S-4/A 1 v337828_s4a.htm AMENDMENT NO. 3

As filed with the Securities and Exchange Commission on March 29, 2013

Registration No. 333-185134

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



 

AMENDMENT NO. 3
TO
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
Chief Executive 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. o

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. o

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. o

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 o   Accelerated filer o   Non-accelerated filer o   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) o

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

 

 


 
 

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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.


 
 

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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 MARCH 29, 2013

[GRAPHIC MISSING]

PROPOSED MERGER — YOUR VOTE IS VERY IMPORTANT

Document Security Systems, Inc., or DSS, Lexington Technology Group, Inc., or Lexington, and Hudson Bay Master Fund Ltd., as representative of Lexington’s stockholders solely for certain purposes, entered into a merger agreement on October 1, 2012 (as may be amended or modified), which we refer to as the Merger Agreement, pursuant to which a wholly-owned subsidiary of DSS will merge with and into Lexington, with Lexington surviving the merger as a wholly-owned subsidiary of DSS. We refer to this transaction as the Merger. The board of directors of each of DSS and Lexington has approved the Merger Agreement and the Merger.

If the Merger is completed, the holders of Lexington Common Stock and Lexington Preferred Stock will have the right to receive, for each share of Lexington Common Stock or Lexington Preferred Stock they hold, as applicable, certain DSS securities, the number of which is based on the Common Stock Exchange Ratio, as such ratio is calculated pursuant to the terms of the Merger Agreement and that was equal to 0.881 as of March 15, 2013, as more fully described in the section entitled “The Merger Agreement — Merger Consideration” in this proxy statement/prospectus.

The exact Common Stock Exchange Ratio, and therefore the actual number of DSS securities to be issued in respect of each share of Lexington capital stock, will not be determined until immediately prior to the completion of the Merger. Assuming the Merger had been completed on March 15, 2013, the following aggregate number of DSS securities would have been issued in the Merger to the holders of Lexington Common Stock and Preferred Stock:

up to 19,990,559 shares of DSS Common Stock (which includes 2,500,000 Additional Shares and 240,559 Exchanged Shares (each as described in the section entitled “The Merger Agreement — Conditions to the Completion of the Merger” beginning on page 97));
7,100,000 shares of DSS Common Stock to be held in escrow;
up to 500,000 shares of DSS Common Stock if Lexington’s cash balance exceeds $7.25 million to a maximum of $9.0 million at the effective time of the Merger;
up to 4,859,894 Warrants with an exercise price of $4.80 per share that are exercisable for an aggregate of 4,859,894 shares of DSS Common Stock;
additional shares of DSS convertible preferred stock, or warrants with an exercise price of $.02 per share if the proposal to authorize DSS Preferred Stock is not approved by DSS stockholders, to any Lexington preferred stockholder that would beneficially own more than 9.99% of DSS Common Stock as a result of this Merger; and
for Lexington option holders only, 2,000,000 options to purchase DSS Common Stock in exchange for their options to purchase 3,600,000 shares of Lexington Common Stock.

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,” “The Merger Agreement — Merger Consideration,” “The Merger Agreement — Conditions to the Completion of the Merger” and “The Merger Agreement — Escrow Agreement” beginning on pages 71, 73, 91, 97 and 100, respectively.

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 51% of the outstanding common stock of the combined company and the current stockholders of DSS are expected to own approximately 49% of the outstanding common stock of the combined company. In addition, Lexington stockholders will own 100% of the outstanding DSS preferred stock, if approved.

It is currently expected that 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. However, certain assumptions made by DSS and certain factors may change from the date of this prospectus to the date of the Merger that could cause the Merger to not being considered a reverse merger, and if so, then the Merger would be accounted for as a business combination with DSS as the accounting acquirer. For the more complete discussion of the accounting treatment of the Merger, see “The Merger — Anticipated Accounting Treatment” on page 85 and “Summary Unaudited Pro Forma Combined Financial Data” on page 31.

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 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
Chief Executive 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.


 
 

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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, Eagle Rock Proxy Advisors, 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 Eagle Rock Proxy Advisors, 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
  Eagle Rock Proxy Advisors
12 Commerce Drive
Cranford, NJ 07016
Call Toll-Free: (800) 951-2406

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. 333-185134), 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).


 
 

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[GRAPHIC MISSING]

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 November 20, 2012;
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.


 
 

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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

Chief Executive 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.


 
 

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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.


 
 

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QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE DSS SPECIAL MEETING
    1  
SUMMARY     13  
The Companies     13  
The Merger     15  
What Lexington Stockholders Will Receive in the Merger     15  
Ownership of the Combined Company After the Completion of the Merger     17  
Treatment of Lexington Stock Options     18  
Treatment of DSS Stock Options; Change of Control Payments     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     20  
Material United States Federal Income Tax Consequences of the Merger     20  
Restrictions on Sales of Shares of DSS Common Stock Received By Lexington Stockholders in the Merger     21  
Appraisal Rights     22  
Regulatory Approvals     22  
Conditions to the Completion of the Merger     22  
No Solicitation     23  
Termination of the Merger Agreement     24  
Termination Fees and Expenses     24  
Voting by DSS Directors and Executive Officers     25  
Voting and Support Agreements     25  
Rights of Lexington Stockholders Will Change as a Result of the Merger     25  
Risk Factors     25  
Matters to Be Considered at the DSS Special Meeting     26  
SELECTED HISTORICAL FINANCIAL DATA OF DSS     27  
SELECTED HISTORICAL FINANCIAL DATA OF LEXINGTON     29  
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA     31  
MARKET PRICE DATA AND DIVIDEND INFORMATION     43  
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     53  
Risks Related to DSS’s Business     58  
Risks Related to Lexington’s Business     64  
THE MERGER     71  
Structure of the Merger     71  
What Lexington Stockholders Will Receive in the Merger     71  
Ownership of the Combined Company After the Completion of the Merger     73  
Treatment of Lexington Stock Options     74  
Background of the Merger     74  
Merger     79  

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Position of the DSS Board of Directors as to Fairness of the Merger and Recommendation of the DSS Board of Directors     81  
Board of Directors and Executive Officers of the Combined Company After the Completion of the Merger     82  
Interests of DSS Directors and Executive Officers in the Merger     82  
Anticipated Accounting Treatment     85  
Tax Treatment of the Merger     85  
Regulatory Approvals Required for the Merger     86  
Restrictions on Sales of Shares of DSS Common Stock and Preferred Stock Received by Lexington Stockholders in the Merger     86  
Appraisal Rights     86  
NYSE MKT Listing of DSS Common Stock     86  
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER     87  
THE MERGER AGREEMENT     90  
Terms of the Merger     90  
Completion of the Merger     90  
Certificate of Incorporation; Bylaws; Directors and Officers     91  
Merger Consideration     91  
Exchange of Lexington Stock Certificates     92  
Representations and Warranties     93  
Material Adverse Effect     93  
Certain Covenants of the Parties     94  
No Solicitation     95  
Board Recommendations     96  
Approval of Stockholders     97  
Indemnification of Directors and Officers     97  
Conditions to the Completion of the Merger     97  
Termination of the Merger Agreement     98  
Termination Fees and Expenses     99  
Amendments     99  
Governing Law     99  
Escrow Agreement     100  
Voting and Support Agreements     100  
INFORMATION ABOUT THE COMPANIES     101  
Document Security Systems, Inc.     101  
Lexington Technology Group, Inc.     102  
DSSIP, Inc.     102  
THE SPECIAL MEETING OF DSS STOCKHOLDERS     103  
Date, Time and Place     103  
Purpose of the DSS Special Meeting     103  
DSS Record Date; Shares Entitled to Vote     103  
Quorum     103  
Required Vote     104  
Counting of Votes; Treatment of Abstentions and Incomplete Proxies     104  
Voting by DSS Directors and Executive Officers     104  
Voting of Proxies by Registered Holders     105  
Shares Held in Street Name     105  

