Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2001

OR

For the transition period from                              to                             

Commission File No.:              

FARGO ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: (952) 941-9470

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        As of March 28, 2002, 11,785,900 shares of the Registrant's common stock were outstanding. The aggregate market value of the Registrant's outstanding common stock as of that date (based upon the last sale price of a share of common stock on that date as reported by the Nasdaq National Market), excluding outstanding shares beneficially owned by directors and executive officers, was $47,333,351.

DOCUMENTS INCORPORATED BY REFERENCE

        Part III of this Annual Report on Form 10-K incorporates by reference information (to the extent specific sections are referred to herein) from the registrant's Proxy Statement for its 2002 Annual Meeting to be held on May 9, 2002.

PART I

BUSINESS

(a)    General Development of the Business

        Fargo is a developer, manufacturer and supplier of desktop systems that personalize plastic identification cards by printing images and text onto the cards, laminating them and electronically encoding them with information. We also sell the consumable supplies, such as ink ribbons, overlaminates and blank cards that are used with our systems. We believe that we have built a reputation for technological leadership in our industry by applying our engineering expertise and knowledge of printing and data encoding to incorporate state-of-the-art technologies into our card personalization systems. The ability to customize cards using advanced technologies, coupled with the convenience of desktop systems, has created a market focused on the on-site production of high quality, tamper-resistant, personalized identification cards that can be created quickly and economically. Our customers use our systems to create personalized cards for a wide variety of applications in various industries, including:

•

corporate security and access;



•

student identification and access;



•

driver's licenses, government and military identification;



•

transportation;



•

recreation and gaming;



•

retail loyalty and discount cards; and



•

membership cards and passes.

        As of December 31, 2001, management estimates that approximately 60,000 card personalization systems are installed in more than 100 countries throughout the world.

        Since our inception in 1974, we have used our engineering expertise and knowledge of printing and data encoding technologies to build a reputation for technological leadership in our industry. Historically, we have leveraged our engineering capabilities to develop systems for multiple markets, including bar code printers, color office printers and card personalization systems.

        In February 1998, we restructured our business and completed a recapitalization of Fargo. As part of the restructuring, we brought in several members of our current management team and shifted our focus to the design, manufacture and sale of products for plastic card personalization and data encoding.

        In February 2000, we completed an initial public offering of 5,000,000 shares of our common stock, resulting in net proceeds of $69,750,000 before offering expenses. We used the proceeds of the offering to repay debt and redeem our redeemable preferred stock. For more information about the use of proceeds from the offering, see Note 3 to our financial statements beginning on page F-10.

        On July 31, 2001, we entered into an acquisition agreement pursuant to which we agreed to be acquired by Zebra Technologies Corporation. Under the now terminated acquisition agreement, on August 3, 2001, a wholly-owned subsidiary of Zebra commenced a cash tender offer for all of our outstanding shares at a price of $7.25 per share. The tender offer was subject to certain conditions, including successful termination of the Federal Trade Commission's antitrust review under the provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

        On March 27, 2002, Fargo and Zebra agreed to terminate the acquisition agreement. Based on discussions with representatives of the Federal Trade Commission, Fargo and Zebra concluded that the

1

FTC would not approve the acquisition of Fargo by Zebra. The agreement between Fargo and Zebra terminating the acquisition agreement provides for the immediate termination of the tender offer and includes a mutual release. Shares tendered in the tender offer will not be accepted by Zebra for payment and will be returned to the stockholders.

        Fargo was originally incorporated in North Dakota in 1979 and reincorporated as a Minnesota corporation in 1985. We reincorporated as a Delaware corporation shortly before our initial public offering of common stock in February 2000. Our principal executive offices are located at 6533 Flying Cloud Drive, Eden Prairie, Minnesota 55344, and our telephone number is (952) 941-9470. Our website address is www.fargo.com.

