following the approval of the DSS Proposals at the special meeting, assuming the satisfaction or waiver of all other closing conditions contained in the Merger Agreement. It is possible, therefore, that factors outside of each company’s control could require DSS to complete the Merger at a later time or not complete it at all.

 

Q:

How does the DSS board of directors recommend that DSS stockholders vote with respect to each of the proposals and the adjournment of the DSS special meeting?

 

A:

The DSS board of directors unanimously 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 2013 Equity Incentive Plan and FOR 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. The DSS board of directors made its recommendation after considering the factors described in this proxy statement/prospectus.

 

Q:

What risks should I consider in deciding whether to vote in favor of the DSS Proposals?

 

A:

You should carefully review the section of this proxy statement/prospectus entitled “Risk Factors” beginning on page 50, which presents risks and uncertainties related to the Merger, the combined company, and the business and operations of each of DSS and Lexington.

 

Q:

What are the material federal income tax consequences of the Merger to me?

 

A:

The Merger should constitute a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”). Mintz., Levin, Cohn, Ferris, Glovsky, Ferris and Popeo, P.C. (“Mintz Levin”) will render its written opinion regarding such qualification. As a result of the reorganization, 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 Internal Revenue Service (“IRS”) or any court. No ruling has been, or will be, sought from the IRS as to the tax consequences of the Merger.

 

The Merger should constitute a “reorganization” within the meaning of Section 368(a) of the Code. 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 (including the $.02 Warrants in the event they are issued). 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.

 

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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 (or the $.02 Warrants in the event they are issued) 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.

 

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.

   
Q:

Do I have appraisal rights in connection with the Merger?

 

A:

Under the Business Corporation Law of the State of New York (the “NYBCL”), holders of DSS Common Stock are not entitled to appraisal rights in connection with the Merger or the proposals described in this proxy statement/prospectus. Under the General Corporation Law of the State of Delaware (the “DGCL”), however, holders of Lexington capital stock may be entitled to appraisal rights in connection with the Merger.

 

Q:

When and where will the DSS special meeting take place?

 

A:

The DSS special meeting will be held on [•], 2013 at [•]:00 a.m., local time, at the offices of [•].

 

Q:

Who can attend and vote at the stockholder meetings?

 

A: All DSS stockholders of record as of the close of business on [•], the record date for the DSS special meeting, are entitled to receive notice of and to vote at the DSS special meeting.

  

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Q:

What do I need to do now and how do I vote?

 

A:

DSS urges you to read this proxy statement/prospectus carefully, including its annexes, and to consider how the Merger may affect you.

 

If you are a DSS stockholder, you may vote by telephone or through the Internet by following the instructions included on your proxy card, you may indicate on the enclosed proxy card how you would like to vote, sign and return the proxy card in the enclosed postage-paid envelope by mail, or you may attend the DSS special meeting in person. Please provide your proxy instructions only once and as soon as possible so that your shares can be voted at the DSS special meeting.

 

If you hold your shares in “street name,” please refer to your proxy card or the information forwarded by your broker or other nominee to see which options are available to you.

 

Q:

What happens if I do not submit my proxy or if I elect to abstain from voting?

 

A:

If you are a DSS stockholder and you fail to submit your proxy (i) through the Internet, (ii) by telephone or (iii) by marking, signing and dating the enclosed proxy card and returning it by mail in the enclosed postage-paid envelope, your shares will not be counted as present for the purpose of determining the presence of a quorum, which is required to transact business at the DSS special meeting, and your failure to take action will have no effect on the outcome of DSS Proposal Nos. 1 (Securities Issuance Proposal), 5 (2013 Equity Incentive Plan Proposal) and 6 (adjournment to solicit additional proxies, if necessary). However, such failure to take action will have the same effect as voting AGAINST DSS Proposal Nos. 2 (Preferred Stock Creation Proposal), 3 (Staggered Board Proposal) and 4 (Reverse Stock Split Proposal).

 

If you are a DSS stockholder and you sign, date, and mail your proxy card without indicating how you wish to vote, your proxy will be counted as present for the purpose of determining the presence of a quorum for the DSS special meeting and all of your shares will be voted FOR DSS Proposal Nos. 1, 2, 3, 4, 5 and 6. However, if you submit a proxy card and affirmatively elect to abstain from voting, your proxy will be counted as present for the purpose of determining the presence of a quorum for the DSS special meeting, but will not be voted at the DSS special meeting. As a result, your abstention will have the same effect as voting AGAINST DSS Proposal Nos. 1, 2, 3, 4, 5 and 6.

 

Q:

If my DSS shares are held in “street name” by a broker or other nominee, will my broker or nominee vote my shares for me?

 

A:

If your DSS shares are held in “street name” in a stock brokerage account or by another nominee, you must provide the record holder of your shares with instructions on how to vote your shares. Please follow the voting instructions provided by your broker or other nominee. Please note that you may not vote shares held in “street name” by returning a proxy card directly to DSS or by voting in person at the DSS special meeting unless you provide a legal proxy, which you must obtain from your broker or other nominee that holds your shares giving you the right to vote the shares in person at the DSS special meeting. 

 

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Q:

May I vote in person?

 

A:

If you are a stockholder of DSS and your shares of DSS Common Stock are registered directly in your name with DSS’s transfer agent, you are considered, with respect to those shares, the stockholder of record, and the proxy materials and proxy card are being sent directly to you by DSS. If you are a DSS stockholder of record, you may attend the DSS special meeting and vote your shares in person, rather than submitting your proxy.

 

If your shares of DSS Common Stock are held in a brokerage account or by another nominee, you are considered the beneficial owner of shares held in street name, and these proxy materials are being forwarded to you together with a voting instruction card. As the beneficial owner, you are also invited to attend the DSS special meeting. However, since a beneficial owner is not the stockholder of record, you may not vote these shares in person at the DSS special meeting unless you obtain a legal proxy from the broker or other nominee that holds your shares giving you the right to vote the shares in person at the DSS special meeting.

 

Q:

May I revoke or change my vote after I have provided proxy instructions?

 

A:

Yes. You may revoke or change your vote at any time before your proxy is voted at the DSS special meeting. You can do this in one of four ways. First, you can send a written notice to DSS stating that you would like to revoke your proxy. Second, you can submit a duly executed proxy bearing a later date or time than that of the previously submitted proxy. Third, you can submit a later dated vote by the Internet or telephone. Fourth, you can attend the DSS special meeting and vote in person. Your attendance alone at the DSS special meeting will not revoke your proxy. If you are a DSS stockholder and have instructed a broker or other nominee to vote your shares, you must follow directions received from your broker or other nominee in order to change those instructions.

 

If you are a beneficial owner of DSS Common Stock, you may submit new voting instructions by contacting your broker or other nominee. You also may vote in person if you obtain a legal proxy. All shares that have been properly voted and not revoked will be voted at the DSS special meeting.

 

Q:

What constitutes a quorum?

 

A:

Stockholders who hold a majority of the shares of DSS Common Stock outstanding as of the close of business on the record date for the DSS special meeting must be present either in person or by proxy in order to constitute a quorum to conduct business at the DSS special meeting.

 

Q:

Who is paying for this proxy solicitation?

 

A:

DSS will bear its own cost and expense of preparing, assembling, printing, and mailing this proxy statement/prospectus, any amendments thereto, the proxy card, and any additional information furnished to the DSS stockholders. DSS will bear any fees paid to the Securities and Exchange Commission (“SEC”). DSS may also reimburse brokerage houses and other custodians, nominees and fiduciaries for their costs of soliciting and obtaining proxies from beneficial owners, including the costs of reimbursing brokerage houses and other custodians, nominees and fiduciaries for their costs of forwarding this proxy statement/prospectus and other solicitation materials to beneficial owners. In addition, proxies may be solicited without additional compensation by directors, officers and employees of DSS by mail, telephone, fax, or other methods of communication. DSS has retained [Proxy Solicitor] to assist DSS in the solicitation of proxies from DSS stockholders in connection with the DSS special meeting. [Proxy Solicitor] will receive a fee of [•] as compensation for its services, plus reimbursement of out-of-pocket expenses. 

  

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Q:

Whom should I contact if I have any questions about the Merger or the DSS special meeting?

 

A:

If you have any questions about the Merger, the DSS special meeting, or if you need assistance in submitting your proxy or voting your shares or need additional copies of this proxy statement/prospectus or the enclosed proxy card, you should contact DSS or [Proxy Solicitor], DSS’s proxy solicitor.

 

If you are a DSS stockholder you should contact DSS or [Proxy Solicitor], DSS’s proxy solicitor, at the applicable address and telephone number listed below:

 

Document Security System, Inc.   [Proxy Solicitor]
First Federal Plaza    
28 Main Street, Suite 1525    
Rochester, New York 14614    
Attn: Chief Executive Officer    
(585) 325-3610    

 

Q:

What happens if I sell my shares after the applicable record date but before the applicable special meeting?

 

A:

If you transfer your DSS Common Stock after the applicable record date but before the date of the applicable meeting, you will retain your right to vote at the special meeting (provided that such shares remain outstanding on the date of the applicable meeting).

 

Q:

What do I do if I receive more than one proxy statement/prospectus or set of voting instructions?

 

A:

If you hold shares directly as a record holder and also in “street name” or otherwise through a nominee, you may receive more than one proxy statement/prospectus and/or set of voting instructions relating to the DSS special meeting. These should each be voted and/or returned separately in order to ensure that all of your shares are voted.

 

Q:

Should I send in my stock certificates now?

 

A:

No. DSS stockholders are not required to tender or exchange their stock certificates as part of the Merger. However, you will receive written instructions from American Stock Transfer & Trust Company, LLC, DSS’s transfer agent, for exchanging your DSS stock certificates in connection with any reverse stock split. 

 

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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.

 

Lexington 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,
·customized technology solutions (such as applications for medical electronic health records),
·strategic partnerships, and
·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. BzdIick 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:

 

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

 

oany 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;

 

othe 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:

 

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

 

othe 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;

 

oLexington 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;

 

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

 

·by Lexington, if:

 

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

 

othe 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;

 

oDSS 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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oDSS 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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SELECTED HISTORICAL FINANCIAL DATA OF DSS

 

The following table sets forth DSS selected historical financial data as of the dates and for each of the periods indicated. The financial data for the years ended December 31, 2011 and 2010 and as of December 31, 2011 and 2010 are derived from DSS’s audited financial statements and Financial data as of September 30, 2011 derived from DSS’s Unaudited financial Statements, which are included elsewhere in this proxy statement/prospectus. The financial data as of and for the years ended December 31, 2009, 2008 and 2007 is derived from DSS’s audited historical financial statements, which are not included into this proxy statement/prospectus. The financial data for the nine months ended September 30, 2012 and 2011 and the financial data as of September 30, 2012 and as of September 30, 2011 are derived from DSS’s unaudited financial statements which are included elsewhere in this proxy statement/prospectus.

 

You should read the selected historical financial data below together with DSS’s Management’s Discussion and Analysis of Financial Condition and Results of Operations and with the financial statements and notes thereto for the year ended December 31, 2011 and for the nine months ended September 30, 2012, each of which are included elsewhere in this proxy statement/prospectus.

 

Statements of Operations Data ($- in thousands, except for share and per share data): 

 

   Nine Months Ended September 30   Years Ended December 31, 
   2012   2011   2011   2010   2009   2008   2007 
                             
Revenue  $11,666   $9,177   $13,384   $13,381   $9912   $6,643   $5,991 
                                    
Cost of revenue   7,558    6,164    9,212    9,696    6,256    3,029    2,864 
                                    
Gross profit   4,108    3,013    4,172    3,685    3,656    3,614    3,127 
                                    
Operating expenses:                                   
Selling, general and administrative   6,061    5,213    7,076    6,138    5,734    7,431    7,974 
Research and development   545    208    285    265    292    433    420 
Impairment of intangible assets   -    -    -    376    -    797    - 
Amortization of intangibles   228    205    285    803    1,342    1,972    1,754 
                                    
Operating expenses   6,834    5,626    7,646    7,582    7,368    10,633    10,148 
                                    
Operating loss   (2,726)   (2,613)    (3,474)   (3,897)   (3,712)   (7,019)   (7,021)
                                    
Other income (expenses), net   (425)   191    102    (688)   (259)   (1,247)   65 
Loss before income taxes   (3,151)   (2,422)   (3,372)   (4,585)   (3,971)   (8,266)   (6,956)
                                    
Income tax expenses, (benefit) net   14    (155)   (151)   (1,122)   19    19    19 
Net loss   (3,165)   (2,267)   (3,221)   (3,463)   (3,990)   (8,285)   (6,975)
                                    
Net loss per share-basic and diluted:   (0.15)   (0.12)   (0.17)   (0.20)   (0.27)   (0.59)   (0.51)
                                    
Weighted average common shares outstanding, basic and diluted   20,536,448    19,435,930    19,454,046    17,755,141    14,700,453    14,002,034    13,629,877 

 

 

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Balance Sheet Data ($- in thousands):

 

   September 30,   December 31, 
   2012   2011   2011   2010   2009   2008   2007 
ASSETS                                   
                                    
Total current assets, net  $4,191   $4,018   $3,192   $7,147   $1,868   $2,005   $2,228 
Property, plant and equipment, net   3,759    4,147    4,020    2,543    1,286    1,517    1,495 
Other assets   234    244    244    326    306    265    325 
Goodwill   3,323    3,323    3,323    3,084    1,316    1,397    1,397 
Other intangible assets, net   1,919    2,077    2,043    1,848    1,939    2,873    6,149 
                                    
Total assets   13,426    13,809    12,822    14,948    6,715    8,057    11,594 
                                    
LIABILITIES AND STOCKHOLDERS' EQUITY                                   
                                    
Total current liabilities:   3,882    4,315    4,272    4,144    2,687    3,486    3,426 
Long-term debt, net   2,132    3,052    2,831    2,260    1,720    2,493    595 
Other long-term liablilities   261    104    219    3,957    71    52    216 
Total stockholders' equity   7,151    6,338    5,500    4,587    2,237    2,026    7,357 
                                    
Total liabilities and stockholders' equity   13,426    13,809    12,822    14,948    6,715    8,057    11,594 

 

 

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SELECTED HISTORICAL FINANCIAL DATA OF LEXINGTON

 

The following tables sets forth Lexington selected historical financial data as of September 30, 2012, which financial data is derived from Lexington’s June 30, 2012 audited financial statements and unaudited financial statements for the three month period ended September 30, 2012 and as of September 30, 2012, which are included elsewhere in this proxy statement/prospectus.

 

You should read the selected historical financial data below together with Lexington’s Management’s Discussion and Analysis of Financial Condition and Results of Operations and with the financial statements and notes thereto as of and for the period ended September 30, 2012 and June 30, 2012, which are included elsewhere in this proxy statement/prospectus.

 

Statements of Operations Data ($- in thousands, except for share and per share data):

  

   Three months   Period from   Period from 
   ended   May 10, 2012   May 10, 2012 
   September 30,   (inception) through   (inception) through 
   2012   June 30,2012   September 30,2012 
             
Operating expenses:               
Officers' compensation  $375   $8   $383 
Legal and professional fees   345    165    510 
General and administrative   146    -    146 
Amortization   98    -    98 
                
Loss from operations   (964)   (173)   (1,137)
                
Other expenses:               
Interest   435    30    465 
Change in fair value of warrant liability   5,320    9    5,329 
                
Total other expenses   5,755    39    5,794 
                
Net loss  $(6,719)  $(212)  $(6,931)

 

 

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Balance Sheet Data ($- in thousands):

  

   September 30,   June 30, 
   2012   2012 
         
ASSETS          
Current Assets:          
Cash  $12,261   $3,627 
Intangible assets, net of accumulated amortization of $98 and 0, respectively   2,077    45 
           
Total assets  $14,338   $3,672 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current Liabilities:          
Accounts payable and accrued expenses  $389   $218 
           
Senior notes payable - related parties, net of deferred debt discount of $989 and $1,164, respectively   2,449    2,461 
Warrant liability   -    252 
           
Total liabilities   2,838    2,931 
           
Stockholders' Equity          
Preferred stock - 29,000,000 shares authorized; par value $0.00001 per share. Series A preferred stock - 27,225,000 shares authorized; par value $0.00001 per share; 17,913,727 and 0 shares issued and outstanding, respectively.   2    - 
           
Common stock - 100,000,000 shares authorized; par value $0.00001 per share; 13,862,825 and 16,571,529 shares issued and outstanding, respectively.   1    2 
Additional paid-in capital   18,428    951 
Deficit accumulated during the development stage   (6,931)   (212)
           
Total stockholders' equity   11,500    741 
           
Total liabilities and stockholders' equity  $14,338   $3,672 

 

 

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SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA

 

The following summary unaudited pro forma combined financial data is intended to show how the Merger might have affected historical financial statements if the Merger had been completed on January 1, 2011, for the purposes of the statements of operations, and September 30, 2012, for the purposes of the balance sheet, and was prepared based on the historical financial statements and results of operations reported by DSS and Lexington. The following should be read in conjunction with the section entitled “Unaudited Pro Forma Combined Financial Statements” beginning on page 202 and the audited historical financial statements of DSS and Lexington and the notes thereto beginning on pages F-1 and F-50, respectively, the sections entitled “DSS’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 141 and “Lexington’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 167, and the other information contained in this proxy statement/prospectus. The following information does not give effect to the proposed reverse stock split of DSS common stock described in DSS Proposal No. 4.

 

Accounting Treatment of the Merger

 

U.S. Generally Accepted Accounting Principles (hereafter — GAAP), require that for each business combination, one of the combining entities shall be identified as the acquirer, and the existence of a controlling financial interest shall be used to identify the acquirer in a business combination. In a business combination effected primarily by exchanging equity interests, the acquirer usually is the entity that issues its equity interests. However, it is sometimes not clear which party is the acquirer. In these situations, the acquirer for accounting purposes may not be the legal acquirer (i.e., the entity that issues its equity interest to effect the business combination).

 

If a business combination has occurred, but it is not clear which of the combining entities is the acquirer, GAAP requires considering additional factors in making that determination. These factors include the relative voting rights of the combined entity after the business combination, the existence of a large minority voting interest in the combined entity, the composition of the governing body of the combined entity, the composition of senior management in the combined entity and the relative size of the combining entities. While no hierarchy is provided to explain how to assess factors that influence the identification of the acquirer in a business combination, effectively concluding that no one of the criteria is more significant than any other, it is reasonable to conclude that the entity with largest percentage of voting rights after the business combination is most like to be considered the acquirer, unless other mitigating factors are present.

 

The stockholders of Lexington will hold the largest percentage of the voting shares on a fully dilutive basis after the completion of the Merger at 56% of the combined entity. The percentages of ownership include the 7,100,000 shares held in escrow, which are eligible to be voted while in escrow. If the escrow shares are terminated (which will be determined after 1 year of the deal being consummated), Lexington stockholders would own 46% and DSS stockholders would own 54% on a fully diluted basis. Lexington stockholders will represent the larger minority voting interest in the combined entity at 46% compared to DSS’s organized group (consisting of management and the board) at 12%. After the closing of the acquisition, senior management of the combined entity is expected to include four officers: the Chief Executive Officer and Chief Investment Officer from Lexington, and the Chief Financial Officer and Chief Operating Officer from DSS. Based on the aforementioned, and after taking in consideration all relevant facts and circumstances (which included, among others, the relative voting rights of the combined entity on a fully diluted basis, the larger minority voting interest, and the composition of the senior management), we came to a conclusion that, Lexington is the accounting acquirer, as it is defined in FASB Topic ASC 805 “Business Combinations.”