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Revocability of Proxies and Changes to a DSS Stockholder’s Vote     105  
Solicitation of Proxies     106  
Delivery of Proxy Materials to Households Where Two or More DSS Stockholders Reside     106  
Attending the DSS Special Meeting     106  
DSS PROPOSALS     107  
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     107  
DSS Proposal No. 2: Approval of an Amendment to DSS’s Amended and Restated Certificate of Incorporation to Authorize a Class of Preferred Stock     109  
DSS Proposal No. 3: Approval of an Amendment to DSS’s Amended and Restated Certificate of Incorporation to Implement a Staggered Board of Directors     111  
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     113  
DSS Proposal No. 5: Approval of Document Security Systems, Inc. 2013 Employee, Director and Consultant Equity Incentive Plan     119  
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
    123  
DSS’S BUSINESS     124  
DSS’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     129  
LEXINGTON’S BUSINESS     139  
LEXINGTON’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     146  
MANAGEMENT OF THE COMBINED COMPANY FOLLOWING THE MERGER     153  
Executive Officers and Directors     153  
Composition of the Board of Directors and Director Independence     156  
Committees of the Board of Directors     157  
Board Leadership Structure and Risk Oversight     158  
Compensation Risk Assessment     158  
Code of Ethics     158  
Section 16(a) Beneficial Ownership Reporting Compliance     159  
Related Person Transactions     159  
Director Compensation     160  
Executive Compensation     161  
DSS SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT     167  
LEXINGTON SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT     169  
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF THE COMBINED COMPANY FOLLOWING THE MERGER     171  
DESCRIPTION OF CAPITAL STOCK     175  
Common Stock     175  
Preferred Stock     175  
Warrants     176  
New York Statutory Business Combination Provisions     177  

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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS     178  
COMPARISON OF RIGHTS OF DSS STOCKHOLDERS AND LEXINGTON STOCKHOLDERS     190  
LEGAL MATTERS     200  
EXPERTS     200  
FUTURE STOCKHOLDER PROPOSALS     200  
WHERE YOU CAN FIND ADDITIONAL INFORMATION     200  
DOCUMENT SECURITY SYSTEMS, INC. INDEX TO THE FINANCIAL STATEMENTS     F-1  
LEXINGTON TECHNOLOGY GROUP, INC. INDEX TO THE FINANCIAL STATEMENTS     F-36  
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

        

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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., or 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., or 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, which we refer to as 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), which we refer to as 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, or the Merger Sub, will merge with and into Lexington, with Lexington being the surviving corporation, or the Surviving Corporation, as a wholly-owned subsidiary of DSS. We refer to this transaction as 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, which we refer to as 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, or 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.
Q: What will Lexington stockholders receive in the Merger?
A: Upon completion of the Merger, the holders of Lexington Common Stock and Lexington Preferred Stock will have the right to receive, for each share of Lexington Common Stock or Lexington Preferred Stock they hold, as applicable, certain DSS securities, the number of which is based on the Common Stock Exchange Ratio, as such ratio is calculated pursuant to the terms of the Merger Agreement and that was equal to 0.881 as of March 15, 2013, as more fully described in the section entitled “The Merger Agreement — Merger Consideration” in this proxy statement/prospectus.

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The exact Common Stock Exchange Ratio, and therefore the actual number of DSS securities to be issued in respect of each share of Lexington capital stock, will not be determined until immediately prior to the completion of the Merger. Assuming the Merger had been completed on March 15, 2013, the following aggregate number of DSS securities would have been issued in the Merger to the holders of Lexington Common Stock and Preferred Stock:

up to 19,990,559 shares of DSS Common Stock (which includes 2,500,000 Additional Shares and 240,559 Exchanged Shares (each as described in the section entitled “The Merger Agreement — Conditions to the Completion of the Merger” beginning on page 97));
7,100,000 shares of DSS Common Stock to be held in escrow;
up to 500,000 shares of DSS Common Stock if Lexington’s cash balance exceeds $7.25 million to a maximum of $9.0 million at the effective time of the Merger;
up to 4,859,894 Warrants with an exercise price of $4.80 per share that are exercisable for an aggregate of 4,859,894 shares of DSS Common Stock;
additional shares of DSS convertible preferred stock, or warrants with an exercise price of $.02 per share if the proposal to authorize DSS Preferred Stock is not approved by DSS stockholders, to any Lexington preferred stockholder that would beneficially own more than 9.99% of DSS Common Stock as a result of this Merger; and
for Lexington option holders only, 2,000,000 options to purchase DSS Common Stock in exchange for their options to purchase 3,600,000 shares of Lexington Common Stock.

For illustrative purposes only and without giving effect to any adjustments resulting from the proposed reverse stock split, if the Merger had been completed on March 15, 2013 and you owned 1,000 shares of Lexington capital stock as of such date, you would have had the right to receive 551 shares of DSS Common Stock, 134 Warrants and 195 Escrow Shares. Based on a closing sale price of DSS Common Stock of $2.24 on March 15, 2013, in exchange for such 1,000 shares of Lexington capital stock, you would have received $1,234.24 in value of DSS Common Stock (or $44,778,852 in aggregate value to all Lexington capital stockholders), $436.80 in value of Escrow Shares (or $15,904,000 in aggregate value to all Lexington capital stockholders) and 134 Warrants with an exercise price of $4.80 per share (or 4,859,894 Warrants in the aggregate to all Lexington capital stockholders). If any shares of DSS Preferred Stock are to be issued to Lexington stockholders as a result of the Beneficial Ownership Condition (currently estimated to be an aggregate of 4,171,052 shares of DSS Preferred Stock convertible into 4,171,052 shares of DSS Common Stock to two Lexington stockholders), such shares of DSS Preferred Stock would be equal in value to the shares of DSS Common Stock and the total value to Lexington stockholders would remain the same. 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 71, 73 and 91, respectively.

The holders of Lexington Preferred Stock shall receive the same merger consideration as the holders of Lexington Common Stock, except that to the extent that such holders of Lexington Preferred Stock would, after giving effect to the Merger and receipt of the merger consideration, beneficially own more than 9.99% of DSS Common Stock, which we refer to as the Beneficial Ownership Condition, such holders of Lexington Preferred Stock shall receive a combination of DSS Common Stock and DSS Preferred Stock that is convertible into so that such holders, after giving effect to the Merger, would beneficially own no more than 9.99% of DSS Common Stock.

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, which we refer to as 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

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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.

In addition, 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 at the Option Exchange Ratio, as such ratio is calculated pursuant to the terms of the Merger Agreement and that was equal .556 as of March 15, 2013.

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, or 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. Lexington stockholders will have voting rights with respect to the Escrow Shares owned by such stockholders and held in escrow for one year following the closing of the Merger even though such shares may be cancelled and returned to the treasury of DSS if the condition for release of the Escrow Shares is not met.

Finally, if at the Effective Time Lexington has at least $7,250,000 in cash (as adjusted to include Lexington’s $250,000 investment in VirtualAgility), 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 up to $9,000,000 by $3.00 (or up to additional 3,000,000 DSS Common Stock), any such shares are referred to as the Additional 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.

In addition, none of the share amounts or other information in this proxy statement/prospectus give effect to any adjustments resulting from the proposed reverse stock split.

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 71, 73 and 91, respectively.

Q: How will DSS stockholders be affected by the Merger?
A: Immediately following completion of the merger, 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 issuance of DSS Preferred Stock is not approved by stockholders, then $.02 Warrants) and warrants to purchase shares of DSS Common Stock. Included in the merger consideration will be DSS Common Stock held in escrow, which will be released to the stockholders of Lexington subject to certain conditions as described on page 91. The Escrow Shares are eligible to be voted by the Lexington stockholders while held in escrow. Therefore, immediately after the Merger, including the Escrow Shares

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(without taking into account any DSS Common Stock held by Lexington stockholders prior to the completion of the Merger, and excluding the conversion of the DSS Preferred Stock and the exercise of any options and warrants), the stockholders of Lexington are expected to own approximately 51% of the outstanding common stock of the combined company with the stockholders of DSS owning approximately 49% of the outstanding common stock of the combined company. In addition, Lexington stockholders will own 100% of the DSS Preferred Stock, which is not eligible to vote, but is convertible into shares of DSS Common Stock subject to the beneficial ownership condition as described on page 91.

Calculated on a fully diluted basis (which includes the exercise of all options and warrants, however excluding the conversion of DSS Preferred Stock), Lexington stockholders are expected to own 53% of the outstanding common stock of the combined company and the stockholders of DSS are expected to own approximately 47% of the outstanding common stock of the combined company. If after one year, the Escrow Shares are cancelled because certain conditions were not met, the stockholders of Lexington based on the circumstances as of the date of the merger, are expected to own approximately 43% of the outstanding common stock of the combined company with the stockholders of DSS owning approximately 57% of the outstanding common stock of the combined company (without taking into account any DSS Common Stock held by Lexington stockholders prior to the completion of the Merger, and excluding the conversion of the DSS preferred stock and the exercise of any options and warrants). The above calculations exclude the DSS Preferred Stock issued to the Lexington stockholders because the DSS Preferred Stock is not eligible to vote and the conversion to DSS Common Stock is limited based on the Beneficial Ownership Condition.