(b)    Financial Information About Segments

        Our business is organized, managed and internally reported as a single segment. Geographical sales information is contained in Note 11 to our financial statements on page F-18 of this report, and is incorporated in this item by reference.

(c)    Narrative Description of the Business

Industry Background

        Certain social, technological and commercial factors are increasing the demand for personalized identification and access cards. As concern for personal safety and property protection has heightened in the wake of the terrorist attacks of September 11, 2001, well-publicized security breaches and violent crimes at government facilities, businesses, hospitals and schools, personalized identification cards are increasingly being used as a means of both visual and electronic identification and to control access to these premises. In addition, new applications for personalized cards are being driven by the development of bar codes, magnetic stripes, proximity sensors, biometric technologies and small computer chips called "smart chips" that store and process information on personalized cards. We believe that these phenomena—the need for security and the development of new technologies—will foster a growing market for digital card personalization systems. We believe that new biometric technologies such as fingerprint reading and voice recognition will be integrated with personalized card systems for added security. These factors will increase the demand for identification card products that involve high quality graphics applied to uneven surfaces in a wide variety of applications.

        For many years the primary method of producing identification cards was to overlay instant photographs and type-set text or logos on a plastic card and then apply a plastic laminate over the card for durability and longevity. The development of digital imaging and direct-to-card thermal dye sublimation processes in the late 1980's created the opportunity to create more durable identification and access cards that offer superior graphic and design capabilities and are less susceptible to alteration or forgery. The development of systems incorporating high definition printing, such as Fargo's High Definition Printing™ (HDP™) process, permits high quality images to be printed on cards with uneven surfaces and of varying size and thickness, such as smart cards and proximity cards. Traditional systems that could deal with the demands of printing on smart cards and proximity cards were expensive and difficult to use. Some of the technologies that were applied to dye sublimation are also being applied using ink jet technology and materials such as glossy paper and lamination or Teslin®, a material that accepts ink jet ink and is more durable than paper.

        The digital card personalization market is characterized by two general types of systems— "central issue" and "instant issue" systems. Central issue systems typically involve batch processing, printing, and the embossing (raising of certain areas of the card to form letters or numbers) of plastic cards, often at a different location from where the relevant data is collected. Cards are usually sent or issued to individuals days or weeks after the initial processing begins. Central issue processing is typically used in large scale programs such as processing of credit cards and, in many cases, issuing of drivers licenses.

2

Central issue systems are generally much larger and substantially more expensive than instant issue systems.

        Instant issue systems, which are typically desktop systems, are used to print personalized cards on demand for issue to the cardholder within moments after processing. Instant issue systems are typically used in small and medium scale applications such as student ID card issuance at high schools or colleges and corporate access control, but are beginning to penetrate the market for large scale applications that were once the sole province of central issue systems.

The Fargo Solution

        We provide desktop card personalization solutions that enable cost-effective, high speed production of personalized cards on demand. Our systems incorporate innovative technologies that encode data and create high quality images on a variety of plastic cards for visual and electronic identification and access control. Our solution provides the following benefits:

        Highly functional systems.    Our systems integrate multiple functions in a single unit, creating complete card solutions in a single-step process. For example, a single Fargo system can use thermal dye sublimation and resin thermal transfer to print multi-colored photographs or logos and singled-colored text or bar codes in the same process and on both sides of a card. Our built-in lamination feature can then apply an added layer of durability and protection to the card surface, including custom holographic images. Within the same card system, a proximity card, smart card or magnetic stripe can be encoded with personalized data. Our systems can rapidly perform these various functions on several cards simultaneously for instant printing of high quality personalized cards.