 

 

33
 

 

 

Because DSS will be issuing equity interests in order to acquire Lexington that results in a change of control in the combined entity, the transaction will be accounted for as a reverse acquisition. In the post-combination consolidated financial statements, Lexington’s assets and liabilities will be presented at its pre-combination carrying amounts, and DSS’s assets and liabilities will be measured and recorded at fair value in accordance with ASC 805. In addition, the consolidated equity will reflect DSS’s common and preferred stock (if any), at par value, as DSS is the legal acquirer. The total consolidated equity will consist of Lexington’s equity just before the merger, along with DSS issued and outstanding common stock prior to the transaction at the quoted price the day the transaction is consummated. Goodwill will be allocated to each reporting unit that is expected to benefit from the synergies created by the business combination.

 

Generally, in reverse acquisitions according to ASC 805-40, the financial statements of the combined entity are a continuation of the financial statements of the accounting acquirer, which as determined above, is Lexington. However, assessment of whether predecessor financial statements are required is separate from the identification of the accounting acquirer. Given that Lexington has limited historical operations, consisting of no revenue and only administrative expense, while DSS has experienced significant operating results in historical periods that would be included in comparative financial statements, management believes predecessor financial statement presentation is appropriate, where DSS is the predecessor.

 

With respect to unaudited pro forma combined financial statements to be presented in the combined entity’s registration statement as required by Rule 8-05 of Regulation S-X and footnotes to the financial statements of future periodic filings as required by ASC 805, the combined entity will present pro forma financial information showing the effects of the acquisition in columnar format including pro forma adjustments and results. Despite the fact that Lexington has only been in existence since May 2012, pro forma operating financial information will assume the merger took place on the first day of the most recently completed fiscal year in order to accommodate predecessor accounting as discussed above.

 

The summary unaudited pro forma combined balance sheet as of September 30, 2012 combines the historical balance sheets of DSS and Lexington as of September 30, 2012 and gives pro forma effect to the Merger as if it had been completed on September 30, 2012.

 

The summary unaudited pro forma statements of operations for the year ended December 31, 2011 and the period from January 1, 2012 through September 30, 2012 gives pro forma effect to the Merger as if it had been completed on January 1, 2011.

 

The historical financial data has been adjusted to give pro forma effect to events that are (i) directly attributable to the Merger, (ii) factually supportable, and (iii) with respect to the statements of operations, expected to have a continuing impact on the combined results. The pro forma adjustments are preliminary and based on management’s estimates of the fair value and useful lives of the assets acquired and liabilities assumed and have been prepared to illustrate the estimated effect of the acquisition and certain other adjustments.

 

 

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The unaudited pro forma combined financial statements are presented for illustrative purposes only, and are not necessarily indicative of the financial condition or results of operations of future periods or the financial condition or results of operations that actually would have been realized had the entities been combined during the periods presented. In addition, as explained in more detail in the accompanying notes to the unaudited pro forma combined financial statements (see the section entitled “Unaudited Pro Forma Combined Financial Statements” beginning on page 202), the preliminary acquisition-date fair value of the identifiable assets acquired and liabilities assumed reflected in the unaudited pro forma combined financial statements is subject to adjustment and may vary from the actual amounts that will be recorded upon completion of the Merger.

 

Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 2012 ($- in thousands)

 

   Historical             
   Lexington
Technology Group,
Inc.
   Document Security
Systems, Inc.
   Pro Forma
Adjustments
   Notes   Pro- Forma
Consolidated
 
                     
ASSETS                         
                          
Total current assets  $12,261   $4,191   $-        $16,452 
Property, plant and equipment, net   -    3,759    -         3,759 
Other assets   -    234    -         234 
Goodwill   -    3,323    66,453    3    69,776 
Other intangible assets, net   2,077    1,919    5,000    1    8,996 
                          
Total assets   14,338   $13,426   $71,453        $99,217 
                          
LIABILITIES AND STOCKHOLDERS' EQUITY                         
                          
Total current liabilities  $389   $3,882   $337    2   $4,608 
Long-term debt, net   2,449    2,132    456    4    5,037 
Interest rate swap hedging liabilities   -    138    -         138 
Deferred tax liability   -    123    (123)   4    - 
                          
Stockholders' equity                         
Preferred stock, $.02 par value   2    -    102    5    104 
Common stock, $.02 par value   1    417    463    5    881 
Additional paid-in capital   18,428    53,212    27,475    2,6    99,115 
Accumulated other comprehensive loss   -    (138)   138    6    - 
Accumulated deficit   (6,931)   (46,340)   42,605    6    (10,666)
                          
Total stockholders' equity   11,500    7,151    70,783         89,434 
                          
Total liabilities and stockholders' equity  $14,338   $13,426   $71,453        $99,217 

 

 

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Unaudited Pro Forma Consolidated Statement of Operations, for the year ended December 31, 2011 ($- in thousands, except per share and per share data)

 

   Historical            
   Lexington
Technology Group,
Inc.
   Document Security
Systems, Inc.
   Pro Forma
Adjustments
   Notes  Pro Forma
consolildated
 
                    
Revenue  $-   $13,384   $-      $13,384 
Cost of revenue   -    9,212    -       9,212 
Gross profit   -    4,172    -       4,172 
                        
Operating expenses:                       
Selling, general and administrative   -    7,076    3,735   2   10,811 
Research and development   -    285    -       285 
Amortization of intangibles   -    285    500   1   785 
                        
Operating expenses   -    7,646    4,235       11,881 
                        
Operating loss   -    (3,474)   (4,235)      (7,709)
                        
Other income (expense):                       
Interest expense   -    (259)   -       (259)
Change in fair value of derivative liability   -    361    -       361 
Loss before income taxes   -    (3,372)   (4,235)      (7,607)
Income tax benefit   -    (151)   -       (151)
Net loss  $-    (3,221)   (4,235)     $(7,456)
                        
Net loss per share -basic and diluted:  $    (0.17)          $(0.21)
                        
Weighted average common shares outstanding, basic and diluted   -    19,454,046    16,082,164   7   35,536,210 

 

 

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Unaudited Pro Forma Consolidated Statement of Operations, for the nine month period ended September 30, 2012 ($- in thousands, except per share and per share data)

 

   Historical            
   Lexington Technology
Group, Inc.
   Document Security
Systems, Inc.
   Pro Forma
Adjustments
   Notes  Pro Forma
consolildated
 
   (From May 10, 2012
(Inception) through
September 30, 2012)
                
                    
Revenue  $-   $11,666   $-      $11,666 
Cost of revenue   -    7,558    -       7,558 
Gross profit   -    4,108    -       4,108 
                        
Operating expenses:                       
Selling, general and administrative   1,039    6,061    -       7,100 
Research and development   -    545    -       545 
Amortization of intangibles   98    228    375   1   701 
                        
Operating expenses   1,137    6,834    375       8,346 
                        
Operating loss   (1,137)   (2,726)   (375)      (4,238)
                        
Other income (expense):                       
Interest expense   (465)   (176)   -       (641)
Change in fair value of derivative liability   (5,329)        -       (5,329)
Amortizaton of note discount   -    (249)   -       (249)
Loss before income taxes   (6,931)   (3,151)   (375)      (10,457)
Income tax expense   -    14    -       14 
Net loss  $(6,931)  $(3,165)  $(375)     $(10,471)
                        
Net loss per share -basic and diluted:  $(0.73)  $(0.15)  $      $(0.29)
                        
Weighted average common shares outstanding, basic and diluted   9,424,022    20,536,448    16,082,164   7   36,618,612 

 

 

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Notes to Unaudited Pro Forma Consolidated Statements of Operations and Balance Sheet

 

1.           This pro forma adjustment represents the additional amortization expense as a result of the long-lived intangible assets acquired in the Merger, assuming the Merger occurred at the beginning of the most recently completed fiscal year, January 1, 2011. The acquired intangible assets have an estimated aggregate fair value of $6,919,000 and a weighted average remaining useful life of 10 years. The $5,000,000 pro forma adjustment represents the estimated difference between the fair value and the carrying value of DSS’s patent assets, customer lists and non-compete agreements on the date of acquisition. As a result, the increase in amortization expense for the year ended December 31, 2011 is $500,000, and the increase in amortization expense for the nine month period ended September 30, 2012 is $375,000. See the preliminary purchase price allocation table on page 204.

 

For these pro forma consolidated financial statements of operations and balance sheet we assume that there was no sign of impairment of long-lived intangible assets throughout the periods presented.

 

2.           This pro-forma adjustment represents direct, incremental costs of the Merger including (1) fees paid to Palladium Capital who acted as an advisor to DSS in the Merger, comprising of cash of $182,000 and the expected fair value of 786,678 shares of DSS Common Stock that will be issued upon the closing of the Merger with an estimated fair value of approximately $2,950,000 to Palladium Capital, and (2) cash bonuses of $155,000 and $448,000 of stock based compensation expense related to the fair value of options issued to executives and senior managers upon closing of the Merger.

 

3.           This pro forma adjustment represents the estimated goodwill acquired as a result of the Merger. For the purposes of the Merger, since Lexington is determined to be the accounting acquirer and DSS is determined to be the accounting acquiree, the consideration effectively transferred is measured based on the expected fair value of the common stock of DSS outstanding immediately prior to the closing of the Merger. For the purposes of the accompanying pro forma combined financial data, the estimated fair value of DSS common stock is $3.75 per share and the number of shares outstanding is based on the 20,872,316 shares outstanding at September 30, 2012. The goodwill adjustment represents the excess of the purchase price over the fair value of the tangible and intangible assets acquired less liabilities assumed. See the preliminary purchase price allocation table on page 204.

 

4.           This pro-forma adjustment represents the change in the fair value of DSS long-term liabilities. The adjustment in a convertible note held by DSS was determined by the difference in the carrying amount of the convertible note as of September 30, 2012 compared to the estimated fair value of the convertible common stock.

 

5.           This pro forma adjustment presents the effect on the common stock and preferred stock (if approved), at par, of the combined company that reflects DSS as the legal acquirer and Lexington as the legal acquiree in the Merger. As a result, the common stock and preferred stock (if approved) share number will be adjusted to include the shares issued to the shareholders of Lexington and to Palladium Capital as an advisor on the date of the Merger. The following shares outstanding:

 

 

38
 

 

 

   As of September 30, 2012 
Document Security Systems   20,872,316 
      
Document Security Systems shares of common stock expected to be issued to former Lexington Technology Group stockholders   22,395,486 
      
Document Security Systems shares of common stock issued to Palladium Capital in conjunction with the Merger   786,678 
      
Total common stock outstanding, pursuant to the Merger   44,054,480 
      
Par value per share of common stock  $0.02 
      
Common stock, at par  $881,000 
      
Document Security Systems shares of preferred stock (if approved) expected to be issued to former Lexington Technology Group stockholders   5,195,073 
      
Par value per share  of preferred stock  $0.02 
      
Preferred stock, at par  $104,000 

 

6.          This pro forma adjustment presents the effect of business combination accounting on additional paid-in capital, accumulated deficit and accumulated other comprehensive loss of the combined company that reflect Lexington as the accounting acquirer and DSS as the accounting acquiree in the Merger. As a result, in the post-combination consolidated financial statements, additional paid-in capital will reflect Lexington’s paid-in capital amounts immediately prior to the Merger, plus the fair value of the outstanding common stock of DSS just prior to the Merger and the fair value of equity securities issued to Palladium Capital. Accumulated deficit will only reflect the balance of Lexington prior to the Merger. The accumulated deficit and accumulated other comprehensive loss of DSS will be cancelled in conjunction with the Merger. (See the preliminary purchase price allocation table on page 204.)

 

7.          The post-combination consolidated pro-forma equity will reflect DSS Common Stock and DSS Preferred Stock (if approved), including that issued to Lexington and Palladium Capital as DSS is the legal acquirer. Shares used to calculate the unaudited pro-forma basis and diluted loss per share were computed by adding the shares assumed to be issued upon the Merger to the weighted average number of shares outstanding of DSS for the year ended December 31, 2011 and the nine months ended September 30, 2012, respectively. Potentially dilutive securities issuable under preferred stock agreements (if approved), convertible debt agreements, options, warrants, and restricted stock agreements were excluded from the calculations of diluted earnings per share because their inclusion would have been anti-dilutive to DSS’s losses in the respective periods.

 

 

39
 

 

 

   For the year ended
December 31, 2011
 
     
Net loss –($ -in thousands)  $(7,456)
      
Weighted average of Document Security Systems shares of common stock outstanding for the period:   19,454,046 
      
Weighted average of Document Security Systems shares of common stock expected to be issued to former Lexington Technology Group stockholders, as of January 1, 2011   22,395,486 
      
Less: Escrow shares   (7,100,000)
      
Weighted average of Document Security Systems shares of common stock issued to Palladium Capital, as  of January 1, 2011   786,678 
      
    35,536,210 
      
Basic and diluted net loss per share  $(0.21)

 

 

40
 

 

 

   For the nine months ended
September 30, 2012
 
     
Net loss –($ -in thousands)  $(10,471)
      
Weighted average of Document Security Systems shares of common stock outstanding for the period   20,536,448 
      
Weighted average of Document Security Systems shares of common stock expected to be issued to former Lexington Technology Group stockholders, as of January 1, 2011.   22,395,486 
      
Less: Escrow shares   (7,100,000)
      
Weighted average of Document Security Systems shares of common stock issued to Palladium Capital, as of January 1, 2011   786,678 
      
    36,618,612 
      
Basic and diluted net loss per share  $(0.29)

 

 

41
 

 

MARKET PRICE DATA AND DIVIDEND INFORMATION

Market Price

 

The table below sets forth, for the calendar quarters indicated, the high and low sales prices per share of DSS Common Stock, which trades on the NYSE MKT under the symbol “DSS.” DSS’s fiscal year ends on December 31st.

 

   DSS
Common
Stock
 
   High   Low 
Fiscal Year 2010          
First Quarter  $4.50   $2.32 
Second Quarter  $4.04   $2.66 
Third Quarter  $4.18   $2.97 
Fourth Quarter  $6.00   $3.32 
Fiscal Year 2011          
First Quarter  $5.65   $4.03 
Second Quarter  $4.16   $2.90 
Third Quarter  $3.97   $1.86 
Fourth Quarter  $3.50   $2.33 
Fiscal Year 2012          
First Quarter  $5.12   $2.40 
Second Quarter  $4.34   $2.26 
Third Quarter  $4.35   $3.50 
Fourth Quarter (through November 19, 2012)  $4.26   $2.50 

 

The closing price as of November 19, 2012 was $2.73. Lexington is a private company and shares of its capital stock are not publicly traded.

 

Record Holders

 

As of November 19, 2012, DSS had 911 stockholders of record.

 

Dividends

 

DSS has not declared or paid any cash dividend on its capital stock during the two most recent fiscal years. Any determination to pay dividends to holders of DSS Common Stock in the future will be at the discretion of the DSS board of directors and will depend upon many factors, including DSS’s financial condition, results of operations, capital requirements and any other factors that the DSS board of directors considers appropriate.

 

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On October 2, 2012, the first trading day following the announcement of the Merger, the last reported sale price of DSS Common Stock was $4.15, for an aggregate market value of DSS of $90,079,763, or $108,003,696 on a fully diluted basis. On [•], the latest practicable date before the printing of this proxy statement/prospectus, the last reported sale price of DSS Common Stock was $[•], for an aggregate market value of DSS of $[•] million, or $[•] million on a fully diluted basis. Assuming the issuance on such date of an aggregate of [•] shares of DSS Common Stock and an aggregate of [•] shares of DSS Preferred Stock based on a Common Stock Exchange Ratio of [•], an aggregate of [•] of DSS Warrants if the Merger was completed on such date, the market value attributable to the shares of DSS Common Stock to be issued to Lexington’s stockholders in the aggregate, or approximately [•]% of the outstanding shares of the combined company calculated on a fully diluted basis, would equal $[•] million.

 

The following table sets forth information as of November 19, 2012, regarding the beneficial ownership of the combined company upon completion of the Merger by (i) each person known by the management of DSS and Lexington that is expected to become the beneficial owner of 5% of the common stock of the combined company upon completion of the Merger, (ii) each director and named executive officer of the combined company, and (iii) all directors and named executive officers of the combined company as a group.

 

Information with respect to beneficial ownership is based solely on a review of DSS capital stock transfer records and on publicly available filings made with the SEC by or on behalf of the stockholders listed below and on Lexington’s stock ledger. Unless otherwise indicated in the footnotes, the address for each listed stockholder is: c/o Lexington Technology Group, Inc., 375 Park Avenue, 26th Floor, New York, New York 10152.

 

The percent of common stock before the merger is based on 21,705,967 shares of DSS common stock that were outstanding as of November 19, 2012. The percent of common stock of the combined company after the merger is based on 49,842,645 shares of common stock of the combined company outstanding upon completion of the Merger on an as-converted basis with respect to the DSS preferred stock issued in connection with the Merger and assumes that the Exchange Ratio to be used in connection with the Merger is approximately 1.02 shares of DSS common stock and DSS Warrants for each share of Lexington capital stock (without giving effect to the proposed reverse stock split described elsewhere in this proxy statement/prospectus) and that Lexington has at least $9,000,000 at the Effective Time of the Merger (and accordingly, the maximum amount of Additional Shares are issued). Shares of DSS common stock subject to stock options and warrants that are currently exercisable or exercisable within 60 days after November 19, 2012 are treated as outstanding and beneficially owned by the holder of such options for the purpose of computing the percentage ownership of the combined company’s common stock of such holder, but are not treated as outstanding for the purpose of computing the percentage ownership of the combined company’s common stock of any other stockholder. Shares of Lexington common stock subject to options that are currently exercisable or exercisable within 60 days of November 19, 2012 are treated as outstanding and beneficially owned by the holder of such options for the purpose of computing the percentage ownership of the combined company’s common stock of such holder, but are not treated as outstanding for the purpose of computing the percentage ownership of the combined company’s common stock of any other stockholder. Unless otherwise indicated, DSS and Lexington believe that each of the persons named in this table has sole voting and investment power with respect to all shares shown as beneficially owned by them.

 

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   Before the Merger   After the Merger 
Name and Address of Beneficial Owner  Amount of
Beneficial
Ownership
   Percent
of
Class
   Amount of
Beneficial
Ownership
   Percent of
Class
 
5% Stockholders (Preferred)                    
                     
Hudson Bay Master Fund, Ltd.
777 Third Avenue
New York, NY 10017
           5,147,606    99%
                     
1960480 BT, LLC (10)
2515 McKinney Ave
Suite 1000
Dallas, TX 75201
           47,467    1%
                     
5% Stockholders (Common)                    
                     
Hudson Bay Master Fund, Ltd.
777 Third Avenue
New York, NY 10017
   725,805(3)   3.3%   5,146,606(9)   9.99%
                     
1960480 BT, LLC
2515 McKinney Ave
Suite 1000
Dallas, TX75201
           5,055,630(10)   9.99%
                     
Barry Honig
4400 Biscayne Boulevard
Suite 850
Miami, FL 33137
   161,290(17)       4,377,867(11)   8.65%
                     
Four Kids Investment Funds LLC
(Alan Honig)
4400 Biscayne Boulevard
Suite 850
Miami, FL 33137
           2,511,680(12)   5.00%
                     
Named Executive Officers and Directors:                    
                     
Philip Jones (1)   163,333(4)   *    163,333(4)   * 
David Klein (1)   8,333(5)   *    8,333(5)   * 
Robert B. Fagenson (1)   1,058,500(6)   4.87%   1,058,500(6)   2.12%
Ira A. Greenstein (1)   52,333(7)   *    52,333(7)   * 
Robert B. Bzdick (1)   673,773(8)   3.08%   673,773(8)   1.35%
Peter Hardigan (2)           141,344(13)   *
Warren Hurwitz (2)               * 
Jeffrey Ronaldi (2)           101,482(14)   *
All executive officers and directors as a group (8 persons)   1,956,270(15)   8.84%   2,199,096(16)   4.37%

 

*Does not exceed 1%

 

(1)The business address of each listed stockholder is c/o Document Security Systems, Inc., 28 East Main Street, Suite 1525, Rochester, New York 14614.