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 March 15, 2013 is 36,264,270. 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.

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 71.

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

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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 March 15, 2013, 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 74.

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, or 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 124). 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 and a minority interest in VirtualAgility. 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,
investment in research and development to commercialize technologies,
creation of customized technology solutions (such as applications for medical electronic health records),
strategic partnerships, and
litigation.

DSS believes that the Bascom intellectual property and the ownership interest in VirtualAgility will significantly augment the scope and value of DSS’s litigation and licensing business without impacting its current operations or resource allocation plan.

The Bascom Portfolio will expand upon DSS’s licensing potential and ability to compete within its current areas of commercial focus. DSS’s primary commercial focus is to develop integrated security solutions for authentication and brand protection that incorporate DSS’s proprietary print and digital technologies such as its suite of AuthentiGuard patents, the DSS Digital Group’s cloud computing platform and intellectual property, and customized software that delivers digital security solutions via standard handheld devices (such as the apple iPhone) and the cloud. DSS anticipates that this commercial focus will benefit from the integration of technical “know-how” from Thomas Bascom, the President and Chief Technology Officer of Bascom Research, as well as from the ability to use the current Bascom Portfolio and any potential new derivative technologies that may be co-developed and licensed. DSS

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initially will be the only competitor in the marketplace that is licensed to practice the Bascom Portfolio, which may lead to additional licensing opportunities for DSS with customers or competitors.

The Bascom Research intellectual property licensing program provides a significant new potential income stream for DSS’s licensing and litigation business that will be funded by Lexington, and as such, will not alter the current resource allocation for DSS’s existing litigation and licensing business. Lexington will deliver approximately $7.0 million in capital (net of transaction fees) upon closing of the Merger, which will be used in part to fund the Bascom Research licensing effort. Of the cash to be delivered by Lexington in the Merger, in addition to the estimated $2,000,000 for legal fees related to the Bascom Research patent infringement litigation, DSS currently estimates that the remaining cash will be used, in its discretion, (i) to advance the combined company’s intellectual property strategy, (ii) to advance product development of DSS’s products (primarily products relating to DSS’s AuthentiGuard patents), and (iii) to enable DSS to engage in further financial restructuring. We do not expect that DSS capital resources will initially be used for Bascom Research, and the Bascom Research effort will not initially divert other DSS resources aside from requiring some oversight by the current DSS General Counsel, who will be involved in all ongoing litigation and licensing matters for the combined company.

In addition, in March 2013, Lexington made a strategic investment in VirtualAgility, a developer of user-friendly programming platforms that facilitate the creation of sophisticated business applications without programming or coding. The investment by Lexington involves a non-recourse note against the proceeds derived from the patent portfolio owned by VirtualAgility, consisting of a total of 11 patents (the “VA Patent Assets”), plus an equity stake of 1/8 of 7% of the outstanding common stock of VirtualAgility, for $250,000 cash, plus options to make seven additional quarterly investments of $250,000 apiece, for a total investment of up to $2 million cash (collectively, the “Investment”). The VA Patent Assets include, but are not limited to, that certain United States Patent No. 8,095,413 (the “413 Patent”). On January 4, 2013, a lawsuit was filed by VirtualAgility in the U.S. Federal District Court, Eastern District of Texas, against six defendants (VirtualAgility v. Salesforce.com et al., Civil Action No.2 , 2:13-CV-00011), alleging infringement of the 413 Patent.

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 124, 129, 139 and 146, 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, or 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 86.

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

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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.”

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, which we refer to as 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, or the DSS’s Certificate, to authorize a class of preferred stock and establish the associated rights and preferences thereof, which we refer to as the Preferred Stock Creation Proposal, (ii) an amendment to the DSS’s Certificate to implement a staggered board of directors, which we refer to as 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), which we refer to as the Reverse 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, which we refer to as the 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, which we refer to as 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

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Merger Agreement; (vii) Lexington and its subsidiaries shall have at least $7,250,000 in cash (as adjusted to include Lexington’s $250,000 investment in VirtualAgility), 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.

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 97.

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 March 15, 2013, the closing price of DSS Common Stock was $2.24. If the DSS Common Stock continues to trade below $3.00 at the time of the Merger, DSS anticipates that it will need to undertake a reverse stock split.
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. It is anticipated that such ninth person will be Richard M. Cohen.

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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, or the Code, Mintz, Levin, Cohn, Ferris, Glovsky, Ferris and Popeo, P.C., or 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, or the 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.

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, which we refer to as 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, or 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.

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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 87.

Q: Do I have appraisal rights in connection with the Merger?
A: Under the Business Corporation Law of the State of New York, or 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, or 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.
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),

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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.
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.

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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, or the 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 Eagle Rock Proxy Advisors to assist DSS in the solicitation of proxies from DSS stockholders in connection with the DSS special meeting. Eagle Rock Proxy Advisors will receive a fee of $5,500 as compensation for its services, plus reimbursement of out-of-pocket expenses.
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 Eagle Rock Proxy Advisors, DSS’s proxy solicitor.

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

 
Document Security System, Inc.
First Federal Plaza
28 Main Street, Suite 1525
Rochester, New York 14614
Attn: Chief Executive Officer
(585) 325-3610
  Eagle Rock Proxy Advisors
12 Commerce Drive
Cranford, NJ 07016
Call Toll-Free: (800) 951-2406
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 200.

The Companies

Document Security Systems, Inc. (see page 101)

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., which we refer to as 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, which we refer to as Secuprint or DSS Printing Group. In 2010, DSS acquired Premier Packaging Corporation, which we refer to as 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., or 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.

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, 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.

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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 124, 129, and F-1, respectively.

Lexington Technology Group Inc. (see page 102)

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”) and invested in VirtualAgility, a developer of user-friendly programming platforms that facilitate the creation of sophisticated business applications without programming or coding. 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,
investment in research and development to commercialize technologies,
creation of 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. Starting on December 12, 2012, the lawsuits were transferred to the United States District Court in the Northern District of California. Lexington will receive between 60 to 65% of the total consideration (including cash payments, equity, assets, or any other form of consideration) received from any license, settlement, judgment or other award relating to the Bascom Research patents. For all consideration earned outside of litigation, Lexington will receive 65% of the total consideration with the other 35% paid to three other parties (the “Monetization Partners”): (i) Kramer Levin Naftalis & Frankel, LLP (“Kramer Levin”), which firm is national counsel for Bascom Research; (ii) IP Navigation, LLC (“IP Navigation”), which is the monetization advisor for Bascom Research; and (iii) Thomas Bascom, the inventor of the Bascom Research patents. For all consideration earned within litigation but prior to the empanelment of a Jury, Lexington will earn 60% of the total consideration with the other 40% paid to the Monetization Partners. For all consideration earned within litigation and after the empanelment of a jury, Lexington will earn 65% of the total consideration with the other 35% paid to the Monetization Partners. Of such amounts to be paid to the Monetization Partners, Lexington will pay 10% of the total consideration to Thomas Bascom pursuant to the Patent Purchase Agreement between Lexington and Mr. Bascom and the remainder of such consideration shall be apportioned among Kramer Levin and IP Navigation, the service providers to Lexington.

In March 2013, Lexington made a strategic investment in VirtualAgility. The investment by Lexington involves a non-recourse note against the proceeds derived from the patent portfolio owned by VirtualAgility, consisting of a total of 11 patents (the “VA Patent Assets”), plus an equity stake of 1/8 of 7% of the outstanding common stock of VirtualAgility, for $250,000 cash, plus options to make seven additional quarterly investments of $250,000 apiece, for a total investment of up to $2 million cash (collectively, the

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“Investment”). The VA Patent Assets include, but are not limited to, that certain United States Patent No. 8,095,413 (the “413 Patent”). On January 4, 2013, a lawsuit was filed by VirtualAgility in the U.S. Federal District Court, Eastern District of Texas, against six defendants (VirtualAgility v. Salesforce.com et al., Civil Action No. 2, 2:13-CV00011), alleging infringement of the 413 Patent.

Lexington is headquartered in McLean, Virginia and was incorporated in Delaware in May 2012. Lexington’s principal offices are located at 1616 Anderson Road, McLean, Virginia 22102 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 139, 146, and F-36, respectively.

DSSIP, Inc. (see page 102)

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.