 

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(2)The business address of each listed stockholder is c/o Lexington Technology Group, Inc., 375 Park Avenue, 26th Floor, New York, New York 10152.

 

(3)Includes 241,935 shares of common stock issuable upon the exercise of warrants exercisable within 60 days of November 19, 2012.

 

(4)Includes 163,333 shares of DSS common stock issuable upon the exercise of stock options exercisable within 60 days of November 19, 2012.

 

(5)Includes 8,333 shares of DSS common stock issuable upon the exercise of stock options exercisable within 60 days of November 19, 2012.

 

(6)Includes 49,000 shares of DSS common stock issuable upon the exercise of stock options exercisable within 60 days of November 19, 2012, 100,000 shares of DSS common stock held by Mr. Fagenson’s wife and an aggregate of 100,000 shares of DSS common stock held in trusts for Mr. Fagenson’s two adult children, of which Mr. Fagenson is trustee. Mr. Fagenson disclaims beneficial ownership of the 100,000 shares of DSS common stock held by his wife and the 100,000 shares of DSS common stock held in trusts for Mr. Fagenson’s two adult children.

 

(7)Includes 52,333 shares of DSS common stock issuable upon the exercise of stock options exercisable within 60 days of November 19, 2012.

 

(8)Includes 158,333 shares of DSS common stock issuable upon the exercise of stock options exercisable within 60 days of November 19, 2012.

 

(9)Includes 1,442,018 shares of common stock issuable upon the exercise of warrants that will be issued in connection with the Merger, 2,106,697 shares of common stock to be held in escrow for up to one year after the closing of the Merger and to be released upon certain conditions, and 241,935 shares of common stock issuable upon the exercise of warrants exercisable within 60 days of November 19, 2012. In addition to any shares of DSS common stock that Hudson Bay and its affiliates will hold after the Merger, Hudson Bay Master Fund Ltd. will hold shares of DSS preferred stock convertible into 5,206,928 shares of DSS common stock. In accordance with the Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock with respect to the DSS preferred stock to be filed by DSS prior to the consummation of the Merger and the terms of the DSS warrants to be received in connection with the Merger, Hudson Bay may not convert any of the DSS preferred stock or exercise its warrants to purchase DSS common stock to the extent that after giving effect to such conversion or exercise, as the case may be, Hudson Bay (together with its affiliates) would have acquired, through conversion of DSS preferred stock, exercise of DSS warrants or otherwise, beneficial ownership of a number of shares of DSS common stock that exceeds 9.99% of the number of shares of DSS common stock outstanding immediately after giving effect to such conversion, excluding for purposes of such determination, shares of DSS common stock issuable upon conversion of the DSS preferred stock or exercise of the DSS warrants that have not been converted or exercised. Hudson Bay Capital Management, L.P., the investment manager of Hudson Bay Master Fund Ltd., has voting and investment power over these securities. Sander Gerber is the managing member of Hudson Bay Capital GP LLC, which is the general partner of Hudson Bay Capital Management, L.P. Sander Gerber disclaims beneficial ownership over these securities.

 

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(10)Includes 769,068 shares of common stock issuable upon the exercise of warrants that will be issued in connection with the Merger, and 1,123,560 shares of common stock to be held in escrow for up to one year after the closing of the Merger and to be released upon certain conditions. In addition to any shares of DSS common stock that 1960480 BT and its affiliates will hold after the Merger, 1960480 BT will hold shares of DSS preferred stock convertible into 79,105 shares of DSS common stock. In accordance with the Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock with respect to the DSS preferred stock to be filed by DSS prior to the consummation of the Merger and the terms of the DSS warrants to be received in connection with the Merger, 1960480 BT may not convert any of the DSS preferred stock or exercise its warrants to purchase DSS common stock to the extent that after giving effect to such conversion or exercise, as the case may be, 1960480 BT (together with its affiliates) would have acquired, through conversion of DSS preferred stock, exercise of DSS warrants or otherwise, beneficial ownership of a number of shares of DSS common stock that exceeds 9.99% of the number of shares of DSS common stock outstanding immediately after giving effect to such conversion, excluding for purposes of such determination, shares of DSS common stock issuable upon conversion of the DSS preferred stock or exercise of the DSS warrants that have not been converted or exercised. Ryan Lane, the managing member of 1960480 BT, has voting and investment power over these securities.

 

(11)Includes 635,464 shares of common stock issuable upon the exercise of warrants that will be issued in connection with the Merger, and 928,373 shares of common stock to be held in escrow for up to one year after the closing of the Merger and to be released upon certain conditions. Includes 216,589 shares of common stock, 52,655 shares of common stock issuable upon exercise of warrants and 76,925 shares of common stock to be held in escrow to be issued to Mr. Honig in connection with the Merger, 893,431 shares of common stock, 217,202 shares of common stock issuable upon exercise of warrants and 317,318 shares of common stock to be held in escrow to be issued to GRQ Consultants, Inc. 401K in connection with the Merger, and 1,503,880 shares of common stock, 365,608 shares of common stock issuable upon exercise of warrants and 534,130 shares of common stock to be held in escrow to be issued to GRQ Consultants, Inc. Roth 401K FBO. Mr. Honig is the trustee of GRQ Consultants, Inc. 401K and GRQ Consultants, Inc. Roth 401K FBO Barry Honig, and, in such capacity, has voting and dispositive power over the securities held by such entities.

 

(12)Includes 378,526 shares of common stock issuable upon the exercise of warrants that will be issued in connection with the Merger, and 553,002 shares of common stock to be held in escrow for up to one year after the closing of the Merger and to be released upon certain conditions. Alan Honig acts as the custodian and trustee of Four Kids Investment Funds LLC and has voting and investment power over these securities.

 

(13)Includes 18,672 shares of common stock issuable upon the exercise of warrants that will be issued in connection with the Merger, and 27,279 shares of common stock to be held in escrow for up to one year after the closing of the Merger and to be released upon certain conditions. Also includes options to purchase 16,667 shares of common stock of DSS that will vest upon the consummation of the Merger.

 

(14)Includes 15,198 shares of common stock issuable upon the exercise of warrants that will be issued in connection with the Merger, and 22,204 shares of common stock to be held in escrow for up to one year after the closing of the Merger and to be released upon certain conditions.

 

(15)Includes 431,333 shares of DSS common stock issuable upon the exercise of stock options exercisable within 60 days of November 19, 2012.

 

(16)Includes 448,000 shares of DSS common stock issuable upon the exercise of stock options exercisable within 60 days of November 19, 2012, 33,870 shares of common stock issuable upon the exercise of warrants that will be issued in connection with the Merger, and 49,483 shares of common stock to be held in escrow for up to one year after the closing of the Merger and to be released upon certain conditions.

 

(17)Includes 80,645 shares of DSS common stock issuable upon the exercise of stock warrants exercisable within 60 days of November 19, 2012.

 

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Because the market price of DSS Common Stock is subject to fluctuation, the market value of the shares of DSS Common Stock that holders of Lexington capital stock will receive in the Merger may increase or decrease. The foregoing information reflects only historical information.

 

Following the completion of the Merger and successful reapplication to the NYSE MKT for initial inclusion of the DSS Common Stock on the NYSE MKT, the common stock of DSS, including the shares of DSS Common Stock issued to Lexington stockholders in connection with the Merger, will continue to be listed on the NYSE MKT.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This proxy statement/prospectus and the other documents referred to in this proxy statement/prospectus contain or may contain forward-looking statements of DSS within the meaning of Section 21E of the Exchange Act, which is applicable to DSS but not to Lexington because DSS, unlike Lexington, is a public company subject to the reporting requirements of the Exchange Act. For this purpose, any statements contained herein, other than statements of historical fact, may be forward-looking statements under the provisions of the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the fact that they do not relate strictly to historical or current facts. Statements that include words such as may, will, project, might, expect, believe, anticipate, intend, could, would, estimate, continue or pursue or the negative of these words or other words or expressions of similar meaning may identify forward-looking statements. These forward-looking statements are found at various places throughout this proxy statement/prospectus and the other documents referred to and relate to a variety of matters, including but not limited to (i) the timing and anticipated completion of the Merger, (ii) the benefits expected to result from the Merger, (iii) the anticipated business of the combined company following the completion of the Merger, and (iv) other statements that are not purely statements of historical fact. These forward-looking statements are made on the basis of the current beliefs, expectations, and assumptions of management are not guarantees of performance and are subject to significant risks and uncertainty. These forward-looking statements should, therefore, be considered in light of various important factors, including those set forth in this proxy statement/prospectus and those that are referred to in this proxy statement/prospectus. Important factors that could cause actual results to differ materially from those described in forward-looking statements contained herein include, but are not limited to:

 

  the expected timetable for completing the Merger;

 

  the potential value created by the Merger for DSS’s and Lexington’s stockholders;

 

  the potential of the combined company’s technology platform;

 

  the respective or combined ability to raise capital to fund the combined operations and business plan;

 

  the listing of the combined company’s securities on the NYSE MKT;

 

  market acceptance of DSS products;

 

  the collective ability to protect intellectual property rights;

 

  competition from other providers and products;

 

  the ability to license and monetize the patents owned by Lexington, including the outcome of the Litigation against five companies, including Facebook, Inc. and LinkedIn Corporation; and

 

  the combined company’s management and board of directors.

 

48
 

 

In addition to the risk factors identified elsewhere, various important risks and uncertainties affecting each of DSS and Lexington may cause the actual results of the combined company to differ materially from the results indicated by the forward-looking statement in this proxy statement/prospectus, including without limitation:

 

  the financial condition, financing requirements, prospects and cash flow of DSS and Lexington;

 

  expectations regarding potential growth;

 

  the inability to have DSS Common Stock listed for trading on the NYSE MKT or another national securities exchange;

 

  the loss of strategic relationships;

 

  competitive position;

 

  introduction and proliferation of competitive products;

 

  changes in technology;

 

  the inability to achieve sustained profitability;

 

  failure to implement short- or long-term growth strategies;

 

  decrease in the market price for the shares of common stock;

 

  the cost of retaining and recruiting key personnel or the loss of such key personnel;

 

  compliance with applicable laws;

 

  ability to maintain or protect the validity of patents and other intellectual property;

 

  ability to obtain a positive verdict or settlement arrangement in Lexington’s initial Litigation;

 

  ability to internally develop new products and intellectual property; and

 

  liquidity.

 

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this proxy statement/prospectus or, in the case of documents referred to in this proxy statement/prospectus, as of the date of those documents. DSS disclaims any obligation to publicly update or release any revisions to these forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this proxy statement/prospectus or to reflect the occurrence of unanticipated events, except as required by law.

 

49
 

 

RISK FACTORS

 

In addition to the other information included and referred to in this proxy statement/prospectus, including the matters addressed in the section entitled “Cautionary Statement Regarding Forward-Looking Statements” beginning on page 48, you should carefully consider the following risk factors before deciding how to vote your shares of DSS Common Stock at the DSS special meeting. These factors should be considered in conjunction with the other information included by DSS in this proxy statement/prospectus. If any of the risks described below or referred to in this proxy statement/prospectus actually materialize, the business, financial condition, results of operations, or prospects of DSS, Lexington, and/or the combined company, or the stock price of DSS and/or the combined company, could be materially and adversely affected.

 

Risks Related to the Merger

 

The issuance of DSS’s securities to Lexington security holders in connection with the Merger will substantially dilute the voting power of current DSS stockholders.

 

Pursuant to the terms of the Merger Agreement, it is anticipated that DSS will issue to Lexington common and preferred stockholders shares of DSS Common Stock and DSS Preferred Stock (or, if the Preferred Stock Creation Proposal is not approved, $.02 Warrants) and Warrants to purchase shares of DSS Common Stock. After such issuance (without taking into account any shares of DSS Common Stock held by Lexington stockholders prior to the completion of the Merger, the possible release of any Escrow Shares or the exercise of any warrants), the stockholders of Lexington are expected to own approximately 43% of the outstanding common stock of the combined company (or 46% of the outstanding common stock of the combined company calculated on a fully diluted basis) and the stockholders of DSS are expected to own approximately 57% of the outstanding common stock of the combined company (or 54% of the outstanding common stock of the combined company calculated on a fully diluted basis). If the Escrow Shares are released, the percentages in the preceding sentence would be 50%, 56%, 50% and 44%. Accordingly, the issuance of shares of DSS Common Stock to Lexington stockholders in connection with the Merger will significantly reduce the relative voting power of each share of DSS Common Stock held by current DSS stockholders.

 

The announcement and pendency of the Merger could have an adverse effect on the business prospects for DSS and/or Lexington and on DSS’s stock price and/or business, financial condition or results of operations.

 

While there have been no significant adverse effects to date, the announcement and pendency of the Merger could disrupt DSS’s and/or Lexington’s prospective and current businesses in the following ways, among others:

 

 

third parties may seek to terminate and/or renegotiate their relationships with DSS or Lexington or decide not to conduct business with either DSS or Lexington as a result of the Merger, whether pursuant to the terms of their existing agreements with DSS and/or Lexington or otherwise; and

 

  the attention of DSS and/or Lexington management may be directed toward the completion of the Merger and related matters and may be diverted from the day-to-day business operations of their respective companies, including from other opportunities that might otherwise be beneficial to DSS or Lexington.

 

50
 

 

Should they occur, any of these matters could adversely affect the stock price of DSS or harm the financial condition, results of operations, or business prospects of DSS, Lexington, and/or the combined company.

 

Failure to complete the Merger or delays in completing the Merger could negatively impact DSS’s business, financial condition or results of operations or DSS’s stock price.

 

The completion of the Merger is subject to a number of conditions and there can be no assurance that the conditions to the completion of the Merger will be satisfied at all or satisfied in a timely manner. If the Merger is not completed or delayed, DSS will be subject to several risks, including:

 

  the current trading price of DSS Common Stock may reflect a market assumption that the Merger will occur, meaning that a failure to complete the Merger or delays in completing the Merger could result in a decline in the price of DSS Common Stock;

 

  certain executive officers and/or directors of DSS may seek other employment opportunities, and the departure of any of DSS’s executive officers and the possibility that DSS would be unable to recruit and hire experienced executives could negatively impact DSS’s future business;

 

  the DSS board of directors will need to reevaluate DSS’s strategic alternatives, such alternatives will include other merger and acquisition opportunities and/or additional financing necessary to ensure that DSS has sufficient funds to operate;

 

  Under certain circumstances, if the Merger is terminated by either DSS or Lexington in connection with or due to DSS entering into an alternate transaction constituting a superior proposal, then DSS is required to 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 such superior proposal in the same form as such consideration is paid to such security holders;

 

  DSS is expected to incur substantial transaction costs in connection with the Merger whether or not the Merger is completed; and

 

  DSS would not realize any of the anticipated benefits of having completed the Merger.

 

If the Merger is not completed, these risks may materialize and materially and adversely affect DSS’s business, financial condition, results of operations, and DSS’s stock price.

 

Any delay in completing the Merger may substantially reduce the benefits that DSS expects to obtain from the Merger.

 

In addition to obtaining the approval of the stockholders of each of DSS and Lexington for the consummation of the Merger, the Merger is subject to a number of other conditions beyond the control of DSS that may prevent, delay, or otherwise materially adversely affect its completion. DSS cannot predict whether or when the conditions required to complete the Merger will be satisfied. The requirements for satisfying the closing conditions could delay the completion of the Merger for a significant period of time or prevent it from occurring. Any delay in completing the Merger may materially adversely affect the benefits that DSS expects to achieve if the Merger and the integration of the companies’ respective businesses are completed within the expected timeframe.

 

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NYSE MKT may consider the anticipated Merger a “reverse merger” and therefore may require that DSS submit a new listing application, which would require certain actions on the part of the combined company which may not be successful and, if unsuccessful, could make it more difficult for holders of shares of the combined company to sell their shares.

 

NYSE MKT may consider the Merger proposed in this proxy statement/prospectus a “reverse merger” and might require that DSS submit a new listing application. If it does so, NYSE MKT may not approve DSS’s new listing application for the NYSE MKT on a timely basis, or at all. If this occurs and the Merger is still completed, you may have difficulty converting your investments into cash effectively.

 

Additionally, as part of any new listing application, DSS may be required to submit, among other things, a plan for the combined company to conduct a reverse stock split. A reverse stock split would likely increase the per share trading price by an as yet undetermined multiple. The change in share price may affect the volatility and liquidity of the combined company’s stock, as well as the marketplace’s perception of the stock. As a result, the relative price of the combined company’s stock may decline and/or fluctuate more than in the past, and you may have trouble converting your investments in the combined company into cash effectively.

 

Some of the directors and executive officers of DSS have interests in the Merger that are different from, or in addition to, those of the other DSS stockholders.

 

When considering the recommendation by the DSS board of directors that the DSS stockholders vote “for” each of the DSS Proposals, DSS’s stockholders should be aware that certain of the directors and executive officers of DSS have arrangements that provide them with interests in the Merger that are different from, or in addition to, those of the stockholders of DSS.

 

For instance, in connection with the Merger, (i) Robert B. Fagenson, Ira A. Greenstein, David Klein and Robert B. Bzdick, each a current director of the DSS board of directors, will continue to serve as a director of the combined company following the completion of the Merger, and the remaining directors of DSS will resign, effective as of the completion of the Merger, (ii) Philip Jones and Robert B. Bzdick, currently executive officers of DSS, will remain executive officers of the combined company following the completion of the Merger, and (iii) options to purchase an aggregate of 775,000 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, 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.

 

In addition, the directors and executive officers of DSS also have certain rights to indemnification and to directors’ and officers’ liability insurance that will be provided by the combined company following the completion of the Merger. See the sections entitled “The Merger — Interests of DSS Directors and Executive Officers in the Merger” beginning on page 87.

 

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.

 

52
 

 

The Merger Agreement contains provisions that could discourage or make it difficult for a third party to acquire DSS prior to the completion of the Merger.

 

The Merger Agreement contains provisions that make it difficult for DSS to entertain a third-party proposal for an acquisition of DSS. These provisions include the general prohibition on DSS’s soliciting or engaging in discussions or negotiations regarding any alternative acquisition proposal. In addition, under certain circumstances, if the Merger is terminated by either DSS or Lexington in connection with or due to DSS entering into an alternate transaction constituting a superior proposal, then DSS is required to 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 such superior proposal in the same form as such consideration is paid to such security holders. See the sections entitled “The Merger Agreement — No Solicitation,” “The Merger Agreement — Board Recommendations” and “The Merger Agreement — Termination Fees and Expenses” beginning on pages 102, 104, and 106, respectively.

 

These provisions might discourage an otherwise interested third party from considering or proposing an acquisition of DSS, even one that may be deemed of greater value than the Merger to DSS stockholders.

 

Lexington can terminate the Merger Agreement for any reason or no reason upon payment of a termination fee and DSS will have no recourse against Lexington.

 

Pursuant to the Merger Agreement, Lexington can terminate the Merger Agreement, at any time, for any reason or no reason, upon payment to DSS of a termination fee equal to $5,000,000. DSS will have no recourse against Lexington other than receiving such termination fee and would not realize any of the anticipated benefits of having completed the Merger.