What Lexington Stockholders Will Receive in the Merger (see page 71)

Upon completion of the Merger, the holders of Lexington Common Stock and Lexington Preferred Stock will have the right to receive, for each share of Lexington Common Stock or Lexington Preferred Stock they hold, as applicable, certain DSS securities, the number of which is based on the Common Stock Exchange Ratio, as such ratio is calculated pursuant to the terms of the Merger Agreement and that was equal to 0.881 as of March 15, 2013, as more fully described in the section entitled “The Merger Agreement — Merger Consideration” in this proxy statement/prospectus.

The exact Common Stock Exchange Ratio, and therefore the actual number of DSS securities to be issued in respect of each share of Lexington capital stock, will not be determined until immediately prior to the completion of the Merger. Assuming the Merger had been completed on March 15, 2013, the following aggregate number of DSS securities would have been issued in the Merger to the holders of Lexington Common Stock and Preferred Stock:

up to 19,990,559 shares of DSS Common Stock (which includes 2,500,000 Additional Shares and 240,559 Exchanged Shares (each as described in the section entitled “The Merger Agreement — Conditions to the Completion of the Merger” beginning on page 97));
7,100,000 shares of DSS Common Stock to be held in escrow;
up to 500,000 shares of DSS Common Stock if Lexington’s cash balance exceeds $7.25 million to a maximum of $9.0 million at the effective time of the Merger;
up to 4,859,894 Warrants with an exercise price of $4.80 per share that are exercisable for an aggregate of 4,859,894 shares of DSS Common Stock;
additional shares of DSS convertible preferred stock, or warrants with an exercise price of $.02 per share if the proposal to authorize DSS Preferred Stock is not approved by DSS stockholders, to any Lexington preferred stockholder that would beneficially own more than 9.99% of DSS Common Stock as a result of this Merger; and

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for Lexington option holders only, 2,000,000 options to purchase DSS Common Stock in exchange for their options to purchase 3,600,000 shares of Lexington Common Stock.

Immediately following completion of the merger, 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 issuance of DSS Preferred Stock is not approved by stockholders, then $.02 Warrants) and warrants to purchase shares of DSS Common Stock. Included in the merger consideration will be DSS Common Stock held in escrow, which will be released to the stockholders of Lexington subject to certain conditions as described on page 91. The Escrow Shares are eligible to be voted by the Lexington stockholders while held in escrow. Therefore, immediately after the Merger, including the Escrow Shares (without taking into account any DSS Common Stock held by Lexington stockholders prior to the completion of the Merger, and excluding the conversion of the DSS Preferred Stock and the exercise of any options and warrants), the stockholders of Lexington are expected to own approximately 51% of the outstanding common stock of the combined company with the stockholders of DSS owning approximately 49% of the outstanding common stock of the combined company. In addition, Lexington stockholders will own 100% of the DSS Preferred Stock, which is not eligible to vote, but is convertible into shares of DSS Common Stock subject to the Beneficial Ownership Condition as described on page 91.

Calculated on a fully diluted basis (which includes the exercise of all options and warrants, however excluding the conversion of DSS Preferred Stock), Lexington stockholders are expected to own 53% of the outstanding common stock of the combined company and the stockholders of DSS are expected to own approximately 47% of the outstanding common stock of the combined company. If after one year, the Escrow Shares are cancelled because certain conditions were not met, the stockholders of Lexington based on the circumstances as of the date of the merger, are expected to own approximately 43% of the outstanding common stock of the combined company with the stockholders of DSS owning approximately 57% of the outstanding common stock of the combined company (without taking into account any DSS Common Stock held by Lexington stockholders prior to the completion of the Merger, and excluding the conversion of the DSS Preferred Stock and the exercise of any options and warrants). The above calculations exclude the DSS Preferred Stock issued to the Lexington stockholders because the DSS Preferred Stock is not eligible to vote and the conversion to DSS Common Stock is limited based on the Beneficial Ownership Condition.

For illustrative purposes only and without giving effect to any adjustments resulting from the proposed reverse stock split, if the Merger had been completed on March 15, 2013 and you owned 1,000 shares of Lexington capital stock as of such date, you would have had the right to receive 551 shares of DSS Common Stock, 134 Warrants and 195 Escrow Shares. Based on a closing sale price of DSS Common Stock of $2.24 on March 15, 2013, in exchange for such 1,000 shares of Lexington capital stock, you would have received $1,234.24 in value of DSS Common Stock (or $44,778,852 in aggregate value to all Lexington capital stockholders), $436.80 in value of Escrow Shares (or $15,904,000 in aggregate value to all Lexington capital stockholders) and 134 Warrants with an exercise price of $4.80 per share (or 4,859,894 Warrants in the aggregate to all Lexington capital stockholders). If any shares of DSS Preferred Stock are to be issued to Lexington stockholders as a result of the Beneficial Ownership Condition (currently estimated to be an aggregate of 4,171,052 shares of DSS Preferred Stock convertible into 4,171,052 shares of DSS Common Stock to two Lexington stockholders), such shares of DSS Preferred Stock would be equal in value to the shares of DSS Common Stock and the total value to Lexington stockholders would remain the same. 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 71, 73 and 91, respectively.

The holders of Lexington Preferred Stock shall receive the same merger consideration as the holders of Lexington Common Stock, except that to the extent that such holders of Lexington Preferred Stock would not satisfy the Beneficial Ownership Condition, after giving effect to the Merger and receipt of the merger consideration, such holders of Lexington Preferred Stock shall receive a combination of DSS Common Stock and DSS Preferred Stock that is convertible into so that such holders, after giving effect to the Merger, would beneficially own no more than 9.99% of DSS Common Stock.

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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. 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.

In addition, 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 at the Option Exchange Ratio, as such ratio is calculated pursuant to the terms of the Merger Agreement and that was equal to .556 as of March 15, 2013.

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, or 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. Lexington stockholders will have voting rights with respect to the Escrow Shares owned by such stockholders and held in escrow for one year following the closing of the Merger even though such shares may be cancelled and returned to the treasury of DSS if the condition for release of the Escrow Shares is not met.

Finally, if at the Effective Time Lexington has at least $7,250,000 in cash (as adjusted to include Lexington’s $250,000 investment in VirtualAgility), 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 up to $9,000,000 by $3.00 (or up to additional 3,000,000 DSS Common Stock), any such shares are referred to as the Additional 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 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 71 and 91, respectively.

Ownership of the Combined Company After the Completion of the Merger (see page 73)

Immediately following completion of the Merger, 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 issuance of DSS Preferred Stock is not approved by stockholders, then $.02 Warrants) and warrants to purchase shares of DSS Common Stock. Included in the merger consideration will be DSS Common Stock held in escrow, which will be released to the holders of Lexington subject to certain conditions as described on page 91. The Escrow Shares are eligible to be voted by the Lexington stockholders while held in escrow.

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Therefore, immediately after the Merger, including the Escrow Shares (without taking into account any DSS Common Stock held by Lexington stockholders prior to the completion of the Merger, and excluding the conversion of the DSS Preferred Stock and the exercise of any options and warrants), the stockholders of Lexington are expected to own approximately 51% of the outstanding common stock of the combined company with the stockholders of DSS owning approximately 49% of the outstanding common stock of the combined company. In addition, Lexington stockholders will own 100% of the DSS Preferred Stock, which is not eligible to vote, but is convertible into shares of DSS Common Stock subject to the Beneficial Ownership Condition as described on page 91.

Calculated on a fully diluted basis (which includes the exercise of all options and warrants, however excluding the conversion of DSS Preferred Stock), Lexington stockholders are expected to own 53% of the outstanding common stock of the combined company and the stockholders of DSS are expected to own approximately 47% of the outstanding common stock of the combined company. If after one year, the Escrow Shares are cancelled because certain conditions were not met, the stockholders of Lexington based on the circumstances as of the date of the merger are expected to own approximately 43% of the outstanding common stock of the combined company with the stockholders of DSS owning approximately 57% of the outstanding common stock of the combined company (without taking into account any DSS Common Stock held by Lexington stockholders prior to the completion of the Merger, and excluding the conversion of the DSS Preferred Stock and the exercise of any options and warrants). The above calculations exclude the DSS Preferred Stock issued to the Lexington stockholders because the DSS Preferred Stock is not eligible to vote and the conversion to DSS Common Stock is limited based on the Beneficial Ownership Condition.

For a more complete discussion of the ownership of the combined company after the completion of the Merger, see the sections entitled “The Merger — Ownership of the Combined Company after the Completion of the Merger.”