 

If the Merger does not qualify as a “reorganization” under Section 368(a) of the Code, the stockholders of Lexington may be required to pay substantial United States federal income taxes as a result of the Merger.

 

DSS and Lexington intend that the Merger will qualify as a “reorganization” under Section 368(a) of the Code. DSS and Lexington currently anticipate that the United States holders of shares of Lexington capital stock generally should not recognize taxable gain or loss as a result of the Merger. However, neither DSS nor Lexington has requested, or intends to request, a ruling from the IRS with respect to the tax consequences of the Merger, and there can be no assurance that the companies’ position would be sustained if challenged by the IRS. Accordingly, if there is a final determination that the Merger does not qualify as a “reorganization” under Section 368(a) of the Code and is taxable for United States federal income tax purposes, Lexington stockholders generally would recognize taxable gain or loss on their receipt of equity securities of DSS in connection with the Merger equal to the difference between such stockholder’s adjusted tax basis in their shares of Lexington capital stock and the fair market value of the equity securities of DSS. 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.

 

53
 

 

Litigation may be instituted against DSS, members of the DSS board of directors, Lexington, members of the Lexington board of directors, and Merger Sub challenging the Merger and adverse judgments in these lawsuits may prevent the Merger from becoming effective within the expected timeframe or at all.

 

DSS, members of the DSS board of directors, Lexington, members of the Lexington board of directors, and Merger Sub may be named as defendants in class action lawsuits to be brought by DSS or Lexington stockholders challenging the Merger. If the plaintiffs in these potential cases are successful, they may prevent the parties from completing the Merger in the expected timeframe, if at all. Even if the plaintiffs in these potential actions are not successful, the costs of defending against such claims could adversely affect the financial condition of DSS or Lexington.

 

Risks Related to the Combined Company if the Merger Is Completed

 

The failure to integrate successfully the businesses of DSS and Lexington in the expected timeframe could adversely affect the combined company’s future results following the completion of the Merger.

 

The success of the Merger will depend, in large part, on the ability of the combined company following the completion of the Merger to realize the anticipated benefits from combining the businesses of DSS and Lexington.

 

The failure to integrate successfully and to manage successfully the challenges presented by the integration process may result in the combined company’s failure to achieve some or all of the anticipated benefits of the Merger.

 

Potential difficulties that may be encountered in the integration process include the following:

 

  using the combined company’s cash and other assets efficiently to develop the business of the combined company;
  appropriately managing the liabilities of the combined company;
  potential unknown or currently unquantifiable liabilities associated with the Merger and the operations of the combined company;
  potential unknown and unforeseen expenses, delays or regulatory conditions associated with the Merger; and
  performance shortfalls at one or both of the companies as a result of the diversion of management’s attention caused by completing the Merger and integrating the companies’ operations.

 

DSS may not realize the potential value and benefits created by the Merger.

 

The success of the Merger will depend, in part, on DSS’s ability to realize the expected potential value and benefits created from integrating DSS’s existing business with Lexington’s business, which includes the maximization of the economic benefits of the combined company’s intellectual property portfolio. The integration process may be complex, costly, and time-consuming. The difficulties of integrating the operations of Lexington’s business could include, among others:

 

  failure to implement DSS’s business plan for the combined business;
  unanticipated issues in integrating the business of both companies;
  Potential lost sales and customers if any customer of DSS decides not to do business with DSS after the Merger;
  loss of key employees with knowledge of DSS’s historical business and operations;
  unanticipated changes in applicable laws and regulations; and

 

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  other unanticipated issues, expenses, or liabilities that could impact, among other things, DSS’s ability to realize any expected benefits on a timely basis, or at all.

 

DSS may not accomplish the integration of Lexington’s business smoothly, successfully, or within the anticipated costs or time frame. The diversion of the attention of management from DSS’s current operations to the integration effort and any difficulties encountered in combining businesses could prevent DSS from realizing the full expected potential value and benefits to result from the Merger and could adversely affect its business. In addition, the integration efforts could divert the focus and resources of the management of DSS and Lexington from other strategic opportunities and operational matters during the integration process.

 

The combined company will be dependent on certain key personnel, and the loss of these key personnel could have a material adverse effect on the combined company’s business, financial conditions and results of operations.

 

The success and future prospects of the combined company largely depend on the skills, experience and efforts of its key personnel, including Jeffrey Ronaldi, Peter Hardigan and [•]. The loss of Messrs. Ronaldi, Hardigan and [•] or other executives of the combined company, or the combined company’s failure to retain other key personnel, would jeopardize the combined company’s ability to execute its strategic plan and materially harm its business.

 

The Merger will result in changes to the DSS board of directors and the combined company may pursue different strategies than either DSS or Lexington may have pursued independently.

 

If the parties complete the Merger, the composition of the DSS board of directors will change in accordance with the Merger Agreement. Following the completion of the Merger, the combined company’s board of directors will consist of nine (9) members, including Jeffrey Ronaldi, Peter Hardigan, Warren Hurwitz, all of whom are designees of Lexington, and two other directors to be designated by Lexington (reasonably acceptable to DSS) and Robert B. Fagenson, Ira A. Greenstein, Robert B. Bzdick and David Klein, all of whom are currently members of the DSS board of directors. 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 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. Currently, it is anticipated that the combined company will maximize the economic benefits of its intellectual property portfolio, add significant talent in technological innovation and potentially enhance its opportunities for revenue generation through the monetization of the combined company’s assets. However, because the composition of the board of directors of the combined company will consist of directors from both DSS and Lexington, the combined company may determine to pursue certain business strategies that neither DSS nor Lexington would have pursued independently.

 

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Ownership of the combined company’s common stock may be highly concentrated, and it may prevent you and other stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause the combined company’s stock price to decline.

 

Upon completion of the Merger, DSS’s and Lexington’s executive officers and directors continuing with the combined company, and are expected to beneficially own or control approximately 4.37% of the combined company (see the sections entitled “DSS Security Ownership of Certain Beneficial Owners and Management” beginning on page 191, “Lexington Security Ownership of Certain Beneficial Owners and Management” beginning on page 193 and “Security Ownership of Certain Beneficial Owners and Management of the Combined Company Following the Merger” beginning on page 195 for more information on the estimated ownership of the combined company following the Merger). Accordingly, these executive officers and directors, acting individually or as a group, will have substantial influence over the outcome of a corporate action of the combined company requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of the combined company’s assets or any other significant corporate transaction. These stockholders may also exert influence in delaying or preventing a change in control of the combined company, even if such change in control would benefit the other stockholders of the combined company. In addition, the significant concentration of stock ownership may adversely affect the market value of the combined company’s common stock due to investors’ perception that conflicts of interest may exist or arise.

 

The success of the combined company will depend in part on relationships with third parties, which relationships may be affected by third-party preferences or public attitudes about the Merger. Any adverse changes in these relationships could adversely affect the combined company’s business, financial condition, or results of operations.

 

The combined company’s success will be dependent on its ability to maintain and renew the business relationships of both DSS and Lexington and to establish new business relationships. There can be no assurance that the management of the combined company will be able to maintain such business relationships, or enter into or maintain new business contracts and other business relationships, on acceptable terms, if at all. The failure to maintain important business relationships could have a material adverse effect on the business, financial condition, or results of operations of the combined company.

 

Future results of the combined company may differ materially from the unaudited pro forma financial statements presented in this proxy statement/prospectus and the financial forecasts prepared by DSS and Lexington in connection with discussions concerning the Merger.

 

The future results of the combined company may be materially different from those shown in the unaudited pro forma combined financial statements presented in this proxy statement/prospectus, which show only a combination of the historical results of DSS and Lexington, prepared by DSS and Lexington in connection with the Merger. DSS expects to incur significant costs associated with the completion of the Merger and combining the operations of the two companies. The exact magnitude of these costs are not yet known, but are estimated to be approximately $1,000,000. Furthermore, these costs may decrease the capital that the combined company could use for continued development of the combined company’s business in the future or may cause the combined company to seek to raise new capital sooner than expected.

 

The combined company may require additional capital to support its present business plan and its anticipated business growth, and such capital may not be available on acceptable terms, or at all, which would adversely affect the combined company’s ability to operate.

 

The combined company may require additional funds to further develop its business plan. Based on current operating plans of DSS and Lexington, the current resources of the combined company are expected to be sufficient to fund its planned operations into the fourth quarter of 2014. Since it is impossible to predict the timing and amount of any recovery, if any, resulting from the Lexington Litigation, we anticipate that we will need to raise additional funds through equity offerings in order to meet our liquidity requirements in the fourth quarter of 2014. However, if revenues of DSS do not meet expectations or if operating expenses exceed expectations, or a combination of both, then the combined company may require additional resources prior to the fourth quarter of 2014. Any such financing that DSS undertakes will likely be dilutive to DSS’s current stockholders.

 

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The combined company intends to continue to make investments to support its business growth, including patent or other intellectual property asset creation. In addition, the combined company may also need additional funds to respond to business opportunities and challenges, including its ongoing operating expenses, protecting its assets, satisfying debt payment obligations, developing new lines of business and enhancing its operating infrastructure. While the combined company may need to seek additional funding for such purposes, it may not be able to obtain financing on acceptable terms, or at all. In addition, the terms of the combined company’s financings may be dilutive to, or otherwise adversely affect, holders of its common stock. The combined company may also seek additional funds through arrangements with collaborators or other third parties. The combined company may not be able to negotiate any such arrangements on acceptable terms, if at all. If the combined company is unable to obtain additional funding on a timely basis, it may be required to curtail or terminate some or all of its business plans.

 

In addition, in accordance with the terms and conditions of the Merger Agreement, DSS may not currently incur any indebtedness without the consent of Lexington. As of September 30, 2012, the indebtedness of DSS and Lexington was approximately $3.1 million and $3.4 million, respectively.

 

The price of DSS Common Stock after the Merger is completed may be affected by factors different from those currently affecting the shares of DSS.

 

Upon completion of the Merger, holders of Lexington capital stock will become holders of DSS Common Stock and DSS Preferred Stock. The business of DSS differs from the business of Lexington and, accordingly, the results of operations of the combined company and the trading price of DSS Common Stock following the completion of the Merger may be significantly affected by factors different from those currently affecting the independent results of operations of DSS because the combined company will be conducting activities not undertaken by DSS prior to the completion of the Merger. For a discussion of the businesses of DSS and Lexington and of certain factors to consider in connection with those businesses, see the sections entitled “DSS’s Business,” “DSS’s Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Lexington’s Business,” “Lexington’s Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the financial statements of DSS and Lexington, including the notes thereto, which are included elsewhere in this proxy statement/prospectus, and the other information contained in this proxy statement/prospectus.

 

Material weaknesses may exist when the combined company reports on the effectiveness of its internal control over financial reporting for purposes of its reporting requirements.

 

Prior to the filing of the registration statement of which this proxy statement/prospectus forms a part, Lexington was not subject to Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”). Therefore, Lexington’s management and independent registered public accounting firm did not perform an evaluation of Lexington’s internal control over financial reporting in accordance with the provisions of Sarbanes-Oxley. Following the completion of the Merger within the expected timeframe, the combined company will be required to provide management’s report on internal control over financial reporting in its Annual Report on Form 10-K for the year ending December 31, 2013, as required by Section 404 of Sarbanes-Oxley. Material weaknesses may exist when the combined company reports on the effectiveness of its internal control over financial reporting for purposes of its reporting requirements under the Exchange Act or Section 404 of Sarbanes-Oxley following the completion of the Merger. The existence of one or more material weaknesses would preclude a conclusion that the combined company maintains effective internal control over financial reporting. Such a conclusion would be required to be disclosed in the combined company’s future Annual Reports on Form 10-K and could impact the accuracy and timing of its financial reporting and the reliability of its internal control over financial reporting, which could harm the combined company’s reputation and cause the market price of its common stock to drop.

 

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DSS does not expect the combined company to pay cash dividends on its common stock.

 

DSS anticipates that the combined company will retain its earnings, if any, for future growth and therefore does not anticipate paying cash dividends on its common stock in the future. Investors seeking cash dividends should not invest in the combined company’s common stock for that purpose.

 

Anti-takeover provisions in the combined company’s charter and bylaws may prevent or frustrate attempts by stockholders to change the board of directors or current management and could make a third-party acquisition of the combined company difficult.

 

The combined company’s certificate of incorporation and bylaws, as amended, will contain provisions that may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could limit the price that investors might be willing to pay in the future for shares of the combined company’s common stock.

 

Because the lack of a public market for Lexington’s capital stock makes it difficult to evaluate the fairness of the Merger, Lexington’s stockholders may receive consideration in the Merger that is greater than or less than the fair market value of Lexington’s capital stock.

 

The outstanding capital stock of Lexington is privately held and is not traded in any public market. The lack of a public market makes it difficult to determine the fair market value of Lexington. Since the percentage of DSS Common Stock, DSS Preferred Stock and Warrants to be issued to Lexington’s stockholders was determined based on negotiations between the parties, it is possible that the value of the DSS Common Stock, DSS Preferred Stock and Warrants to be issued in connection with the Merger will be greater than the fair market value of Lexington. Alternatively, it is possible that the value of the shares of DSS Common Stock, DSS Preferred Stock and Warrants to be issued in connection with the Merger will be less than the fair market value of Lexington.

 

If any of the events described in “Risks Related to DSS’s Business” or “Risks Related to Lexington’s Business” occur, those events could cause the potential benefits of the Merger not to be realized.

 

Following the completion of the Merger, current DSS executive officers and certain Lexington executive officers and certain Lexington and DSS directors will direct the business and operations of the combined company. Additionally, Lexington’s business is expected to be an important part of the business of the combined company following the Merger. As a result, the risks described below in the section entitled “Risks Related to Lexington’s Business” beginning on page 66 are among the significant risks to the combined company if the Merger is completed. To the extent any of the events in the risks described below in either the section entitled “Risks Related to DSS’s Business” or “Risks Related to Lexington’s Business” occur, those events could cause the potential benefits of the Merger not to be realized and the market price of the combined company’s common stock to decline.

 

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Risks Related to DSS’s Business

 

DSS is currently, and after the completion of the Merger the combined company will continue to be, subject to the risks described below.

 

DSS may not be able to consummate the Merger with Lexington.

 

The consummation of the Merger with Lexington is subject to stockholders approval and other closing conditions. DSS has expended significant effort and management attention to the proposed transaction. There is no assurance that the Merger will be approved. For example, DSS’s stockholders may not approve the Merger. If the Merger is not consummated for any reason, DSS’s business and operations, as well as the market price of its common stock may be adversely affected.

 

DSS has a history of losses.

 

DSS has a history of losses. In fiscal 2011, 2010, and 2009, DSS incurred losses of approximately $3.2 million, $3.5 million, and $4.0 million, respectively. DSS’s results of operations in the future will depend on many factors, but largely on DSS’s ability to successfully market DSS’s anti-counterfeiting products, technologies and services. DSS’s failure to achieve profitability in the future could adversely affect the trading price of its common stock and its ability to raise additional capital and, accordingly, its ability to continue to grow its business. There can be no assurance that DSS will succeed in addressing any or all of these risks, and the failure to do so could have a material adverse effect on DSS’s business, financial condition and operating results.

 

DSS has a significant amount of indebtedness, some of which is secured by its assets, and may be unable to satisfy its obligations to pay interest and principal thereon when due.

 

 As of September 30, 2012, DSS has the following significant amounts of outstanding indebtedness:

 

  (i) $575,000 convertible promissory note bearing interest at 10% per annum due in full on December 29, 2013, or convertible into up to 260,180 shares of DSS Common Stock, secured by the assets of DSS’s wholly-owned subsidiary, Secuprint. Interest is due quarterly.

 

  (ii) $725,000 due under a term loan with Citizens Bank which matures February 1, 2015 and is payable in monthly payments of $25,000 plus interest. Interest accrues at 1 Month LIBOR plus 3.75% and is secured by all of the assets of DSS’s subsidiary, Premier Packaging. DSS subsequently entered into an interest rate swap agreement to lock into a 5.7% effective interest rate over the life of the term loan. The term loan has also been guaranteed by DSS and its subsidiaries P3 and Secuprint.

 

  (iii) Up to $1,000,000 in a revolving line of credit with Citizens Bank available for use by Premier Packaging, subject to certain limitations which matures on May 31, 2013 (as amended) and is payable in monthly installments of interest only. Interest accrues at 1 Month LIBOR plus 3.75%, and is secured by all of the assets of the DSS’s subsidiary, Premier Packaging. As of September 30, 2012, there was approximately $481,000 outstanding on the line.

 

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  (iv) $1,176,433 due under a promissory note with Citizens Bank used to purchase DSS’s packaging division facility. DSS is required to pay monthly installments of $7,658 plus interest until August 2021 at which time a balloon payment of the remaining principal balance of $919,677 is due. DSS subsequently entered into an interest rate swap agreement to lock into a 5.865% effective interest rate over the life of the term loan. The promissory note is secured by a first mortgage.

 

All of the Citizens Bank credit facilities are subject to various covenants including a fixed charge coverage ratio, tangible net worth and current ratio. The Citizens Bank obligations are secured by all of the assets of Premier Packaging and are also secured through cross guarantees by DSS and its other wholly-owned subsidiaries, P3 and Secuprint.

 

If DSS were to default on any of the above indebtedness, and the creditors were to foreclose on secured assets, this could have a material adverse effect on DSS’s business, financial condition and operating results.

 

If DSS is unable to adequately protect its intellectual property, its competitive advantage may disappear.

 

The success of DSS will be determined in part by its ability to obtain United States and foreign patent protection for its technology and to preserve its trade secrets. Because of the substantial length of time and expense associated with developing new document security technology, DSS places considerable importance on patent and trade secret protection. DSS intends to continue to rely primarily on a combination of patent protection, trade secrets, technical measures, copyright protection and nondisclosure agreements with its employees and customers to establish and protect the ideas, concepts and documentation of software and trade secrets developed by DSS. DSS’s ability to compete and the ability of its business to grow could suffer if these intellectual property rights are not adequately protected. There can be no assurance that DSS’s patent applications will result in patents being issued or that current or additional patents will afford protection against competitors. Failure of DSS’s patents, copyrights, trademarks and trade secret protection, non-disclosure agreements and other measures to provide protection of its technology and its intellectual property rights could enable DSS’s competitors to more effectively compete with it and have an adverse effect on DSS’s business, financial condition and results of operations. In addition, DSS’s trade secrets and proprietary know-how may otherwise become known or be independently discovered by others. No guarantee can be given that others will not independently develop substantially equivalent proprietary information or techniques, or otherwise gain access to DSS’s proprietary technology.

 

In addition, DSS may be required to litigate in the future to enforce its intellectual property rights, to protect its trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Any such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on DSS’s business, financial condition or results of operations, and there can be no assurances of the success of any such litigation.

 

DSS may face intellectual property infringement or other claims against it, its customers or its intellectual property that could be costly to defend and result in its loss of significant rights.

 

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Although DSS has received patents with respect to certain of its technologies, there can be no assurance that these patents will afford DSS any meaningful protection. Although DSS believes that its use of the technology and products it has developed and other trade secrets used in its operations do not infringe upon the rights of others, DSS’s use of the technology and trade secrets it developed may infringe upon the patents or intellectual property rights of others. In the event of infringement, DSS could, under certain circumstances, be required to obtain a license or modify aspects of the technology and trade secrets it developed or refrain from using the same. DSS may not have the necessary financial resources to defend an infringement claim made against it or be able to successfully terminate any infringement in a timely manner, upon acceptable terms and conditions or at all. Failure to do any of the foregoing could have a material adverse effect on DSS and its financial condition. Moreover, if the patents, technology or trade secrets DSS developed or uses in its business are deemed to infringe upon the rights of others, DSS could, under certain circumstances, become liable for damages, which could have a material adverse effect on DSS and its financial condition. As DSS continues to market its products, DSS could encounter patent barriers that are not known today. A patent search may not disclose all related applications that are currently pending in the United States Patent Office, and there may be one or more such pending applications that would take precedence over any or all of DSS’s applications.