Treatment of Lexington Stock Options (see page 74)

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 74.

Treatment of DSS Stock Options; Change of Control Payments (see page 82)

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 650,000 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 $115,000 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 (see page 82)

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, Warren Hurwitz, Jonathon Perrelli and Richard M. Cohen, all of whom are designees of Lexington. 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. It is anticipated that such ninth person will be Richard M. Cohen.

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 Jonathon Perrelli and Class III to be comprised of Warren Hurwitz, Robert B. Fagenson and Richard M. Cohen. 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. It is anticipated that such ninth person will be Richard M. Cohen. 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 Operating Officer
Philip Jones   Chief Financial Officer of DSS   Chief Financial Officer
Robert B. Bzdick   Chief Executive Officer of DSS   President

Recommendations of the DSS Special Committee and the DSS Board of Directors and Its Reasons for the Merger (see page 81)

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 81.

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 81, 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

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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 81.

Interests of DSS Directors and Executive Officers in the Merger (see page 82)

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. Bzdick 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 150,000 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 $115,000 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:

   
Name   Bonus
($)
  Equity
($)(1)
Robert B. Bzdick(2)   $ 50,000     $ 98,000  
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. 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.

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 Directors and Executive Officers in the Merger” beginning on page 82.

Anticipated Accounting Treatment of the Merger (see page 85)

DSS currently expects that 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. However, certain assumptions made by DSS and certain factors may change from the date of this prospectus to the date of the Merger that could cause the Merger to not being considered a reverse merger, and if so, then the Merger would be accounted for as a business combination with DSS as the accounting acquirer. 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 85.

Material United States Federal Income Tax Consequences of the Merger (see page 87)

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

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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, which we refer to as 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 or 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.

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 87.

Restrictions on Sales of Shares of DSS Common Stock Received by Lexington Stockholders in the Merger (see page 86)

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 may be resold by them only in transactions permitted by Rule 144 or as otherwise permitted under the Securities Act.

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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 86.

Appraisal Rights (see page 86)

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 (see page 86)

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.

Conditions to the Completion of the Merger (see page 97)

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 $7,250,000 in cash on hand (as adjusted to include Lexington’s $250,000 investment in VirtualAgility), 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;

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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;
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 97.

No Solicitation (see page 95)

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.

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 95.

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Termination of the Merger Agreement (see page 98)

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

by mutual written consent of DSS, Merger Sub and Lexington; or
by either party, if:
º the closing has not occurred on or before April 30, 2013;
º any law enacted by a governmental authority prohibits the consummation of the Merger; or any governmental authority has issued an order or taken any other action which restrains, enjoins or otherwise prohibits the Merger;
º the other party’s stockholders do not approve the Merger, unless the failure to obtain approval is attributable to a failure on the part of such party seeking to terminate the Agreement; or
by DSS, if:
º the Lexington’s board of directors changes its recommendation for approval of the Merger;
º the board of directors of Lexington or any authorized committee has failed to present or recommend the approval of the Merger Agreement and the Merger to the stockholders;
º Lexington shall have entered or caused itself or its subsidiaries to enter, into any letter of intent, agreement in principle, term sheet, merger agreement, acquisition agreement or other similar agreement related to any Lexington Acquisition Proposal;
º Lexington shall have breached any term of the non-solicitation provision of the Merger Agreement; or
by Lexington, if:
º the DSS board of directors changes their recommendation for approval of the Merger;
º the board of directors of DSS or any authorized committee has failed to present or recommend the approval of the Merger Agreement and the Merger to the stockholders;
º DSS shall have entered or caused itself or its subsidiaries to enter, into any letter of intent, agreement in principle, term sheet, merger agreement, acquisition agreement or other similar agreement related to any DSS Acquisition Proposal;
º DSS shall have breached any term of the non-solicitation provision of the Merger Agreement; or
by either party, if the other party, or in the case of Lexington, DSS or Merger Sub, is in material breach of its obligations or representations or warranties under the Agreement;
by either DSS or Lexington, if prior to obtaining stockholder approval such party determines to enter into a definitive agreement relating to a superior proposal; or
by Lexington, at any time, upon payment to DSS of a termination fee equal to $5,000,000.

For a more complete discussion of termination of the Merger Agreement, see the section entitled “The Merger Agreement — Termination of the Merger Agreement” beginning on page 98.

Termination Fees and Expenses (see page 99)

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 99.

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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 (see page 100)

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, which we refer to herein collectively as the Key DSS Stockholders, entered into voting and support agreements, or 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.

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, which we refer to herein collectively as the Key Lexington Stockholders, entered into voting agreements, or 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 (see page 190)

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 190.

Risk Factors (see page 50)

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;

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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.

Matters to Be Considered at the DSS Special Meeting (see page 103)

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 103.

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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, 2012 and 2011 and as of December 31, 2012 and 2011 are derived from DSS’s audited financial statements which are included elsewhere in this proxy statement/prospectus. The financial data as of and for the years ended December 31, 2010, 2009 and 2008 is derived from DSS’s audited historical financial statements.

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, 2012 included elsewhere in this proxy statement/prospectus.

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

         
  Years Ended December 31,
     2012   2011   2010   2009   2008
Revenue   $ 17,115     $ 13,384     $ 13,381     $ 9,912     $ 6,643  
Cost of revenue     11,387       9,212       9,696       6,256       3,029  
Gross profit     5,728       4,172       3,685       3,656       3,614  
Operating expenses:
                                            
Selling, general and administrative     8,707       7,076       6,138       5,734       7,431  
Research and development     491       285       265       292       433  
Impairment of intangible assets                 376             797  
Amortization of intangibles     304       285       803       1,342       1,972  
Operating expenses     9,502       7,646       7,582       7,368       10,633  
Operating loss     (3,774 )      (3,474 )      (3,897 )      (3,712 )      (7,019 ) 
Other income (expenses), net     (488 )      102       (688 )      (259 )      (1,247 ) 
Loss before income taxes     (4,262 )      (3,372 )      (4,585 )      (3,971 )      (8,266 ) 
Income tax expenses, (benefit) net     19       (151 )      (1,122 )      19       19  
Net loss   $ (4,281 )    $ (3,221 )    $ (3,463 )    $ (3,990 )    $ (8,285 ) 
Net loss per share – basic and diluted:   $ (0.21 )    $ (0.17 )    $ (0.20 )    $ (0.27 )    $ (0.59 ) 
Weighted average common shares outstanding, basic and diluted     20,828,149       19,454,046       17,755,141       14,700,453       14,002,034  

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Balance Sheet Data ($- in thousands):

         
  December 31,
     2012   2011   2010   2009   2008
ASSETS
                                            
Total current assets, net   $ 5,118     $ 3,192     $ 7,147     $ 1,868     $ 2,005  
Property, plant and equipment, net     3,724       4,020       2,543       1,286       1,517  
Other assets     233       244       326       656       265  
Goodwill     3,323       3,323       3,084       1,316       1,397  
Other intangible assets, net     1,853       2,043       1,848       1,589       2,873  
Total assets   $ 14,251     $ 12,822     $ 14,948     $ 6,715     $ 8,057  
LIABILITIES AND STOCKHOLDERS' EQUITY
                                            
Total current liabilities:   $ 3,788     $ 4,272     $ 4,144     $ 2,687     $ 3,486  
Long-term debt, net     1,484       2,831       2,260       1,720       2,493  
Other long-term liablilities     255       219       3,957       71       52  
Total stockholders' equity     8,724       5,500       4,587       2,237       2,026  
Total liabilities and
stockholders' equity
  $ 14,251     $ 12,822     $ 14,948     $ 6,715     $ 8,057  

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SELECTED HISTORICAL FINANCIAL DATA OF LEXINGTON

The following tables sets forth Lexington selected historical financial data as of December 31, 2012, which financial data is derived from Lexington’s December 31, 2012 and June 30, 2012 audited financial statements.

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 December 31, 2012, which is included elsewhere in this proxy statement/prospectus.