 

Furthermore, third parties may assert that DSS’s intellectual property rights are invalid, which could result in significant expenditures by DSS to refute such assertions. If DSS becomes involved in litigation, DSS could lose its proprietary rights, be subject to damages and incur substantial unexpected operating expenses. Intellectual property litigation is expensive and time-consuming, even if the claims are subsequently proven unfounded, and could divert management’s attention from DSS’s business. If there is a successful claim of infringement, DSS may not be able to develop non-infringing technology or enter into royalty or license agreements on acceptable terms, if at all. If DSS is unsuccessful in defending claims that its intellectual property rights are invalid, DSS may not be able to enter into royalty or license agreements on acceptable terms, if at all. This could prohibit DSS from providing its products and services to customers, which could have a material adverse effect on DSS and its financial condition.

 

The value of DSS’s intangible assets may not be equal to their carrying values.

 

As of September 30, 2012, DSS had approximately $5.2 million of net intangible assets, including goodwill. DSS is required to evaluate the carrying value of such intangibles. Whenever events or changes in circumstances indicate that the carrying value of an intangible asset, including goodwill, may not be recoverable, DSS will have to determine whether there has been impairment by comparing the anticipated undiscounted cash flows (discounted cash flows for goodwill) from the operation and eventual disposition of the product line with its carrying value. If any of DSS’s intangible assets are deemed to be impaired then it will result in a significant reduction of the operating results in such period. No impairments were recognized as of September 30, 2012.

 

Certain of DSS’s recently developed products are not yet commercially accepted and there can be no assurance that those products will be accepted, which would adversely affect DSS’s financial results.

 

Over the past several years, DSS has spent significant funds and time to create new products by applying its technologies onto media other than paper, including plastic and cardboard packaging, and delivery of DSS’s technologies digitally. DSS has had limited success to date in selling its products that are on cardboard packaging and those that are delivered digitally. DSS’s business plan for 2012 and beyond includes plans to incur significant marketing, intellectual property development and sales costs for these newer products, particularly the digitally delivered products. If DSS is not able to sell these new products, its financial results will be adversely affected.

 

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The results of DSS’s research and development efforts are uncertain and there can be no assurance of the commercial success of its products.

 

DSS believes that it will need to continue to incur research and development expenditures to remain competitive. The products DSS is currently developing or may develop in the future may not be technologically successful. In addition, the length of DSS’s product development cycle may be greater than it originally expected and DSS may experience delays in future product development. If DSS’s resulting products are not technologically successful, they may not achieve market acceptance or compete effectively with DSS’s competitors’ products.

 

Changes in document security technology and standards could render DSS’s applications and services obsolete.

 

The market for document security products, applications, and services is fast moving and evolving. Identification and authentication technology is constantly changing as DSS and its competitors introduce new products, applications, and services, and retire old ones as customer requirements quickly develop and change. In addition, the standards for document security are continuing to evolve. If any segments of DSS’s market adopt technologies or standards that are inconsistent with DSS’s applications and technology, sales to those market segments could decline, which could have a material adverse effect on DSS and its financial condition.

 

The market in which DSS operates is highly competitive, and DSS may not be able to compete effectively, especially against established industry competitors with greater market presence and financial resources.

 

DSS’s market is highly competitive and characterized by rapid technological change and product innovations. DSS competitors may have advantages over DSS because of their longer operating histories, more established products, greater name recognition, larger customer bases, and greater financial, technical and marketing resources. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, and devote greater resources to the promotion and sale of their products. Competition may also force DSS to decrease the price of DSS’s products and services. DSS cannot assure you that it will be successful in developing and introducing new technology on a timely basis, new products with enhanced features, or that these products, if introduced, will enable DSS to establish selling prices and gross margins at profitable levels.

 

DSS’s growth strategy depends, in part, on DSS acquiring complementary businesses and assets and expanding DSS’s existing operations to include manufacturing capabilities, which DSS may be unable to do.

 

DSS’s growth strategy is based, in part, on its ability to acquire businesses and assets that are complementary to its existing operations and expanding DSS’s operations to include manufacturing capabilities. DSS may also seek to acquire other businesses. The success of this acquisition strategy will depend, in part, on DSS’s ability to accomplish the following:

 

·identify suitable businesses or assets to buy;
·complete the purchase of those businesses on terms acceptable to DSS;
·complete the acquisition in the time frame DSS expects; and
·improve the results of operations of the businesses that DSS buys and successfully integrate their operations into DSS’s.

 

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Although DSS has been able to make acquisitions in the past, there can be no assurance that DSS will be successful in pursuing any or all of these steps on future transactions. DSS’s failure to implement its acquisition strategy could have an adverse effect on other aspects of DSS’s business strategy and its business in general. DSS may not be able to find appropriate acquisition candidates, acquire those candidates that DSS finds or integrate acquired businesses effectively or profitably.

 

DSS has in the past used, and may continue to use, its common stock as payment for all or a portion of the purchase price for acquisitions. If DSS issues significant amounts of its common stock for such acquisitions, this could result in substantial dilution of the equity interests of DSS stockholders.

 

If DSS fails to retain certain of its key personnel and attract and retain additional qualified personnel, DSS might not be able to pursue its growth strategy.

 

DSS’s future success depends upon the continued service of certain of its executive officers and other key sales and research personnel who possess longstanding industry relationships and technical knowledge of DSS products and operations. Although DSS believes that its relationship with these individuals is positive, there can be no assurance that the services of these individuals will continue to be available to DSS in the future. There can be no assurance that these persons will agree to continue to be employed by DSS after the expiration dates of their current contracts.

 

If DSS does not successfully expand its sales force, it may be unable to increase its revenues.

 

DSS must expand the size of its marketing activities and sales force to increase revenues. DSS continues to evaluate various methods of expanding its marketing activities, including the use of outside marketing consultants and representatives and expanding its in-house marketing capabilities. If DSS is unable to hire or retain qualified sales personnel or if newly hired personnel fail to develop the necessary skills to be productive, or if they reach productivity more slowly than anticipated, DSS’s ability to increase its revenues and grow could be compromised. The challenge of attracting, training and retaining qualified candidates may make it difficult to meet DSS’s sales growth targets. Further, DSS may not generate sufficient sales to offset the increased expense resulting from expanding DSS’s sales force or DSS may be unable to manage a larger sales force.

 

Future growth in DSS’s business could make it difficult to manage DSS’s resources.

 

DSS’s anticipated business expansion could place a significant strain on its management, administrative and financial resources. Significant growth in DSS’s business may require it to implement additional operating, product development and financial controls, improve coordination among marketing, product development and finance functions, increase capital expenditures and hire additional personnel. There can be no assurance that DSS will be able to successfully manage any substantial expansion of its business, including attracting and retaining qualified personnel. Any failure to properly manage its future growth could negatively impact its business and operating results.

 

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DSS cannot predict its future capital needs and DSS may not be able to secure additional financing.

 

DSS may need to raise additional funds in the future to fund its working capital needs, to fund more aggressive expansion of its business, to complete development, testing and marketing of its products and technologies, or to make strategic acquisitions or investments. DSS may require additional equity or debt financings, collaborative arrangements with corporate partners or funds from other sources for these purposes. No assurance can be given that necessary funds will be available for DSS to finance its development on acceptable terms, if at all. Furthermore, such additional financings may involve substantial dilution of DSS stockholders or may require that DSS relinquish rights to certain of its technologies or products. In addition, DSS may experience operational difficulties and delays due to working capital restrictions. If adequate funds are not available from operations or additional sources of financing, DSS may have to delay or scale back its growth plans.

 

If DSS is unable to respond to regulatory or industry standards effectively, its growth and development could be delayed or limited.

 

DSS’s future success will depend in part on its ability to enhance and improve the functionality and features of its products and services in accordance with regulatory or industry standards. DSS’s ability to compete effectively will depend in part on its ability to influence and respond to emerging industry governmental standards in a timely and cost-effective manner. If DSS is unable to influence these or other standards or respond to these or other standards effectively, its growth and development of various products and services could be delayed or limited.

 

Changes in the laws and regulations to which DSS are subject may increase DSS’s costs.

 

DSS is subject to numerous laws and regulations, including, but not limited to, environmental and health and welfare benefit regulations, as well as those associated with being a public company. These rules and regulations may be changed by local, state, provincial, national or foreign governments or agencies. Such changes may result in significant increases in DSS’s compliance costs. Compliance with changes in rules and regulations could require increases to DSS’s workforce, and could result in increased costs for services, compensation and benefits, and investment in new or upgraded equipment.

 

Declines in general economic conditions or acts of war and terrorism may adversely impact DSS’s business.

 

Demand for printing services is typically correlated with general economic conditions. The recent declines in United States economic conditions have adversely impacted DSS’s business and results of operations, and may continue to do so for the foreseeable future. The overall business climate of DSS’s industry may also be impacted by domestic and foreign wars or acts of terrorism, which events may have sudden and unpredictable adverse impacts on demand for DSS’s products and services.

 

DSS has a large number of authorized but unissued shares of common stock, which DSS’s management may issue without further stockholder approval, thereby causing dilution of your holdings of DSS Common Stock.

 

As of September 30, 2012, there were approximately 179 million authorized but unissued shares of DSS Common Stock. DSS management continues to have broad discretion to issue shares of its common stock in a range of transactions, including capital-raising transactions, mergers, acquisitions, for anti-takeover purposes, and in other transactions, without obtaining stockholder approval, unless stockholder approval is required for a particular transaction under the rules of the NYSE MKT, state and federal law, or other applicable laws. If DSS’s board of directors determines to issue additional shares of DSS Common Stock from the large pool of authorized but unissued shares for any purpose in the future without obtaining stockholder approval, your ownership position would be diluted without your further ability to vote on such transaction.

 

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The exercise of DSS’s outstanding options and warrants, vesting of restricted stock awards and conversion of debt securities may depress DSS’s stock price.

 

As of September 30, 2012, DSS had outstanding stock options, warrants, and convertible debt, to purchase an aggregate of 4,319,200 shares of DSS Common Stock at exercise prices ranging from $1.86 to $6.31 per share. This amount includes 130,000 outstanding unvested restricted shares of DSS’s common stock that are subject to various vesting terms and 260,180 shares issuable upon conversion of debt securities. To the extent that these securities are converted into common stock, dilution to DSS’s stockholders will occur. Moreover, the terms upon which DSS will be able to obtain additional equity capital may be adversely affected, since the holders of these securities may exercise them at a time when DSS would, in all likelihood, be able to obtain any needed capital on terms more favorable to DSS than the exercise and conversion terms provided by those securities.

 

Sales of these securities in the public market, or the perception that future sales of these securities could occur, could have the effect of lowering the market price of DSS Common Stock below current levels and make it more difficult for DSS and DSS’s stockholders to sell DSS’s equity securities in the future.

 

Sale or the availability for sale of shares of common stock by stockholders could cause the market price of DSS Common Stock to decline and could impair DSS’s ability to raise capital through an offering of additional equity securities.

 

DSS does not intend to pay cash dividends.

 

DSS does not intend to declare or pay cash dividends on its common stock in the foreseeable future. DSS anticipates that it will retain any earnings and other cash resources for investment in its business. The payment of dividends on DSS’s common stock is subject to the discretion of its board of directors and will depend on DSS’s operations, financial position, financial requirements, general business conditions, restrictions imposed by financing arrangements, if any, legal restrictions on the payment of dividends and other factors that its board of directors deems relevant.

 

DSS has material weaknesses in its internal control over financial reporting structure, which, until remedied, may cause errors in its financial statements that could require restatements of its financial statements and investors may lose confidence in DSS’s reported financial information, which could lead to a decline in DSS’s stock price.

 

Section 404 of the Sarbanes-Oxley Act of 2002 requires DSS to evaluate the effectiveness of its internal control over financial reporting as of the end of each year, and to include a management report assessing the effectiveness of DSS’s internal control over financial reporting in each Annual Report on Form 10-K.

 

DSS has identified two material weaknesses in its internal control over financial reporting in its annual assessment of internal controls over financial reporting that management performed for the year ended December 31, 2011. Management has concluded that (i) DSS did not maintain a sufficient complement of qualified accounting personnel and controls associated with segregation of duties; and (ii) DSS lacks sufficient resources within the accounting department to have effective controls associated with identifying and accounting for complex and non-routine transactions in accordance with United States generally accepted accounting principles, and that the foregoing represented material weaknesses in its internal control over financial reporting. DSS is uncertain at this time of the costs to remediate all of the above listed material weaknesses, however, DSS anticipates the cost to be in the range of $200,000 to $400,000 (including the cost of hiring additional qualified accounting personnel to eliminate segregation of duties issues and using the services of accounting consultants for complex and non-routine transactions if and when they arise). DSS cannot guarantee that the actual costs to remediate these deficiencies will not exceed this amount. If DSS’s internal control over financial reporting or disclosure controls and procedures are not effective, there may be errors in DSS’s financial statements and in DSS’s disclosure that could require restatements. Investors may lose confidence in DSS’s reported financial information and in DSS’s disclosure, which could lead to a decline in DSS’s stock price.

 

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DSS’s management, including its Chief Executive Officer and Chief Financial Officer, does not expect that DSS’s internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

As a result, DSS cannot assure you that significant deficiencies or material weaknesses in its internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties DSS encounters in their implementation, could result in significant deficiencies or material weaknesses, cause DSS to fail to timely meet DSS’s periodic reporting obligations, or result in material misstatements in DSS’s financial statements. Any such failure could also materially adversely affect the results of periodic management evaluations regarding disclosure controls and procedures and the effectiveness of DSS’s internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. 

 

Risks Related to Lexington’s Business

 

Lexington’s limited operating history makes it difficult to evaluate its current business and future prospects.

 

Lexington is a newly formed development stage company and has generated no revenue to date and has only incurred expenses. Lexington was incorporated in May 2012 and acquired a portfolio of patents from Thomas Bascom in July 2012. Therefore, Lexington not only has a very limited operating history, but also a very limited track record in executing its business model which includes, among other things, creating, prosecuting, licensing, litigating or otherwise monetizing its patent assets. Lexington’s limited operating history makes it difficult to evaluate its current business model and future prospects.

 

In light of the costs, uncertainties, delays and difficulties frequently encountered by companies in the early stages of development with no operating history, there is a significant risk that Lexington will not be able to:

 

·implement or execute its current business plan, or that its business plan is sound; and/or

 

·raise sufficient funds in the capital markets to effectuate its business plan.

 

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If Lexington cannot execute any one of the foregoing or similar matters relating to its operations, its business may fail.

 

Lexington is presently reliant exclusively on the patent assets it recently acquired. If Lexington is unable to license or otherwise monetize such assets and generate revenue and profit through those assets or by other means, there is a significant risk that Lexington’s business would fail.

 

In July 2012, Lexington acquired a portfolio of patent assets from Thomas Bascom that Lexington plans to license or otherwise monetize. If Lexington’s efforts to generate revenue from such assets fail, Lexington will have incurred significant losses and may be unable to acquire additional assets. If this occurs, Lexington’s business would likely fail.

 

Lexington has commenced legal proceedings against five companies, including Facebook, Inc. and LinkedIn Corporation, and Lexington expects such litigation to be time-consuming and costly, which may adversely affect Lexington’s financial condition and its ability to operate its business.

 

To license or otherwise monetize the patent assets Lexington acquired from Thomas Bascom, Lexington has commenced legal proceedings against five companies, including Facebook, Inc. and LinkedIn Corporation, pursuant to which Lexington alleges that such companies infringe on one or more of Lexington’s patents. Lexington’s viability is highly dependent on the outcome of this litigation, and there is a risk that Lexington may be unable to achieve the results it desires from such litigation, which failure would harm Lexington’s business to a great degree. In addition, the defendants in this litigation are much larger than Lexington and have substantially more resources than Lexington does, which could make Lexington’s litigation efforts more difficult.

 

Lexington anticipates that these legal proceedings may continue for several years and may require significant expenditures for legal fees and other expenses. Disputes regarding the assertion of patents and other intellectual property rights are highly complex and technical. Once initiated, Lexington may be forced to litigate against others to enforce or defend Lexington’s intellectual property rights or to determine the validity and scope of other parties’ proprietary rights. The defendants or other third parties involved in the lawsuits in which Lexington is involved may allege defenses and/or file counterclaims in an effort to avoid or limit liability and damages for patent infringement. If such defenses or counterclaims are successful, they may preclude Lexington’s ability to derive licensing revenue from the patents. A negative outcome of any such litigation, or one or more claims contained within any such Litigation, could materially and adversely impact Lexington’s business. Additionally, Lexington anticipates that its legal fees and other expenses will be material and will negatively impact Lexington’s financial condition and results of operations and may result in its inability to continue its business. Lexington estimates that its legal fees over the next twelve months will be approximately $2,000,000. Expenses thereafter are dependent on the outcome of the litigation; in the event the case is appealed, legal fees over the course of the subsequent twelve months would be approximately $2,000,000. The costs of enforcing Lexington’s patent rights may exceed its recoveries from such enforcement activities. In addition, the primary law firm being utilized by Lexington for such litigation would be entitled to a certain percentage of any recoveries from the litigation or licensing of the patents. The inventor of the patents is likewise entitled to a percentage of such recoveries, as is IP Navigation Group, the intellectual property consulting firm engaged by Lexington in connection with its efforts to acquire and monetize this portfolio of patents. Accordingly, in order for Lexington to generate a profit from its patent enforcement and monetization activities, the revenues from such enforcement and monetization activities must be high enough to offset both the cash outlays and the contingent fees payable from such revenues. Lexington’s failure to monetize its patent assets would significantly harm its business.

 

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While Lexington believes that the patents acquired from Thomas Bascom are infringed by the defendants in the Litigation, there is a risk that a court will find the patents invalid, not infringed or unenforceable and/or that the US Patent Office will either invalidate the patents or materially narrow the scope of their claims during the course of a re-examination. In addition, even with a positive trial court verdict, the patent may be invalidated, found not infringed or rendered unenforceable on appeal. This risk may occur either presently in Lexington’s initial litigation or from time to time in connection with future litigations Lexington may bring. If this were to occur, it would have a material adverse effect on the viability of its company and its operations.

 

Lexington believes that certain social and business networking and other companies infringe on at least four of its patents, but recognizes that obtaining and collecting a judgment against such infringers may be difficult or impossible. Patent litigation is inherently risky and the outcome is uncertain. Some of the parties Lexington believes infringe on Lexington’s patents are large and well-financed companies with substantially greater resources than Lexington. Lexington believes that these parties would devote a substantial amount of resources in an attempt to avoid or limit a finding that they are liable for infringing Lexington’s patents or, in the event liability is found, to avoid or limit the amount of associated damages. In addition, there is a risk that these parties may file re-examinations or other proceedings with the USPTO or other government agencies in an attempt to invalidate, narrow the scope or render unenforceable the patents Lexington acquired from Thomas Bascom.

 

At this time, Lexington cannot predict the outcome of such potential litigation or administrative action, and if Lexington is unsuccessful in its litigation efforts for any reason, Lexington’s business would be significantly harmed.

 

Moreover, in connection with any of Lexington’s present or future patent enforcement actions, it is possible that a defendant may request and/or a court may rule that Lexington has violated statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or procedural aspects of such enforcement actions. In such event, a court may issue monetary sanctions against Lexington or its operating subsidiaries or award attorneys’ fees and/or expenses to one or more defendants, which could be material, and if Lexington or its subsidiaries are required to pay such monetary sanctions, attorneys’ fees and/or expenses, such payment could materially harm Lexington’s operating results and its financial position.

 

In addition, it is difficult in general to predict the outcome of patent enforcement litigation at the trial level. There is a higher rate of appeals in patent enforcement litigation than more standard business litigation. Such appeals are expensive and time-consuming, and the outcomes of such appeals are sometimes unpredictable, resulting in increased costs and reduced or delayed revenue.

 

Finally, Lexington believes that the more prevalent patent enforcement actions become, the more difficult it will be for Lexington to license its patents without engaging in litigation. As a result, Lexington may need to increase the number of its patent enforcement actions to cause infringing companies to license the patent or pay damages for lost royalties. This will adversely affect Lexington’s operating results due to the high costs of litigation and the uncertainty of the results.

 

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Lexington may be unable to retain key advisors and legal counsel to represent Lexington in the current patent infringement Litigation and in future legal proceedings.

 

The success of Lexington’s pending legal proceedings and future legal proceedings depends in part upon Lexington’s ability to retain key advisors and legal counsel to represent Lexington in such litigation. The retention of such key advisors and legal counsel is likely to be expensive and Lexington may not be able to retain such key advisors and legal counsel on favorable economic terms. Therefore, Lexington may be unable to retain key advisors and legal counsel to represent Lexington in its litigation, which could have a material adverse effect on Lexington’s business.

 

The patent infringement cases initiated by Lexington may take longer and be more expensive if the cases litigated in the United States District Court for the Eastern District of Virginia are transferred to another jurisdiction.

 

Lexington initiated its patent infringement litigation in the United States District Court for the Eastern District of Virginia. It is difficult to predict the length of time it will take to complete such litigation. If the patent infringement cases initiated by Lexington are transferred to another jurisdiction, Lexington believes that, as a result, the patent infringement litigation may be significantly longer, more expensive and the financial position of Lexington could be adversely affected.

 

Lexington may seek to internally develop additional new inventions and intellectual property, which would take time and would be costly. Moreover, the failure to obtain or maintain intellectual property rights for such inventions would lead to the loss of Lexington’s investments in such activities.

 

Members of Lexington’s management team have significant experience as inventors. As such, part of Lexington’s business may include the internal development of new inventions or intellectual property that Lexington will seek to monetize. However, this aspect of Lexington’s business would likely require significant capital and would take time to achieve. Such activities could also distract Lexington’s management team from its present business initiatives, which could have a material and adverse effect on Lexington’s business. There is also the risk that Lexington’s initiatives in this regard would not yield any viable new inventions or technology, which would lead to a loss of Lexington’s investments in time and resources in such activities.

 

In addition, even if Lexington is able to internally develop new inventions, in order for those inventions to be viable and to compete effectively, Lexington would need to develop and maintain, and it would heavily rely on, a proprietary position with respect to such inventions and intellectual property. However, there are significant risks associated with any such intellectual property Lexington may develop principally including the following:

 

·patent applications Lexington may file may not result in issued patents or may take longer than Lexington expects to result in issued patents;
·Lexington may be subject to interference proceedings;
·Lexington may be subject to opposition proceedings in the U.S. or foreign countries;
·any patents that are issued to Lexington may not provide meaningful protection;
·Lexington may not be able to develop additional proprietary technologies that are patentable;
·other companies may challenge patents issued to Lexington;
·other companies may design around technologies Lexington has developed; and
·enforcement of Lexington’s patents would be complex, uncertain and very expensive.

 

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Lexington cannot be certain that patents will be issued as a result of any future applications, or that any of Lexington’s patents, once issued, will provide Lexington with adequate protection from competing products. For example, issued patents may be circumvented or challenged, declared invalid or unenforceable, or narrowed in scope. In addition, since publication of discoveries in scientific or patent literature often lags behind actual discoveries, Lexington cannot be certain that it will be the first to make its additional new inventions or to file patent applications covering those inventions. It is also possible that others may have or may obtain issued patents that could prevent Lexington from commercializing Lexington’s products or require Lexington to obtain licenses requiring the payment of significant fees or royalties in order to enable Lexington to conduct its business. As to those patents that Lexington may license or otherwise monetize, Lexington’s rights will depend on maintaining its obligations to the licensor under the applicable license agreement, and Lexington may be unable to do so. Lexington’s failure to obtain or maintain intellectual property rights for Lexington’s inventions would lead to the loss of Lexington’s investments in such activities, which would have a material and adverse effect on Lexington’s company.

 

Moreover, patent application delays could cause delays in recognizing revenue from Lexington’s internally generated patents and could cause Lexington to miss opportunities to license patents before other competing technologies are developed or introduced into the market.

 

New legislation, regulations or court rulings related to enforcing patents could harm Lexington’s business and operating results.

 

If Congress, the United States Patent and Trademark Office or courts implement new legislation, regulations or rulings that impact the patent enforcement process or the rights of patent holders, these changes could negatively affect Lexington’s business model. For example, limitations on the ability to bring patent enforcement claims, limitations on potential liability for patent infringement, lower evidentiary standards for invalidating patents, increases in the cost to resolve patent disputes and other similar developments could negatively affect Lexington’s ability to assert its patent or other intellectual property rights.

 

In addition, on September 16, 2011, the Leahy-Smith America Invents Act (or the Leahy-Smith Act), was signed into law. The Leahy-Smith Act includes a number of significant changes to United States patent law. These changes include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. The U.S. Patent Office is currently developing regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act will not become effective until one year or 18 months after its enactment. Accordingly, it is too early to tell what, if any, impact the Leahy-Smith Act will have on the operation of Lexington’s business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of Lexington’s issued patents, all of which could have a material adverse effect on Lexington’s business and financial condition.

 

Further, and in general, it is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become enacted as laws. Compliance with any new or existing laws or regulations could be difficult and expensive, affect the manner in which Lexington conducts its business and negatively impact Lexington’s business, prospects, financial condition and results of operations.

 

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Lexington’s acquisitions of patent assets may be time consuming, complex and costly, which could adversely affect Lexington’s operating results.

 

Acquisitions of patent or other intellectual property assets, which are and will be critical to Lexington’s business plan, are often time consuming, complex and costly to consummate. Lexington may utilize many different transaction structures in its acquisitions and the terms of such acquisition agreements tend to be heavily negotiated. As a result, Lexington expects to incur significant operating expenses and will likely be required to raise capital during the negotiations even if the acquisition is ultimately not consummated. Even if Lexington is able to acquire particular patent assets, there is no guarantee that Lexington will generate sufficient revenue related to those patent assets to offset the acquisition costs. While Lexington will seek to conduct confirmatory due diligence on the patent assets Lexington is considering for acquisition, Lexington may acquire patent assets from a seller who does not have proper title to those assets. In those cases, Lexington may be required to spend significant resources to defend Lexington’s interest in the patent assets and, if Lexington is not successful, its acquisition may be invalid, in which case Lexington could lose part or all of its investment in the assets.

 

Lexington may also identify patent or other intellectual property assets that cost more than Lexington is prepared to spend with its own capital resources. Lexington may incur significant costs to organize and negotiate a structured acquisition that does not ultimately result in an acquisition of any patent assets or, if consummated, proves to be unprofitable for Lexington. These higher costs could adversely affect Lexington’s operating results, and if Lexington incurs losses, the value of its securities will decline.

 

In addition, Lexington may acquire patents and technologies that are in the early stages of adoption in the commercial, industrial and consumer markets. Demand for some of these technologies will likely be untested and may be subject to fluctuation based upon the rate at which Lexington’s licensees will adopt its patents and technologies in their products and services. As a result, there can be no assurance as to whether technologies Lexington acquires or develops will have value that it can monetize.

 

In certain acquisitions of patent assets, Lexington may seek to defer payment or finance a portion of the acquisition price. This approach may put Lexington at a competitive disadvantage and could result in harm to Lexington’s business.

 

Lexington has limited capital and may seek to negotiate acquisitions of patent or other intellectual property assets where Lexington can defer payments or finance a portion of the acquisition price. These types of debt financing or deferred payment arrangements may not be as attractive to sellers of patent assets as receiving the full purchase price for those assets in cash at the closing of the acquisition. As a result, Lexington might not compete effectively against other companies in the market for acquiring patent assets, many of whom have greater cash resources than Lexington has. In addition, any failure to satisfy Lexington’s debt repayment obligations may result in adverse consequences to its operating results.

 

Any failure to maintain or protect Lexington’s patent assets or other intellectual property rights could significantly impair its return on investment from such assets and harm Lexington’s brand, its business and its operating results.

 

Lexington’s ability to operate its business and compete in the intellectual property market largely depends on the superiority, uniqueness and value of Lexington’s acquired patent assets and other intellectual property. To protect Lexington’s proprietary rights, Lexington relies on and will rely on a combination of patent, trademark, copyright and trade secret laws, confidentiality agreements with its employees and third parties, and protective contractual provisions. No assurances can be given that any of the measures Lexington undertakes to protect and maintain its assets will have any measure of success.

 

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Following the acquisition of patent assets, Lexington will likely be required to spend significant time and resources to maintain the effectiveness of those assets by paying maintenance fees and making filings with the United States Patent and Trademark Office. Lexington may acquire patent assets, including patent applications, which require Lexington to spend resources to prosecute the applications with the United States Patent and Trademark Office. Further, there is a material risk that patent related claims (such as, for example, infringement claims (and/or claims for indemnification resulting therefrom), unenforceability claims, or invalidity claims) will be asserted or prosecuted against Lexington, and such assertions or prosecutions could materially and adversely affect Lexington’s business. Regardless of whether any such claims are valid or can be successfully asserted, defending such claims could cause Lexington to incur significant costs and could divert resources away from Lexington’s other activities.

 

Despite Lexington’s efforts to protect its intellectual property rights, any of the following or similar occurrences may reduce the value of Lexington’s intellectual property:

 

·Lexington’s applications for patents, trademarks and copyrights may not be granted and, if granted, may be challenged or invalidated;
·issued trademarks, copyrights, or patents may not provide Lexington with any competitive advantages versus potentially infringing parties;
·Lexington’s efforts to protect its intellectual property rights may not be effective in preventing misappropriation of Lexington’s technology; or
·Lexington’s efforts may not prevent the development and design by others of products or technologies similar to or competitive with, or superior to those Lexington acquires and/or prosecutes.

 

Moreover, Lexington may not be able to effectively protect its intellectual property rights in certain foreign countries where Lexington may do business in the future or from which competitors may operate. If Lexington fails to maintain, defend or prosecute its patent assets properly, the value of those assets would be reduced or eliminated, and Lexington’s business would be harmed.

 

Lexington may not be able to capitalize on potential market opportunities related to its licensing strategy or patent portfolio.

 

In order to capitalize on its patent portfolio, Lexington intends to enter into licensing relationships. However, there can be no assurance that Lexington will be able to capitalize on its patent portfolio or any potential market opportunity in the foreseeable future. Lexington’s inability to generate licensing revenues associated with potential market opportunities could result from a number of factors, including, but not limited to:

 

·Lexington may not be successful in entering into licensing relationships on commercially acceptable terms; and

 

·challenges from third parties as to the validity of Lexington’s patents underlying Lexington’s licensing opportunities.

 

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Weak global economic conditions may cause infringing parties to delay entering into licensing agreements, which could prolong Lexington’s litigation and adversely affect its financial condition and operating results.

 

Lexington’s business plan depends significantly on worldwide economic conditions, and the United States and world economies have recently experienced weak economic conditions. Uncertainty about global economic conditions poses a risk as businesses may postpone spending in response to tighter credit, negative financial news and declines in income or asset values. This response could have a material negative effect on the willingness of parties infringing on Lexington’s assets to enter into licensing or other revenue generating agreements voluntarily. Entering into such agreements is critical to Lexington’s business plan, and Lexington’s failure to do so could cause material harm to its business.

 

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THE MERGER

 

Structure of the Merger

 

In accordance with the Merger Agreement, the NYBCL and the DGCL, at the Effective Time, Merger Sub, a wholly-owned subsidiary of DSS formed solely for the purpose of carrying out the Merger, will merge with and into Lexington with Lexington continuing as the surviving corporation and a wholly-owned subsidiary of DSS. In connection with the Merger, each share of Lexington capital stock outstanding as of immediately prior to the effective time will be converted into the right to receive shares of DSS Common Stock and DSS Preferred Stock (or, if the proposal to authorize DSS Preferred Stock is not approved by the DSS stockholders, $.02 Warrants), as applicable, and Warrants, all in accordance with the terms and conditions of the Merger Agreement. The Merger will become effective when a certificate of merger is filed with the Secretary of State of the State of Delaware or at such other time as agreed to by the parties and specified in the certificate of merger. If the DSS stockholders approve the Securities Issuance Proposal, then DSS expects the Merger to be completed as soon as practicable following the DSS special meeting.

 

What Lexington Stockholders Will Receive in the Merger

 

Pursuant to the terms of the Merger Agreement, 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 the 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, which is equal to 0.998 at November 19, 2012. 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) Warrants to purchase an aggregate of 4,859,894 shares of DSS Common Stock. 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.

 

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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 the $.02 Warrants to purchase DSS Common Stock with an exercise price of $0.02 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 Warrant. In addition, under certain circumstances, a holder of the $.02 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 $.02 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.

 

As a result, 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).

 

Fractional Shares

 

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 an additional discussion of what Lexington stockholders will receive in connection with the Merger, see the section entitled “The Merger Agreement—Merger Consideration” beginning on page 97.

 

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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 Exchange Ratio (or any reverse stock split), Lexington stockholders are expected to receive shares of DSS Common Stock and DSS Preferred Stock and Warrants representing an aggregate of approximately 56% of the outstanding shares of common stock of the combined company calculated on a fully diluted basis. DSS stockholders will continue to own their existing shares of DSS Common Stock, which will not be affected by the Merger, and, unless they hold shares of Lexington capital stock, will not receive any additional shares of DSS Common Stock in connection with the Merger. As a result, immediately upon completion of the Merger, such shares will represent an aggregate of approximately 44% of the outstanding shares of common stock of the combined company calculated on a fully diluted basis. For example, if you are a DSS stockholder and hold 5% of the outstanding shares of DSS Common Stock calculated on a fully diluted basis immediately prior to the completion of the Merger and do not also hold shares of Lexington capital stock, then upon completion of the Merger you will hold an aggregate of approximately 2.20% of the outstanding shares of common stock of the combined company calculated on a fully diluted basis as of immediately following the completion of the Merger. If you are a Lexington stockholder and hold 5% of the outstanding shares of Lexington capital stock calculated on a fully diluted basis immediately prior to the completion of the Merger and do not also hold shares of DSS Common Stock, then upon completion of the Merger you will hold an aggregate of approximately 2.80% of the outstanding shares of common stock of the combined company, calculated on a fully diluted basis as of immediately following the completion of the Merger.

 

Treatment of Lexington Stock Options

 

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 November 19, 2012, the outstanding and unexercised stock options to purchase 3,600,000 shares of Lexington, at an exercise price of $1.67 per share, would be converted and become options to purchase an aggregate of 2,000,000 shares of DSS Common Stock at an exercise price of $3.00 per share.

 

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 an additional discussion of the treatment of Lexington stock options, see the section entitled “The Merger Agreement ─ Merger Consideration” beginning on page 97.

 

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Background of the Merger

 

The terms of the merger are the result of negotiations that took place between executives and board members of DSS and executives, on the one hand, and board members of Lexington and partners of Hudson Bay Capital Management LP (“Hudson Bay Capital”), the investment manager of Lexington’s large stockholder, Hudson Bay, on the other hand.

 

DSS’s Background

 

DSS was incorporated in May of 1984 under the original name of Thoroughbreads, USA, Inc. DSS’s principal executive offices are located in Rochester, New York. In 2002, DSS chose to strategically focus on becoming a developer and marketer of secure technologies. 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 its 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. During the period from February 2012 through the entry into the Merger Agreement, DSS has explored a number of potential mergers to maximize shareholder value.

 

Lexington’s Background

 

Lexington was incorporated under the laws of the state of Delaware on May 10, 2012 under the name Snip Inc. On September 10, 2012, Snip Inc. changed its name to Lexington Technology Group, Inc. Lexington is a holding company that owns 100% of the membership interests of Bascom Research. Bascom was incorporated in Virginia on June 6, 2012 under the name of Bascom Linking Intellectual Property, LLC, for the purpose of acquiring and/or developing patented technologies and intellectual property. On August 29, 2012, Bascom Linking Intellectual Property, LLC changed its name to Bascom Research, LLC. Lexington’s principal offices are located in New York City.

 

History of Events

 

On February 7, 2012, Michael Hartstein, Director of Investment Banking of Palladium Capital Advisors, LLC (“Palladium”), provided an introduction among DSS and certain investors interested in participating in a DSS private placement. These investors included Hudson Bay.

 

On February 12, 2012, DSS closed the private placement resulting in gross proceeds to DSS of $3,000,000, $1,500,000 of which were invested by Hudson Bay.

 

On February 14, 2012, a meeting between DSS, Palladium, and certain of the investors in the private placement was held in the Rochester, New York offices of DSS. Present at the meeting were Patrick A. White, then the Chief Executive Officer of DSS, Philip Jones, Chief Financial Officer of DSS, Robert B. Bzdick, President and Chief Operating Officer of DSS, Jeff D’Angelo, Vice President and General Counsel of DSS, David Wicker, Vice President of Research and Development of DSS, Mr. Hartstein, Yoav Roth, a partner at Hudson Bay, the investment manager for Lexington’s large stockholder, Hudson Bay, Barry Honig of CRQ Consultants, the Chief Operating Officer of Party A and via telephone, John Cronin, Chief Executive Officer of IpCapital (“IpCapital”) and a DSS director. During the meeting DSS provided an overview of DSS with particular focus on DSS’s patent portfolio and strategy. In addition, the Chief Executive Officer of Party A provided an overview of Party A and its patent portfolio and patent litigation opportunities, including a patent litigation opportunity related to its search engine patents.

 

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On February 17, 2012, DSS received an unsolicited Letter of Intent from Party A for a proposed merger of Party A with and into DSS for the purpose of merging Party A’s patent asset portfolio and related patent litigation strategy with DSS. DSS began several internal discussions regarding the Letter of Intent and potential litigation opportunity and ultimately determined it was not ready to move forward on the proposal at that time.

 

On February 22, 2012, DSS rejected Party A’s offer.

 

On April 24, 2012, a dinner meeting was held in New York City between Messrs. White, Jones, Hartstein, Roth and Honig to discuss DSS and an additional patent litigation opportunity similar to the Party A opportunity.

 

On April 25, 2012, Mr. White informed Mr. Hartstein that DSS was interested in pursuing additional patent litigation opportunities similar to the Party A opportunity.

 

On April 26, 2012, DSS and Hudson Bay Capital entered into a confidentiality agreement.

 

On May 7, 2012, a meeting was held at the New York offices of Hudson Bay among Robert Fagenson, Chairman of the Board of DSS, Mr. Hartstein, Mr. Roth and Mr. Honig. A potential merger transaction was discussed, including the overview of Lexington’s (f/n/a SNIP, Inc.) patents, the potential litigation defendants, the size and scope of the potential litigation strategy of Lexington. In addition, the general structure of a potential merger transaction was discussed and both parties agreed to continue negotiations.