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

     
  Six months
ended
December 31,
2012
  Period from
May 10, 2012
(inception) through
June 30,
2012
  Period from
May 10, 2012
(inception) through
December 31, 2012
Operating expenses:
                          
Officers' compensation   $ 743     $ 8     $ 751  
Legal and professional fees     1,486       165       1,651  
General and administrative     161             161  
Amortization     207             207  
Loss from operations     (2,597 )      (173 )      (2,770 ) 
Other expenses:
                          
Interest     577       30       607  
Unrealized loss on investment     300             300  
Change in fair value of warrant liability     5,320       9       5,329  
Total other expenses     6,197       39       6,236  
Net loss   $ (8,794 )    $ (212 )    $ (9,006 ) 

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Balance Sheet Data ($- in thousands):

   
  December 31,
2012
  June 30,
2012
ASSETS
                 
Current Assets:
                 
Cash   $ 10,031     $ 3,627  
Investments at fair value and other assets     424        
Intangible assets, net of accumulated amortization of $207
and 0, respectively
    1,968       45  
Total assets   $ 12,423     $ 3,672  
LIABILITIES AND STOCKHOLDERS' EQUITY
                 
Current Liabilities:
                 
Accounts payable and accrued expenses   $ 213     $ 218  
Senior notes payable – related parties, net of deferred debt discount of $848 and $1,164, respectively     2,590       2,461  
Warrant liability           252  
Total liabilities     2,803       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.            
Common stock – 100,000,000 shares authorized; par value $0.00001 per share; 14,064,825 and 16,571,529 shares issued and
outstanding, respectively.
           
Additional paid-in capital     18,626       953  
Deficit accumulated during the development stage     (9,006 )      (212 ) 
Total stockholders' equity     9,620       741  
Total liabilities and stockholders' equity   $ 12,423     $ 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, 2012, for the purposes of the statements of operations, and December 31, 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 178 and the audited historical financial statements of DSS and Lexington and the notes thereto beginning on pages F-1 and F-36, respectively, the sections entitled “DSS’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 129 and “Lexington’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 146, 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).

In accordance with FASB Topic ASC 805 “Business Combinations”, 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.

To determine the accounting acquirer, we will evaluate the aforementioned factors as of the date of the Merger. If the Merger had occurred on March 15, 2013, we have identified Lexington as the accounting acquirer based on the combination of two primary factors: (1) the relative voting rights of the combined company, and (2) the composition of the governing body of the combined company.

First, if the Merger had been completed on March 15, 2013, then immediately following the Merger, the stockholders of Lexington will hold approximately 50.7% and DSS common stockholders will hold approximately 49.3% of outstanding DSS Common Stock after the Merger. These ownership percentages include the 7,100,000 Escrow Shares held that will be owned by Lexington stockholders, since the Escrow Shares are eligible to be voted while in escrow during the one-year holding period. Calculated on a fully diluted basis (which includes all options and warrants expected to be exercisable at the Merger date, however excluding the conversion of DSS Preferred Stock), Lexington stockholders would hold 52.2% and DSS stockholders would hold 47.8% of the aggregate common stock outstanding. In addition, Lexington stockholders will own 100% of the DSS Preferred Stock, which is not eligible to vote, but is convertible into shares of DSS Common Stock subject to the Beneficial Ownership Condition. As a result, while the relative voting rights of the combined company held by the Lexington stockholders does not create a significant difference in control of the combined company, this factor supports the conclusion that Lexington is the accounting acquirer.

Second, the board composition of the combined company after the Merger will be nine persons if the staggered board proposal is approved by the shareholders of DSS, of which five of the board members will be designees of Lexington and four of the board member will remain from the DSS board. Thus, if the staggered board proposal is approved, Lexington will have a controlling position of the board after the Merger. We believe that the staggered board will be approved and as such, the expected composition of the board of the directors after the Merger supports the conclusion that Lexington is the accounting acquirer.

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However, if the staggered board is not approved or the relative voting rights change so that there is no clear evidence of more voting control by either DSS or Lexington, then our final determination of the accounting acquirer in the transaction could change.

If Lexington is determined to be the accounting acquirer, then 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 FASB 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.

If DSS is determined to be the accounting acquirer then the transaction will be accounted for as a business combination in accordance with the Business Combination Topic of the FASB ASC 805. Under the guidance, the assets and liabilities of the acquired business, Lexington, are recorded at their fair value at the date of acquisition. The excess of the purchase price over the estimated fair values is recorded as goodwill, if any. If the fair value of the assets acquired exceeds the purchase price and the liabilities assumed, then a gain on acquisition is recorded.

Due to the degree of uncertainty in the determination of the accounting acquirer in the Merger, we are presenting two pro forma combined financial statements, one that presents Lexington as the accounting acquirer and one with DSS as the accounting acquirer.

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 FASB 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.

The summary unaudited pro forma combined balance sheets as of December 31, 2012 presented for each scenario combines the historical balance sheets of DSS and Lexington as of December 31, 2012 and gives pro forma effect to the Merger as if it had been completed on December 31, 2012.

The summary unaudited pro forma statements of operations for the year ended December 31, 2012 for each scenario gives pro forma effect to the Merger as if it had been completed on January 1, 2012.

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.

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 178), 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.

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If Lexington is determined to be the accounting acquirer, then the following unaudited pro forma consolidated balance sheet is presented.

Unaudited Pro Forma Consolidated Balance Sheet as of December 31, 2012 ($- in thousands)

         
  Historical  
     Lexington
Technology Group, Inc.
  Document Security
Systems, Inc.
  Pro Forma
Adjustments
  Notes   Pro-Forma
Consolidated
ASSETS
                                            
Total current assets   $ 10,031     $ 5,118     $              $ 15,149  
Property, plant and equipment, net           3,724                      3,724  
Other assets     424       233       (424 )      9       233  
Goodwill           3,323       33,251       3       36,574  
Other intangible assets, net     1,968       1,853       5,000       1       8,821  
Total assets   $ 12,423     $ 14,251     $ 37,827           $ 64,501  
LIABILITIES AND STOCKHOLDERS' EQUITY
                                            
Total current liabilities   $ 213     $ 3,788     $ 297       2     $ 4,298  
Long-term debt, net     2,590       1,484             4       4,074  
Other long-term liabilities           255       (127 )      4       128  
Stockholders' equity
                                            
Preferred stock, $.02 par value                 83       5       83  
Common stock, $.02 par value           434       469       2,5       903  
Additional paid-in capital     18,626       55,873       (8,326 )      2,6,9       66,173  
Accumulated other
comprehensive loss
          (128 )      128       6        
Accumulated deficit     (9,006 )      (47,455 )      45,303       2,6       (11,158 ) 
Total stockholders' equity     9,620       8,724       37,657             56,001  
Total liabilities and stockholders' equity   $ 12,423     $ 14,251     $ 37,827           $ 64,501  

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If Lexington is determined to be the accounting acquirer, then the following unaudited pro forma consolidated statement of operations is presented.

Unaudited Pro Forma Consolidated Statement of Operations, for the year ended December 31, 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
Revenue   $     $ 17,115     $              $ 17,115  
Cost of revenue           11,387                   11,387  
Gross profit           5,728                      5,728  
Operating expenses:
                                            
Selling, general and administrative     2,563       8,707       2,151       2       13,421  
Research and development           491                      491  
Amortization of intangibles     207       304       500       1       1,011  
Operating expenses     2,770       9,502       2,651             14,923  
Operating loss     (2,770 )      (3,774 )      (2,651 )               (9,195 ) 
Other income (expense), net     (6,236 )      (488 )                  (6,724 ) 
Loss before income taxes     (9,006 )      (4,262 )      (2,651 )               (15,919 ) 
Income tax benefit           19                   19  
Net loss   $ (9,006 )    $ (4,281 )    $ (2,651 )          $ (15,938 ) 
Net loss per share – basic and diluted:   $     $ (0.21 )                   $ (0.43 ) 
Weighted average common shares outstanding, basic and diluted           20,828,149       16,365,626       7       37,193,775  

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Notes to Unaudited Pro Forma Consolidated Statements of Operations and Balance Sheet if Lexington is determined to be the accounting acquirer:

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, 2012. The acquired intangible assets have an estimated aggregate fair value of $6,853,000 and a weighted average remaining useful life of 10 years. The $5,000,000 pro forma adjustment represents the preliminary 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, 2012 is $500,000. See the preliminary purchase price allocation table on page 180.

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 $1,707,000 to Palladium Capital, and (2) cash bonuses of $115,000 and $147,000 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 $2.17 per share based on the closing price on December 31, 2012 and the number of shares outstanding is based on the 21,705,969 shares outstanding at December 31, 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 180.
4. This pro-forma adjustment represents the change in the fair value of DSS long-term liabilities.