 

On May 11, 2012, Mr. Hartsein sent a Non-Binding Confidential Term Sheet for a proposed merger between DSS and Lexington. Under the Non-Binding Confidential Term Sheet, DSS and Lexington would merge. At the effective time of the merger, Lexington would become a wholly-owned subsidiary of DSS in exchange for 27,000,000 shares of DSS common stock, of which 9,000,000 would be subject to a “claw back” provision, 12,500,000 warrants to purchase DSS common stock at exercise prices between $4.00 and $6.00 per share, and the assumption of up to $4,000,000 of Lexington’s debt by DSS. In addition, under the Non-Binding Confidential Term Sheet, DSS would conduct a private placement in which Palladium would act as the placement agent. The private placement was not a condition to the consummation of the proposed merger.

 

On May 21, 2012, Mr. Fagenson sent a memo to Mr. Roth in response to the Non-Binding Confidential Term Sheet which set forth the points of difference between DSS and Lexington, including, among other things, the number of shares to be issued to the Lexington stockholders, the number and exercise price of the warrants, the “claw back” terms and the private placement.

 

On May 24, 2012, Lexington sent a revised Non-Binding Confidential Term Sheet to DSS. The only material change from the Non-Binding Confidential Term Sheet previously delivered was changes to post-merger management and the terms of the private placement.

 

On May 29, 2012, Mr. Fagenson sent an email to Mr. Roth expressing his concern with the latest Non-Binding Confidential Term Sheet and suggested that the merger discussions should be discontinued.

 

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On May 29, 2012, Mr. Roth responded to Mr. Fagenson’s email by indicating that he believed the differences could be resolved, but also that if DSS was not interested in a merger, Lexington had other companies that would be interested in the opportunity.

 

On May 31, 2012, Mr. Fagenson and Mr. Roth agreed via email to continue the negotiation process and scheduled a meeting for June 6, 2012 at the New York offices of Hudson Bay.

  

On June 6, 2012, Messrs. Fagenson, White, Roth, Hartstein, Honig and Ira A. Greenstein, a DSS director, (via telephone) met at the New York offices of Hudson Bay. During the meeting, significant transaction terms were discussed, including the following: (i) the structural issues of the proposed merger that would affect the accounting treatment and tax effects of the proposed merger, (ii) the voting control of the combined company, (ii) the composition of the board of directors and management of the combined company, and (iv) the funding requirements of DSS post-merger. The meeting was concluded with the intention that both parties would engage legal counsel to assist in finalizing the Non-Binding Confidential Term Sheet and prepare a Definitive Term Sheet.

 

On June 15, 2012, the DSS board of directors held its 2012 annual shareholders meeting and immediately thereafter. a board of directors meeting. At the DSS board of directors meeting, Messrs. Fagenson and White described to the board of directors the potential merger transaction with Lexington. After much discussion, the board of directors approved the formation of a special committee, consisting of Mr. Fagenson, Mr. Greenstein, David Klein and Roger O’Brien, (i) to investigate Lexington’s proposal and any matters relating thereto as the DSS special committee, in its sole discretion, deemed appropriate; (ii) to review and evaluate the terms of Lexington’s proposal and discuss such terms with Lexington and its representatives as the DSS special committee deemed appropriate; (iii) if and when appropriate, to negotiate and execute ancillary and definitive agreements with respect to Lexington’s proposal, the execution and delivery of any such definitive agreements being subject, however, to the approval of the full DSS board of directors; (iv) to report to the DSS board of directors the recommendations and conclusions of the DSS special committee with respect to Lexington’s proposal, including a determination or recommendation as to whether the final terms of such proposal are fair to and in the best interests of the stockholders of DSS and should be approved by the full DSS board of directors and, if applicable, by DSS’s stockholders. In addition, the DSS special committee was instructed to engage legal counsel for the transaction.

 

The board of directors of DSS also considered the cost of obtaining a fairness opinion and the relative benefits considering that the assets of Lexington consisted solely of cash (which did not require any input from an investment banking firm) and intellectual property and determined not to obtain a fairness opinion.

 

On June 16, 2012, the DSS special committee held its first official meeting and elected Mr. Fagenson as Chairman of the DSS special committee. Also at the meeting, the DSS special committee discussed next steps, including retaining an independent legal advisor to assist the DSS special committee with its evaluation of Lexington’s proposal.

 

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On June 16, 2012 the DSS special committee retained Troutman Sanders LLP (“Troutman Sanders”) to act as its independent legal advisor. Among the reasons for this selection were Troutman Sanders’ reputation, its experience in mergers and acquisitions transactions, its experience in representing other special committees and the absence of any material prior relationship with Lexington. Troutman Sanders provided the DSS special committee with an overview of the directors’ fiduciary duties in connection with their role as members of the DSS special committee and discussed the independence standards under New York law. After a further discussion, the DSS special committee determined that no conflicts existed that would impair the ability of the DSS special committee to act in the best interests of DSS’ stockholders.

 

Between June 16, 2012 and June 21, 2012, Troutman Sanders and Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., counsel for Lexington (“Mintz Levin”), held a series of conference calls to discuss the transaction and consider various legal and tax structures in relation to the proposed merger.

 

On June 21, 2012, DSS sent Lexington a revised Non-Binding Confidential Term Sheet that included, among other things, the following revised terms: (i) the number of DSS shares to be issued in the proposed merger was reduced to 24,000,000 shares, of which 8,000,000 were to be held in escrow, (ii) added a provision that a portion of the 24,000,000 shares could be issued in the form of preferred stock of DSS, (iii) the number of DSS warrants to be issued was reduced to 4,486,056 with an exercise price between $4.60 and $5.00, (iv) change to the assumption of Lexington debt by DSS to up to $4,000,000 provided that Lexington had at least $4,000,000 in cash and cash equivalents to offset the debt at the time of closing, and (5) the DSS board post-merger would consist of eleven directors, six of which would be designated by Lexington and five of which would be designated by DSS.

 

Between June 22, 2012, and July 10, 2012, Troutman Sanders and Mintz Levin held a series of conference calls to discuss the proposed merger transaction.

 

On July 10, 2012, DSS sent Lexington a revised Non-Binding Confidential Term Sheet that included, among other things, the following revised terms: (i) the number of DSS shares to be issued was increased to 25,000,000 shares, of which 7,500,000 were to be held in escrow (ii) the number of DSS warrants to be issued was increased to 4,859,894 with an exercise price of $4.80, (iii) the condition that Lexington have at least $7,500,000 in cash and no debt at the time of closing in exchange for an additional 2,500,000 shares of DSS common stock, and (iv) the board of directors of the combined company would consist of nine directors, five of which would be designated by Lexington and four of which would be designated by DSS.

 

On July 13, 2012, the DSS special committee held a telephonic meeting. Also present at this meeting were representatives of Troutman Sanders. Troutman Sanders first discussed the material terms of the revised Non-Binding Confidential Term Sheet with the members of the DSS special committee. The DSS special committee then approved the revised Non-Binding Confidential Term Sheet and recommended to the DSS board of the directors that they approve the Non-Binding Confidential Term Sheet.

 

On July 16, 2012, the DSS board of directors held a telephonic meeting. Also present as this meeting were representatives of Troutman Sanders. Troutman Sanders first discussed the material terms of the Non-Binding Confidential Term Sheet with the members of the DSS Board. Mr. Fagenson then discussed with the full DSS Board the recommendation of the DSS special committee. Based on the recommendation of the DSS special committee, the DSS board of directors approved the Non-Binding Confidential Term Sheet.

 

On July 17, 2012, the Definitive Term Sheet was signed by DSS and Lexington.

 

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Commencing on July 17, 2012, both parties began to prepare a definitive merger agreement and ancillary documents including the warrants, the voting and support agreements, the amended DSS Certificate of Incorporation, the escrow agreement, and various employment agreements and amendments. In addition, both parties initiated formal due diligence procedures.

 

On July 18, 2012, Troutman Sanders engaged ipCapital to provide an analysis and report of Lexington’s patent portfolio and its proposed litigation with Facebook, Inc. and other potential infringers. Among other reasons for taking this action, the DSS special committee noted the analysis and report would provide additional support for the merger consideration to be paid to the Lexington stockholders.

 

On July 26, 2012 Mintz Levin distributed an initial draft of the merger agreement.

 

On August 3, 2012, DSS and Troutman Sanders sent Lexington and Mintz Levin their combined comments on the initial draft of the merger agreement where, along with various edits, suggested the concept of a staggered board to ensure that the initial composition of the post-merger board of directors would be maintained for a period of up to three years.

 

On August 10, 2012, DSS and Troutman Sanders provided comments to the proposed warrants, including the rejection of any down-round protection provisions, cashless exercise provisions and dividend participation rights.

 

Between August 10, 2012 and August 26, 2012, Mr. Fagenson, Mr. Roth and representatives of Troutman Sanders and Mintz Levin considered various mechanisms that did not unduly impact the economics of the overall transaction or adversely affect the tax treatment of the transaction in the event that DSS’s stockholders approved the merger agreement and the proposed merger but did not approve the authorization of the DSS convertible preferred stock. The primary use of the convertible preferred stock was the use of a beneficial ownership limitation which was to minimize the voting control in the hands of one Lexington stockholder and also benefitting such stockholder by reducing its obligations under the federal securities laws.

 

On August 27, 2012, a revised draft of the merger agreement was sent by Mintz Levin which, among other things, included a warrant with an exercise price of $0.02 per share that could be used to address the possibility that DSS would not gain stockholders approval for the amendment of its Certificate of Incorporation authorizing DSS to issue the preferred stock in the merger. Prior to this date, the parties had discussed the issuance of convertible debt and exchangeable preferred stock which would remain as preferred stock at the Lexington level but be exchangeable for DSS common stock subject to the beneficial ownership limitation. The parties determined that convertible debt was not desirable because it would require DSS to incur debt which would adversely affect the balance sheet and be burdensome on DSS. The exchangeable preferred stock idea was dismissed because it was more complex than the warrants with an exercise price of $0.02 per share and the exchange of Lexington capital stock for DSS common stock would have been a taxable transaction. Although warrants with an exercise price of $0.02 per share were not desirable, it was more favorable than the other proposals. In addition, this version of the merger agreement memorialized the staggered board concept.

 

On August 30, 2012, Mr. Fagenson, Mr. Roth and representatives of Troutman Sanders and Mintz Levin met at the New York officers of Hudson Bay. During this meeting, Mr. Fagenson and Mr. Roth agreed, among other things, to the following: (i) that if the staggered board proposal was not approved by the DSS stockholders, the DSS board of directors post-merger will consent of eight directors, four of which would be designated by DSS and four of which would be designated by Lexington, (ii) cashless exercise of the warrants issued in the merger only if at the time of exercise, there was not an effective registration statement covering the resale of the shares issued upon exercise thereof, and (iii) Dawson James Securities (“Dawson James”) would replace Palladium as the placement agent for the private placement.

 

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On August 31, 2012, Mintz Levin circulated a revised draft of the merger agreement that, among other things, included Hudson Bay as the agent for the escrow shares, reduced the number of escrow shares to 7,100,000 and if the staggered board proposal was not approved by the DSS stockholders, the DSS board of directors post-merger will consist of eight directors, four of which would be designated by DSS and four of which would be designated by Lexington. Subsequent to this version of the merger agreement, while additional drafts of the merger agreement were sent back and forth between the parties, there were no additional substantive issues or terms that changed.

 

On September 6, 2012, Troutman Sanders delivered the final form of the merger agreement and related documents to the DSS special committee, along with the findings of the due diligence, including the report of the patents by ipCapital.

 

On September 7, 2012, DSS replaced Palladium as placement agent for the private placement with Dawson James.

 

On September 19, 2012, the DSS special committee met with Troutman Sanders to consider the final terms of the merger agreement and its recommendation of the transaction to the full DSS board of directors. Troutman then described in detail Lexington’s intellectual property portfolio to the DSS special committee. Mr. Cronin of ipCapital then gave a report on the potential value of Lexington’s intellectual property. After considering, among other things, the factors discussed below under “—Recommendation of the DSS Special Committee and DSS Board of Directors and its Reasons for the Merger,” the DSS special committee determined that the proposed merger was fair to and in the best interests of DSS and its stockholders and unanimously approved resolutions recommending that the DSS board of directors approve and declare advisable the merger agreement and the proposed merger.

 

On September 20, a revised draft of the merger agreement was circulated that finalized all of the terms of the merger agreement, including the names of the proposed post-merger executive management and board of directors and updated the merger agreement to reflect the name change of SNIP, Inc. to Lexington Technology Group, Inc.

 

On September 20, 2012, the full DSS board of directors convened to consider the DSS special committee’s recommendation and Mr. Fagenson discussed with the DSS board of directors the various factors which led to the recommendation of the proposed merger to the DSS board of directors. Mr. Fagenson then reviewed with the DSS board of directors the terms of the proposed transaction. Troutman Sanders then described in detail the material terms of the merger agreement to the DSS board of directors. Troutman Sanders directed the DSS board of directors’ particular attention to material terms and conditions, including, but not limited to, the closing conditions and the termination provisions. After considering, among other things, the factors described below under “—Recommendation of the DSS Special Committee and DSS Board of Directors and its Reasons for the Merger,” the terms of the definitive merger agreement and the recommendation of the special committee, the members of the board of directors unanimously determined that the proposed merger was advisable, fair to and in the best interests of DSS shareholders and unanimously approved resolutions approving the proposed merger and recommending that DSS’s shareholders vote to adopt the merger agreement.

 

On October 1, 2012, the private placement closed resulting in net proceeds of $2,500,000 and the Merger Agreement was executed and publicly announced by DSS and Lexington.

 

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On November 19, 2012, the DSS board of directors convened to discuss amending the Merger Agreement to provide for (i) the entry into of employment agreements between Lexington and Mr. Ronaldi and Mr. Hardigan, respectively, (ii) the issuance of equity by Lexington in connection therewith, (iii) the cancellation of options issued to certain officers and employees of DSS, and (iv) the increase in the number of options DSS may issue from 300,000 to 775,000. An amendment to the Merger Agreement was executed by the parties on November 20, 2012 memorializing the foregoing.

 

Merger

 

Both the DSS special committee and the DSS board of directors have 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.

 

The DSS Special Committee

 

The DSS special committee, acting with the advice and assistance of its legal advisor, evaluated the terms and conditions of the Merger Agreement and the transactions contemplated thereby, including the Merger At a meeting on September 19, 2012, 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 to the DSS board of directors that it approve and declare advisable the Merger Agreement and the transactions contemplated thereby, including the Merger, upon the terms and conditions contained therein, and that the Merger Agreement and the transactions contemplated thereby, including the Merger, be submitted to the DSS stockholders for approval and adoption.

 

In the course of reaching its determination and recommendations, the DSS special committee considered the following factors as being generally positive or favorable, each of which the DSS special committee believed supported its determination and recommendations:

 

·the belief that the combination of DSS’s and Lexington’s businesses would create more value for the DSS stockholders in the long-term than DSS could create as a stand-alone business given the challenges in its business and those presented by a volatile economy;

 

·the DSS special committee's and the DSS board of directors’ consideration of strategic alternatives to the Merger in the form of a potential equity fundraising, a sale of the business or other merger scenarios considered by the DSS special committee and the DSS board in the document security industries or continuing to operate DSS on a stand-alone basis;

 

·the opportunity for the DSS stockholders to participate in the potential future value of the combined company;

 

·ipCapital's analysis and report of Lexington's patent portfolio and its proposed litigation with Facebook and other potential infringers;

 

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·the consideration of DSS short- and long-term performance on a stand-alone basis;

 

·the belief that the Merger is more favorable to the DSS stockholders than the alternatives to the Merger;

 

·the terms and conditions of the Merger Agreement, including that DSS is permitted to engage in negotiations with, and provide information to, third parties, under certain circumstances in response to an unsolicited proposals received by DSS prior to stockholder approval of the Merger that DSS’s board of directors determines in good faith constitutes or would reasonably be expected to lead to a transaction that is more favorable to DSS stockholders than the Merger;

 

·the belief that the terms of the Merger Agreement, including the parties’ representations, warranties and covenants and the conditions to their respective obligations, are reasonable;

 

·the likelihood that the Merger will be completed on a timely basis; and

 

·the fact that the Common Stock Exchange Ratio will not fluctuate based upon changes in the price of DSS Common Stock or the value of Lexington capital stock prior to the completion of the Merger, which protects the DSS stockholders from any materially negative trends in the price of DSS Common Stock.

 

The DSS special committee also considered a number of potentially negative factors in its deliberations concerning the Merger, including:

 

·the general challenges associated with successfully integrating two companies;

 

·the failure to integrate successfully the businesses of DSS and Lexington in the expected timeframe could adversely affect the combined company’s future results following the completion of the Merger;

 

·the risk that Lexington will be unable to achieve a positive verdict or settlement in the Litigation;

 

·the possible volatility, at least in the short term, of the trading price of DSS Common Stock resulting from the public announcement of the Merger;

 

·the announcement and pendency of the Merger could have an adverse effect on DSS’s stock price and/or the business, financial condition, results of operations, or business prospects for DSS and/or Lexington;

 

·the potential loss of key employees critical to the ongoing success of the combined company’s business;

 

·the interests of DSS directors and executive officers in the Merger, including the matters described under the section entitled “The Merger — Interests of DSS Directors and Executive Officers in the Merger” beginning on page 87;

 

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·the impact of certain deal protection measures contained in the Merger Agreement on DSS, its business and operation, including the restrictions on DSS’s ability to solicit better offers;

 

·the risk that conditions to the completion of the Merger will not be satisfied and that the Merger may not be completed in a timely manner or at all;

 

·the ability of Lexington’s current stockholders and board members to significantly influence the combined company’s business following the completion of the Merger;

 

·the ability of Lexington to terminate the Merger Agreement for any reason;

 

·the absence of any material risk that any governmental authority would prevent or materially delay the merger under any antitrust law;

 

·the requirement that DSS receive approval from NYSE MKT for the listing of DSS’s common stock to be issued in connection with the Merger; and

 

·the other risks described above under the section entitled “Risk Factors” beginning on page 50.

 

The foregoing discussion of the information and factors considered by the DSS special committee is not intended to be exhaustive, but includes the material factors considered by the DSS special committee. In view of the wide variety of factors considered by the DSS special committee in evaluating the Merger Agreement and the Merger, the DSS special committee did not find it practicable, and did not attempt, to quantify, rank or otherwise assign relative weights to the foregoing factors in reaching its conclusion. In addition, individual members of the DSS special committee may have given different weights to different factors and may have viewed some factors more positively or negatively than others. The DSS special committee’s determinations and recommendations described above were based upon the totality of the information considered.

 

Position of the DSS Board of Directors as to Fairness of the Merger and Recommendation of the DSS Board of Directors

 

The DSS board of directors, after considering the factors described below, (i) 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, (ii) has approved the Merger Agreement and each of the amendments to DSS’s Certificate, and (iii) recommends that the DSS stockholders vote FOR the DSS Proposals. The board of directors made its recommendation to the DSS stockholders after considering the factors described in this proxy statement/prospectus. The DSS board of directors consulted with DSS’s senior management in evaluating the Merger. In addition, the DSS board of directors considered a number of factors that they believed supported their respective decisions to take the foregoing actions, including, but not limited to, the following:

 

·the DSS special committee’s unanimous determination 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 shareholders and its unanimous recommendation that the DSS Board approve and declare advisable the Merger Agreement and the transactions contemplated thereby, including the Merger; and

 

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·the DSS board of directors independently reviewed and evaluated the positive and negative factors set forth above under Recommendations of the DSS Special Committee and DSS Board of Directors and its Reasons for the Merger – The DSS Special Committee;

 

·ipCapital's analysis and report of Lexington's patent portfolio and its proposed litigation with Facebook and other potential infringers;

 

·the DSS special committee’s having retained and received advice from its legal advisor and that legal advisor's presentation to the DSS Board regarding Merger;

 

·the process undertaken by the DSS special committee in connection with evaluating the proposed Merger, as described above in “—Background of the Merger,” beginning on page 77; and

 

·their own views as to the value of Lexington, the value of the Company and the relative future prospects of Lexington and the Company.

 

This discussion of the information and factors considered by the DSS board of directors is not intended to be exhaustive but is intended to summarize all material factors considered by the DSS board of directors in connection with its approval and recommendation of the Merger and the other related transactions described in this proxy statement/prospectus. In view of the wide variety of factors considered, DSS board of directors has not found it practicable to quantify or otherwise assign relative weights to the specific factors considered. However, the DSS board of directors concluded that the potential benefits of the Merger outweighed the potential negative factors and that, overall, the Merger had greater potential benefits for the DSS stockholders than other strategic alternatives, including continuing to operate DSS as a stand-alone publicly traded company on the NYSE MKT. Therefore, after taking into account all of the factors set forth above, the DSS board of directors 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 that DSS should enter into the Merger Agreement and take all actions necessary to complete the Merger.

 

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

 

Board of Directors

 

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.

 

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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.

 

Executive Officers

 

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

 

Name Position with the Combined Company
Jeffrey Ronaldi Chief Executive Officer
Peter Hardigan Chief Investment Officer
Philip Jones Chief Financial Officer
Robert B. Bzdick Executive Vice President

 

Interests of DSS Directors and Executive Officers in the Merger

 

In considering the recommendation of the DSS board of directors to vote FOR the DSS Proposals, DSS stockholders should be aware that the directors and executive officers of DSS have interests in the Merger that may be in addition to, or different from, your interests as DSS stockholders, which could create conflicts of interest in their determinations to recommend the Merger. You should consider these interests in voting on the merger. These interests in connection with the Merger relate to or arise from, among other things:

 

·the fact that Robert B. Fagenson, Ira A. Greenstein, Robert B. Bzdick and David Klein are current directors of DSS and will remain directors of the combined company following the completion of the Merger;

 

·the fact that Philip Jones and Robert B. Bzdick are currently executive officers of DSS and will remain executive officers of the combined company following the completion of the Merger;

 

·the fact that options to purchase an aggregate of 775,000 shares of DSS Common Stock at an exercise price of $3.00 per share for a term of five years were granted to certain of DSS’s 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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·the right to continued indemnification for directors and executive officers of DSS following the completion of the Merger; and

 

·the DSS board of directors was aware of these potential conflicts of interest during its deliberations on the merits of the Merger and when making its decision regarding the Merger Agreement and the transactions contemplated thereby, including the Merger.

 

Ownership Interests

 

As of ______________, 2013, the latest practicable date before the printing of this proxy statement/prospectus, directors and executive officers of DSS, together with their respective affiliates, beneficially owned and were entitled to vote ______________ shares of DSS Common Stock, or approximately [•]% of the shares of DSS Common Stock outstanding on that date. Assuming the Merger had been completed as of such date, all directors and executive officers of DSS, together with their respective affiliates, would beneficially own, in the aggregate, approximately [•]% of the outstanding shares of common stock of the combined company.

 

For a more complete discussion of the ownership interests of the directors and executive officers of DSS, see the sections entitled “DSS Security Ownership of Certain Beneficial Owners and Management” and “Security Ownership of Certain Beneficial Owners and Management of the Combined Company Following the Merger” beginning on pages 191 and 195, respectively.

 

Employment Agreements with Certain Executive Officers of DSS

 

Upon completion of the Merger, Patrick A. White, Philip Jones and Robert B. Bzdick will be entitled to certain payments and other benefits or payments, as applicable, as more fully described below.

 

Patrick A. White

 

In conjunction with the termination of Mr. White’s employment as the Chief Executive Officer of the DSS, effective December 1, 2012, DSS and Mr. White entered into an Amended Consulting Agreement (the “White Amended Consulting Agreement”) and a Confidentiality, Non-Competition, Non-Solicitation and Intellectual Property Agreement (the “White Confidentiality and Non-Compete Agreement”), both dated November 15, 2012, and both having an effective date of December 1, 2012.

 

The White Amended Consulting Agreement replaces a consulting agreement previously entered into between DSS and White, dated October 1, 2012. The term of the White Amended Consulting Agreement will commence on December 1, 2012 continue until March 1, 2015. Pursuant to the White Amended Consulting Agreement, Mr. White will provide consulting services to DSS as requested by DSS’s Chief Executive Officer, up to a maximum of 60 hours per month. As consideration for the performance of the consulting services, Mr. White shall be paid the sum of $14,166.67 per month for the 15 month period commencing from December 1, 2012 through February 28, 2014 and, thereafter, Mr. White will be paid the sum of $11,666.67 per month for the remaining 12 months of the consulting term. In addition to the above-described monthly payments, White will be paid a bonus of $40,000 on or before December 7, 2012 and, on September 21, 2012, Mr. White was granted options to acquire 50,000 shares of DSS Common Stock at an exercise price of $4.26 per share.

 

On November 19, 2012, DSS cancelled Mr. White’s September 21, 2012 option grant, and reissued his options to acquire 50,000 shares of DSS Common Stock with an exercise price of $3.00 per share.

 

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Under the White Confidentiality and Non-Compete Agreement, Mr. White has agreed, among other things, not to (i) disclose certain Confidential Information (as defined in the White Confidentiality and Non-Compete Agreement) related to DSS; (ii) while engaged with DSS, and for a period of one year from and after the termination of the White Amended Consulting Agreement, engage in certain competitive activities relating to DSS’s business (as defined in the White Confidentiality and Non-Compete Agreement); or (iii)(a) solicit any Customer (as defined in the White Confidentiality and Non-Compete Agreement) of DSS that has purchased or licensed the DSS’s intellectual property, products or services, (b) solicit any employee of DSS to become an employee of any other business or business entity, or (c) at any time without DSS’s prior written consent, discuss, publish or otherwise divulge any Confidential Information.

 

Philip Jones

 

On October 1, 2012, DSS and Philip Jones, Chief Financial Officer of DSS, entered into a letter agreement (the “Jones Letter Agreement”), which will be effective on the date of the consummation of the Merger. Under the Jones Letter Agreement, upon termination of Mr. Jones’s employment for any reason by DSS, DSS will pay Mr. Jones (or, in the case of his death, his estate) (i) any unpaid base salary earned through the date of termination payable when otherwise due in accordance with DSS’s regular payroll practices and any accrued but unused vacation in accordance with DSS’s policy; (ii) any unreimbursed expenses incurred through the date of termination; and (iii) all other payments, benefits or fringe benefits to which Mr. Jones may be entitled. In the event Mr. Jones’s employment with DSS is terminated by DSS without Cause (as defined in the Jones Letter Agreement), or by Mr. Jones for Good Reason (as defined in the Jones Letter Agreement), and provided Mr. Jones executes a customary general release, DSS will pay to Mr. Jones, (1) his current base salary following the date of his termination, payable in equal biweekly installments in accordance with DSS’s regular payroll practices, for an additional 12 months; and (2) certain medical benefits premiums pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1986, as amended (“COBRA”), for the first twelve months of such COBRA coverage.

 

On November 19, 2012, DSS granted Mr. Jones options to acquire 100,000 shares of DSS common stock at an exercise price of $3.00 per share, and cancelled a previous grant to Jones of options to acquire 25,000 share at DSS common stock at an exercise price of $4.26 per share.

 

Robert B. Bzdick

 

On October 1, 2012, DSS and Robert B. Bzdick, Chief Operating Officer of DSS, entered into Amendment No. 1 to Employment Agreement (the “Bzdick Amendment”) which amended certain terms and provisions of his Employment Agreement, effective as of February 12, 2010, (as amended, the “Bzdick Employment Agreement”). The Bzdick Amendment will be effective on the date of the consummation of the Merger. Pursuant to the Bzdick Amendment, among other things, (i) the term of the Bzdick Employment Agreement is reduced from February 12, 2015 to December 31, 2014, which agreement shall be renewed automatically for a succeeding period of five years on the same terms and conditions as set forth therein, unless either party, at least 90 days prior to the expiration of the term of the Bzdick Employment Agreement, provides written notice to the other party of its intention not to renew the Bzdick Employment Agreement; (ii) if DSS elects not to renew the initial term of the Bzdick Employment Agreement, DSS will pay Mr. Bzdick $300,000, which shall be payable as follows: $100,000 on the first anniversary of such non-renewal, and $50,000 on each of the second through fifth anniversaries after such non-renewal; and (iii) Mr. Bzdick’s salary is decreased from $240,000 to $200,000. Upon the consummation of the Merger, DSS will pay to Mr. Bzdick a bonus equal to $50,000 and on September 21, 2012, DSS granted options to Mr. Bzdick to acquire 150,000 shares of DSS common stock at an exercise price of $4.26 per share, which options will vest in full upon the consummation of the Merger. On November 19, 2012, DSS reissued Mr. Bzdick’s options to acquire 150,000 shares of DSS common stock at an exercise price of $3.00 per share, and cancelled the previous grant of options made to him on September 21, 2012. The November 19, 2012 event to Bzdick will vest in full upon consummation of the Merger. In addition, on November 19, 2012, DSS granted Mr. Bzdick options to purchase an additional 100,000 shares of DSS common stock at an exercise price of $3.00 per share, which will vest ratably over 12 calendar quarters .

 

Upon consummation of the Merger, Mr. Bzdick will be permitted to sell up to 300,000 shares of common stock that he currently owns pursuant to a 10b5-1 plan previously approved by DSS’s board of directors.

 

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Accelerated Vesting of Stock Options

 

DSS’s employees, consultants and directors who received option grants or restricted stock grants prior to the Merger will continue to hold such options and stock post-merger. No acceleration of those options grants will occur as a result of the Merger. Options grants made to certain of DSS’s employees in consideration of their agreements to modify employment agreements and/or subject themselves to post-merger restrictive covenants in connection with the Merger will vest in full upon consummation of the Merger.

 

Indemnification and Insurance

 

The Merger Agreement provides that all rights to indemnification with respect to acts or omissions occurring at or prior to the completion of the Merger (including any acts or omissions arising out or pertaining to the Merger) existing in favor of each present and former director, officer or employee of Lexington or any of its subsidiaries as provided in their respective certificates of incorporation or bylaws or indemnification agreements shall continue. The Merger Agreement provides that DSS and Merger Sub will continue to indemnify and hold harmless each present and former director, officer or employee of Lexington or any of its subsidiaries, with respect to acts or omissions occurring or alleged to have occurred before or after the completion of the Merger, including advancing expenses to the fullest extent allowed by law.

 

The Merger Agreement provides the DSS will continue to indemnify and hold harmless each present and former director (or member of any committee of a board of directors) or officer, employee or agent of Lexington or any of its subsidiaries, with respect to acts or omissions occurring or alleged to have occurred at or prior to the completion of the Merger, to the fullest extent permitted under applicable law in effect on the date of the Merger Agreement or as amended to increase the scope of permitted indemnification and DSS’s Certificate or DSS’s bylaws (the “DSS’s Bylaws”). The Merger Agreement also provides that the combined company will honor all indemnification agreements in place with each present and former director or officer of DSS.

 

In addition, following the closing of the Merger, DSS shall purchase and maintain a directors’ and officers’ liability insurance policy, and, if such policy does not cover certain of DSS’s directors, officers and employees for events occurring at or prior to the Effective Time, DSS shall purchase and obtain a six (6) year extended reporting period or tail policy covering each for events occurring at or prior to the Effective Time, at DSS’s expense.

 

Anticipated Accounting Treatment

 

The Merger will be treated by DSS as a reverse merger under the acquisition method of accounting in accordance with GAAP. For accounting purposes, Lexington is considered to be acquiring DSS in this transaction. Therefore, the aggregate consideration paid in connection with the Merger will be allocated to DSS tangible and intangible assets and liabilities based on their fair market values. The assets and liabilities and results of operations of DSS will be consolidated into the results of operations of Lexington as of the completion of the Merger. These allocations will be based upon a valuation that has not yet been finalized.

 

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Tax Treatment of the Merger

 

DSS and Lexington intend the Merger to qualify as a reorganization within the meaning of Section 368(a) of the Code and have agreed to use reasonable best efforts to structure the Merger to qualify as a reorganization and not to take any action that would prevent the Merger from qualifying as a reorganization under Section 368(a) of the Code. DSS and Lexington shall use commercially reasonable efforts to enable Lexington to receive a written opinion, in form and substance reasonably acceptable to it, dated as of the closing date of the Merger to the effect that, for United States federal income tax purposes the Merger should constitute a “reorganization” within the meaning of Section 368(a) of the Code. In rendering such opinion, such counsel shall be entitled to rely upon customary assumptions and representations reasonably satisfactory to such counsel, including representations set forth in certificates of officers of DSS, Merger Sub and the Lexington.

 

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.

 

Regulatory Approvals Required for the Merger

 

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 antitrust 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 Preferred Stock (or, if Proposal 2 is not approved by the DSS stockholders, $.02 Warrants) and Warrants in the Merger and what may possibly be deemed the resulting change in control of DSS and the filing of this proxy statement/prospectus with the SEC.

 

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 (or, if Proposal 2 is not approved by the DSS stockholders, $.02 Warrants) 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, may be resold by them only in transactions permitted by Rule 144 or as otherwise permitted under the Securities Act.

 

Appraisal Rights

 

Under the NYBCL, holders of DSS Common Stock are not entitled to appraisal rights in connection with the Merger or the proposals described in this proxy statement/prospectus. Under the DGCL, however, holders of Lexington capital stock may be entitled to appraisal rights in connection with the Merger.

 

NYSE MKT Listing of DSS Common Stock

 

DSS Common Stock currently is listed on the NYSE MKT under the symbol “DSS.” DSS has agreed to use its reasonable best efforts to cause the shares of DSS Common Stock to be approved, at or prior to the completion of the Merger, for listing (subject only to notice of issuance) on the NYSE MKT at and following the completion of the Merger, and the listing of the shares of DSS Common Stock issuable pursuant to the Merger Agreement on the NYSE MKT is a condition to Lexington’s obligation to complete the Merger.

 

As of the date of the mailing of this proxy statement/prospectus, DSS has filed an initial listing application for listing on the NYSE MKT in connection with the Merger pursuant to NYSE MKT’s reverse merger rules. If such application is approved, DSS anticipates that its common stock will be listed on the NYSE MKT following the completion of the Merger under the trading symbol “DSS.”

 

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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER

 

The following discussion summarizes the material United States federal income tax consequences of the Merger. This summary is based upon current provisions of the Code, existing Treasury Regulations promulgated thereunder and current administrative rulings and court decisions, all of which are subject to change and to differing interpretations, possibly with retroactive effect. Any change could alter the tax consequences to DSS, Lexington or Lexington stockholders, as described in this summary. This summary is not binding on the IRS, and there can be no assurance that the IRS (or a court, in the event of an IRS challenge) will agree with the conclusions stated herein.

 

This discussion does not address all of the United States federal income tax consequences of the Merger that may be relevant to Lexington stockholders and DSS stockholders in light of their particular circumstances and does not apply to stockholders that are subject to special treatment under United States federal income tax laws, including, without limitation:

 

dealers, brokers and traders in securities;

 

individuals who are not citizens or residents of the United States, including United States expatriates;

 

corporations (or other entities taxable as a corporation for United States federal income tax purposes) created or organized outside of the United States;

 

tax-exempt entities;

 

financial institutions, regulated investment companies, real estate investment trusts or insurance companies;

 

partnerships, limited liability companies that are not treated as corporations for United States federal income tax purposes, subchapter S corporations and other pass-through entities and investors in such entities;

 

an estate or trust;

 

holders who are subject to the alternative minimum tax provisions of the Code;

 

holders who acquired their shares in connection with stock option or stock purchase plans or in other compensatory transactions;

 

holders who hold their shares through a pension plan or other qualified retirement plan;

 

holders who hold their shares as part of an integrated investment such as a hedge or as part of a hedging, straddle or other risk reduction strategy;

 

holders who do not hold their shares as capital assets within the meaning of Section 1221 of the Code (generally, property held for investment will be a capital asset); or

 

holders who have a functional currency other than the United States dollar.

 

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In addition, the following discussion does not address:

 

the tax consequences of the Merger under any United States federal non-income tax laws or under state, local or foreign tax laws;

 

the tax consequences of transactions effectuated before, after or at the same time as the Merger, whether or not they are in connection with the Merger, including, without limitation, transactions in which shares of Lexington capital stock or DSS capital stock are acquired;

 

the tax consequences to holders of options issued by Lexington that are assumed, replaced, exercised or converted, as the case may be, in connection with the Merger;

 

the tax consequences of the receipt of equity securities of DSS other than in exchange for shares of Lexington capital stock; or

 

the tax consequences of the ownership or disposition of equity securities of DSS Common Stock, DSS Preferred Stock and/or Warrants acquired in the Merger.

 

Accordingly, Lexington stockholders are advised and expected to consult their own tax advisors regarding the United States federal income tax consequences of the Merger in light of their personal circumstances and the consequences of the Merger under United States federal non-income tax laws and state, local and foreign tax laws.

 

United States Federal Income Tax Consequences of the Merger

 

The Merger is intended to qualify as a “reorganization” within the meaning of Section 368(a) of the Code. DSS and Lexington have agreed to use reasonable best efforts to structure the Merger to qualify as a “reorganization” and not to take any action that would prevent the Merger from qualifying as a reorganization under Section 368(a) of the Code. Neither DSS nor Lexington presently intends to waive these conditions.

 

If, as intended, the Merger is treated for United States federal income tax purposes as a “reorganization” within the meaning of Section 368(a) of the Code, then the Merger will have the following material United States federal income tax consequences:

 

The Merger will be treated for United States federal income tax purposes as a “reorganization” within the meaning of Section 368(a) of the Code and that the Merger will have the following material United States federal income tax consequences:

 

DSS, Merger Sub, Lexington and the DSS stockholders generally will recognize no gain or loss solely as a result of the Merger;

 

Lexington stockholders, other than Lexington stockholders who exercise appraisal rights (as discussed below), generally will recognize no gain or loss upon the receipt of equity securities of DSS for their Lexington capital stock (including the $.02 Warrants in the event they are issued);

 

the aggregate tax basis of the equity securities of DSS that are received by a Lexington stockholder in the Merger will be equal to the aggregate tax basis of the shares of Lexington capital stock surrendered in exchange therefor; and

 

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the holding period of the equity securities of DSS received by a Lexington stockholder in connection with the Merger will include the holding period of the shares of Lexington capital stock surrendered in exchange therefor.

 

Mintz Levin will render its written opinion that the Merger should constitute a “reorganization” within the meaning of Section 368(a) of the Code. 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. 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. Accordingly, if there is a final determination that the Merger does not qualify as a “reorganization” under Section 368(a) of the Code and is taxable for United States federal income tax purposes, Lexington stockholders generally would recognize taxable gain or loss on their receipt of equity securities of DSS in connection with the Merger equal to the difference between such stockholder’s adjusted tax basis in their shares of Lexington capital stock and the fair market value of the equity securities of DSS.

 

There will be no material United States federal income tax consequences of the Merger for DSS stockholders whether or not the Merger qualifies as a “reorganization” within