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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:

 
  As of December 31, 2012
Document Security Systems     21,705,969  
Document Security Systems shares of common stock expected to be issued to former Lexington Technology Group stockholders     22,678,948  
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     45,171,595  
Par value per share of common stock   $ 0.02  
Common stock, at par   $ 903,432  
Document Security Systems shares of preferred stock (if approved) expected to be issued to former Lexington Technology Group stockholders     4,171,052  
Par value per share of preferred stock   $ 0.02  
Preferred stock, at par   $ 83,000  
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 reflect the balance of Lexington prior to the Merger along with proforma adjustments representing direct and incremental costs of 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 180.)
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, 2012. 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.

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  For the year ended December 31, 2012
Net loss –($ -in thousands)   $ (15,938 ) 
Weighted average of Document Security Systems shares of common stock outstanding for
the period:
    20,828,149  
Weighted average of Document Security Systems shares of common stock expected to be issued to former Lexington Technology Group stockholders, as of January 1, 2012     22,678,948  
Less: Escrow shares     (7,100,000 ) 
Weighted average of Document Security Systems shares of common stock issued to Palladium Capital, as of January 1, 2012     786,678  
       37,193,775  
Basic and diluted net loss per share   $ (0.43 ) 
8. The proforma does not include the accounting for the tax consequence of the acquisition given various uncertainties.
9. This pro forma adjustment represents the amount of investment in DSS held by Lexington that will be exchanged for the Exchange Shares and distributed to the shareholders of Lexington.

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If DSS is determined to be the accounting acquirer, then the following unaudited pro forma consolidated balance sheet is presented.

Unaudited Pro Forma Consolidated Balance Sheet as of December 31, 2012 ($- in thousands)

         
  Historical  
  Lexington
Technology Group, Inc.
  Document Security
Systems, Inc.
  Pro Forma
Adjustments
  Notes   Pro-Forma
Consolidated
ASSETS
                             
Total current assets   $ 10,031     $ 5,118     $           $ 15,149  
Property, plant and equipment, net           3,724                   3,724  
Other assets     424       233       (424 )      8       233  
Goodwill and other intangible
assets, net
    1,968       5,176       52,396       1       59,540  
Total assets   $ 12,423     $ 14,251     $ 51,972           $ 78,646  
LIABILITIES AND STOCKHOLDERS' EQUITY
                             
Total current liabilities   $ 213     $ 3,788     $ 297       2     $ 4,298  
Long-term debt, net     2,590       1,484                      4,074  
Other long-term liabilities           255                      255  
Stockholders' equity
                             
Preferred stock, $.02 par value                 83       3       83  
Common stock, $.02 par value           434       469       2,3       903  
Additional paid-in capital     18,626       55,873       40,941       2,4,8       115,440  
Accumulated other
comprehensive loss
          (128 )            4       (128 ) 
Accumulated deficit     (9,006 )      (47,455 )      10,182       2,4       (46,279 ) 
Total stockholders' equity     9,620       8,724       51,675             70,019  
Total liabilities and stockholders' equity   $ 12,423     $ 14,251     $ 51,972           $ 78,646  

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If DSS is determined to be the accounting acquirer, then the following unaudited pro forma consolidated statement of operations is presented.

Unaudited Pro Forma Consolidated Statement of Operations, for the year ended December 31, 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
Revenue   $     $ 17,115     $           $ 17,115  
Cost of revenue           11,387                   11,387  
Gross profit           5,728                   5,728  
Operating expenses:
                             
Selling, general and administrative     2,563       8,707       2,151       2       13,421  
Research and development           491                   491  
Amortization of intangibles     207       304       6,930       6       7,441  
Operating expenses     2,770       9,502       9,081             21,353  
Operating loss     (2,770 )      (3,774 )      (9,081 )            (15,625 ) 
Other income (expense), net     (6,236 )      (488 )                  (6,724 ) 
Loss before income taxes     (9,006 )      (4,262 )      (9,081 )            (22,349 ) 
Income tax benefit           19                   19  
Net loss   $ (9,006 )    $ (4,281 )    $ (9,081 )          $ (22,368 ) 
Net loss per share – basic and diluted:   $     $ (0.21 )                $ (0.60 ) 
Weighted average common shares outstanding, basic and diluted           20,828,149       16,365,626       5       37,193,775  

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Notes to Unaudited Pro Forma Consolidated Statements of Operations and Balance Sheet if DSS is determined to be the accounting acquirer:

1. This pro forma adjustment represents the estimated goodwill and other intangible assets acquired as a result of the Merger. For the purposes of the Merger, since DSS is determined to be the accounting acquirer the consideration transferred is measured based on the expected fair value of the DSS common stock, preferred stock, and warrants issued by DSS to Lexington. For the purposes of the accompanying pro forma combined financial data, the estimated fair value of the aggregate of 26,850,000 shares of DSS common stock and DSS preferred stock to be issued is $2.17 per share based on the closing price on December 31, 2012. Included in the aggregate shares issued is the escrow shares based on Management’s estimate that it is probable the contingency will be met. For the purposes of this pro forma estimate, the fair value of the preferred shares is based on their immediate convertibility to DSS common stock. The fair value 4,859,894 warrants to be issued by DSS is estimated to be $3,327,736 using the Black-Scholes-Merton option pricing model. As a result, the total purchase price is approximately $61,592,236. The Company will account for the acquisition in accordance with FASB ASC 805, whereby the Company will measure the assets acquired and liabilities assumed based on the acquisition date fair value. For the purposes of this pro forma adjustment, the Company measured the identifiable assets acquired and liabilities assumed based on the acquisition date fair value. Due to the cost and complexity of a fair value analysis expected in order to determine the fair value of Lexington’s patent assets, and the likelihood that it will be determined that DSS is not the accounting acquirer and therefore, the Company would not need to determine the fair value of the Lexington patent assets, the Company has not determined the fair value of the patent assets of Lexington as of the date of this prospectus. For the purposes of this pro forma adjustment, the Company has made the assumption that the balance of the consideration transferred will be allocated to patent assets amounting to $54,364,000, which is the full amount of potential goodwill and other intangibles (assuming no bargain purchase). See the preliminary purchase price allocation table on page 180.
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 $1,707,000 to Palladium Capital, and (2) cash bonuses of $115,000 and $147,000 of stock based compensation expense related to the fair value of options issued to executives and senior managers upon closing of the Merger.

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3. 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 and accounting acquirer and Lexington as the legal and accounting 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:

 
  As of December 31, 2012
Document Security Systems     21,705,969  
Document Security Systems shares of common stock expected to be issued to former Lexington Technology Group stockholders     22,678,948  
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     45,171,595  
Par value per share of common stock   $ 0.02  
Common stock, at par   $ 903,432  
Document Security Systems shares of preferred stock (if approved) expected to be issued to former Lexington Technology Group stockholders     4,171,052  
Par value per share of preferred stock   $ 0.02  
Preferred stock, at par   $ 83,000  
4. 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 DSS as the accounting acquirer and Lexington as the accounting acquiree in the Merger. As a result, in the post-combination consolidated financial statements, additional paid-in capital will reflect DSS’s paid-in capital amounts immediately prior to the Merger, plus the fair value of the DSS common stock, DSS Preferred Stock (if any) and DSS common stock warrants issued to Lexington as consideration, the fair value of equity securities issued to Palladium Capital and the fair value of stock options that vest upon consummation of the merger. Accumulated deficit and accumulated other comprehensive loss will reflect the balance of DSS prior to the Merger along with proforma adjustments representing direct and incremental costs of the Merger. The accumulated deficit of Lexington will be cancelled in conjunction with the Merger. (See the preliminary purchase price allocation table on page 180.)
5. 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 and accounting 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, 2012. 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.

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  For the year ended December 31, 2012
Net loss –($ -in thousands)   $ (22,368 ) 
Weighted average of Document Security Systems shares of common stock outstanding for
the period:
    20,828,149  
Weighted average of Document Security Systems shares of common stock expected to be issued to former Lexington Technology Group stockholders, as of January 1, 2012     22,678,948  
Less: Escrow shares     (7,100,000 ) 
Weighted average of Document Security Systems shares of common stock issued to Palladium Capital, as of January 1, 2012     786,678  
    37,193,775  
Basic and diluted net loss per share   $ (0.60 ) 
6. This pro forma adjustment represents the additional amortization expense that will result from the patent assets acquired from Lexington. As discussed in footnote 1, the Company will measure the assets acquired and liabilities assumed based on fair value. Due to the cost and complexity of a fair value analysis expected in order to determine the fair value of Lexington’s patent assets, and the likelihood that it will be determined that DSS is not the accounting acquirer and therefore, the Company would not need to determine the fair value of the Lexington patent assets, the Company has not determined the fair value of the patent assets of Lexington as of the date of this prospectus. However, the Company believes that the fair value of the patent assets could be significant. For the purposes of the this pro forma adjustment, a fair value of $54,364,000 was used for the patent assets, which is the full amount of potential goodwill and other intangible assets described in footnote 1 (assuming no bargain purchase). Furthermore, the Company’s preliminary estimate is that weighted average remaining useful life of the Lexington patent assets will be approximately 7.5 years. Therefore, if the merger occurred on January 1, 2012, then the additional amortization expense using these figures would have been approximately $6,930,000 for the year ended December 31, 2012. Until the Company prepares a formal analysis of the fair value of Lexington’s patents, which will only be required if DSS is determined to be the accounting acquirer in the merger, it understands that the final amount attributed to this pro forma adjustment is an estimate subject to a wide range of possible outcomes. The Company believes that using the largest potential amount of additional amortization expense for this pro forma presents an understanding of the most significant difference between the pro forma statement of operations presented when DSS is determined to be the accounting acquirer as opposed to Lexington being determined to be the accounting acquirer in the Merger.
7. The proforma does not include the accounting for the tax consequence of the acquisition of Lexington given the uncertainty surrounding the fair value assigned to the patent, other intangibles, and goodwill of Lexington.
8. This pro forma adjustment represents the amount of investment in DSS held by Lexington that will be exchanged by Lexington for the Exchange Shares and distributed to the shareholders of Lexington.

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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 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   $ 4.60     $ 2.11  

The closing price as of March 15, 2013 was $2.24. Lexington is a private company and shares of its capital stock are not publicly traded.

Record Holders

As of March 15, 2013, DSS had 907 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.

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 December 31, 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., 1616 Anderson Road, McLean, Virginia 22102.

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The percent of common stock before the merger is based on 21,709,488 shares of DSS common stock that were outstanding as of March 15, 2013. The percent of common stock of the combined company after the merger is based on 49,346,166 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 0.881 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 $7,250,000 at the Effective Time of the Merger. Shares of DSS common stock subject to stock options and warrants that are currently exercisable or exercisable within 60 days after March 15, 2013 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 December 31, 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
                4,171,052       100 % 
Barry Honig
4400 Biscayne Boulevard
Suite 850
Miami, FL 33137
    80,645 (16)            3,802,290(11)       7.59 % 
5% Stockholders (Common)
                       
Hudson Bay Master Fund, Ltd.
777 Third Avenue
New York, NY 10017
    725,805 (3)      3.3 %      5,081,830 (9)      9.99 % 
1960480 BT, LLC
2515 McKinney Ave
Suite 1000
Dallas, TX75201
                4,495,405(10)       8.99 % 
Named Executive Officers and Directors:
                       
Philip Jones(1)     186,667 (4)      *       186,667 (4)      *  
David Klein(1)     14,167 (5)      *       14,167 (5)      *  
Robert B. Fagenson(1)     1,059,500 (6)      4.87 %      1,059,500 (6)      2.14 % 
Ira A. Greenstein(1)     56,667 (7)      *       56,667 (7)      *  
Robert B. Bzdick(1)     682,104 (8)      3.12 %      682,104 (8)      1.38 % 
Peter Hardigan(2)                 193,164 (12)      *  
Warren Hurwitz(2)                       *  
Jeffrey Ronaldi(2)                 162,135 (13)      *  
Jonathon Perrelli(2)                        
Richard M. Cohen                        
All executive officers and directors as a
group (10 persons)
    1,999,105(14)       8.92 %      2,265,762(15)       4.50 % 

* 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.
(2) The business address of each listed stockholder is c/o Lexington Technology Group, Inc., 1616 Anderson Road, McLean, Virginia 22102.
(3) Includes 241,935 shares of common stock issuable upon the exercise of warrants exercisable within 60 days of December 31, 2012.
(4) Includes 186,667 shares of DSS common stock issuable upon the exercise of stock options exercisable within 60 days of March 15, 2013.
(5) Includes 14,167 shares of DSS common stock issuable upon the exercise of stock options exercisable within 60 days of March 15, 2013.
(6) Includes 50,000 shares of DSS common stock issuable upon the exercise of stock options exercisable within 60 days of March 15, 2013, 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

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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 56,667 shares of DSS common stock issuable upon the exercise of stock options exercisable within 60 days of March 15, 2013.
(8) Includes 166,667 shares of DSS common stock issuable upon the exercise of stock options exercisable within 60 days of March 15, 2013.
(9) Includes 1,284,590 shares of common stock issuable upon the exercise of warrants that will be issued in connection with the Merger, 1,876,705 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 March 15, 2013. 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 4,171,052 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.
(10) Includes 683,784 shares of common stock issuable upon the exercise of warrants that will be issued in connection with the Merger, and 998,965 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.
(11) Includes 646,734 shares of common stock issuable upon the exercise of warrants that will be issued in connection with the Merger, and 827,021 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 449,677 shares of common stock, 109,321 shares of common stock issuable upon exercise of warrants and 159,711 shares of common stock to be held in escrow to be issued to Mr. Honig in connection with the Merger, 700,214 shares of common stock, 170,229 shares of common stock issuable upon exercise of warrants and 248,693 shares of common stock to be held in escrow to be issued to GRQ Consultants, Inc. 401K in connection with the Merger, and 1,178,645 shares of common stock, 286,540 shares of common stock issuable upon exercise of warrants and 418,616 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 16,706 shares of common stock issuable upon the exercise of warrants that will be issued in connection with the Merger, and 24,407 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 83,333 shares of common stock of DSS that will vest upon the consummation of the Merger.
(13) Includes 11,986 shares of common stock issuable upon the exercise of warrants that will issued in connection with the Merger, and 17,511 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 83,333 shares of common stock of DSS that will vest upon the consummation of the Merger.
(14) Includes 474,168 shares of DSS common stock issuable upon the exercise of stock options exercisable within 60 days of March 15, 2013.
(15) Includes 640,835 shares of DSS common stock issuable upon the exercise of stock options exercisable within 60 days of March 15, 2013, 28,692 shares of common stock issuable upon the exercise of

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warrants that will be issued in connection with the Merger, and 41,918 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.
(16) Includes 80,645 shares of DSS common stock issuable upon the exercise of stock warrants exercisable within 60 days of March 15, 2013.

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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.

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;

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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.

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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.

Immediately following completion of the merger, 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 issuance of DSS Preferred Stock is not approved by stockholders, then $.02 Warrants) and warrants to purchase shares of DSS common stock. Included in the merger consideration will be DSS Common Stock held in escrow, which will be released to the holders of Lexington subject to certain conditions as described on page 91. The Escrow Shares are eligible to be voted by the Lexington stockholders while held in escrow. Therefore, immediately after the Merger, including the Escrow Shares (without taking into account any DSS Common Stock held by Lexington stockholders prior to the completion of the Merger, and excluding the conversion of the DSS Preferred Stock and the exercise of any options and warrants), the stockholders of Lexington are expected to own approximately 51% of the outstanding common stock of the combined company with the stockholders of DSS owning approximately 49% of the outstanding common stock of the combined company. In addition, Lexington stockholders will own 100% of the DSS Preferred Stock, which is not eligible to vote, but is convertible into shares of DSS Common Stock subject to the Beneficial Ownership Condition as described on page 91.

Calculated on a fully diluted basis (which includes the exercise of all options and warrants, however excluding the conversion of DSS Preferred Stock), Lexington stockholders are expected to own 53% of the outstanding common stock of the combined company and the stockholders of DSS are expected to own approximately 47% of the outstanding common stock of the combined company. If after one year, the Escrow Shares are cancelled because certain conditions were not met, the stockholders of Lexington based on the circumstances as of the date of the Merger are expected to own approximately 43% of the outstanding common stock of the combined company with the stockholders of DSS owning approximately 57% of the outstanding common stock of the combined company (without taking into account any DSS Common Stock held by Lexington stockholders prior to the completion of the Merger, and excluding the conversion of the DSS Preferred Stock and the exercise of any options and warrants). The above calculations exclude the DSS Preferred Stock issued to the Lexington shareholders because the DSS Preferred Stock is not eligible to vote and the conversion to DSS Common Stock is limited based on the Beneficial Ownership Condition. 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.

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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.

Since the announcement of the Merger, DSS stock price has declined, from $4.16 on September 28, 2012 to $2.24 on March 15, 2013. Further more, 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.

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;