        Integrated, innovative technologies.    We have consistently been successful seeking out and incorporating innovative technologies, developed by us and others, to create integrated, precise solutions. One of the greatest challenges in our industry is to construct a system that can effectively manage the various electrical, mechanical, digital and chemical processes required to print, laminate and encode a card quickly and accurately within a single, compact system. Our systems incorporate two print methods, thermal dye sublimation and resin thermal transfer, to create images either directly on a card or on the underside of special film that becomes bonded to the card through our pioneering high definition printing process. By precisely controlling the heat and pressure applied by the ceramic printhead, in concert with the movements of a chemically engineered print ribbon, our systems create exceptionally sharp color images. Our integrated lamination and data encoding features are also among the many innovative technologies that work together in our technologically advanced card personalization systems.

        Reliability and durability.    We make highly reliable desktop systems that consistently produce high quality cards that are durable and secure, qualities that are of vital importance to end users. Our printing processes diffuse images and text into the card surface and our lamination techniques add a layer of protection that adheres to the cards to prevent tampering after the card has been printed and encoded. Because lamination and data encoding are done inside a single card system, the opportunities for deliberate tampering or an encoding error are greatly reduced. In addition, our line of integrated consumable supplies is specially designed for optimal use in our systems.

        Broad array of systems.    While our premium systems incorporate multiple functions, we seek to meet the varying needs of end users by offering several product lines including less sophisticated systems at lower prices. We currently offer four principal product lines with variations within each line to meet customer needs.

        Flexibility and ease of use.    All of our systems can be integrated into a network or operated as a stand alone system, attached to a single personal computer. Because our systems are relatively compact, they are easily moved from one location to another. Although our systems are technically sophisticated,

3

they do not require a high level of technical sophistication to operate, so end users can create personalized cards quickly and easily. All of our systems are designed to be interoperable with the hardware, software and other equipment most often used by our resellers so they can create systems tailored to their customers' needs.

        Training and technical support.    We provide training and technical support to our resellers and systems integrators to assist them in marketing and servicing our systems. Our on-site training workshops, instructional videos and live telephone support assist our resellers in helping end users make the purchasing decision that best suits their particular needs.

Digital Card Personalization Technologies

        Printing technologies.    Currently, there are two primary digital card printing technologies used to print personalized cards—direct-to-card printing and high definition printing technology. We manufacture systems that use each of these technologies.

        Direct-to-card printing is the most common technology used by digital card printers to print images directly onto the surface of a plastic card. The process involves heating a special print ribbon beneath a thermal printhead and pressing down so that the ribbon is in contact with the card and the printhead rests on the top of the ribbon, resulting in the transfer of color from the ribbon to a blank card. This method requires that the card be clean and very flat, as the printhead itself is flat and must contact all of the card in order to lay down a proper print. Because PVC is the most conducive material on which to print, almost all of the blank cards used with our systems are made with a clear PVC layer on both sides of the card. Most card printers in the market today use this direct-to-card technology, including the vast majority of the printers that we have manufactured to date.

        High definition printing is a process in which the printer first prints images onto a special film, which is then laminated onto the surface of a blank card through heat and pressure. Because the graphics and text are printed on the underside of the film, the image is "sandwiched" between the film and the card, providing for better image quality and improved dye migration and ultraviolet light control than direct-to-card printing. By printing on the film rather than directly on the surface of a card, the ceramic printheads in our HDP systems are less susceptible to damage that can result from contact with debris or imperfections on the hard surface of a card. High definition printing also eliminates many of the printing irregularities that can occur in direct-to-card printing when the printhead passes over a dirty or uneven area and fails to maintain contact with the card surface. For example, our HDP systems are ideal for printing on proximity cards and smart cards, which tend to have uneven surfaces due to embedded wires and smart chips. We have been shipping our line of high definition printing systems since 2000. In summary, high definition printing produces higher quality images than direct-to-card printing, and the ability to print on many card sizes, types or chemical compositions, including biodegradable cards.

        Print methods.    Dye sublimation is the process our printers use to print smooth, continuous tone images that look truly photographic. This process uses a dye based ribbon roll that is partitioned by a number of consecutive color panels. The panels are grouped in a repeating series of the three process colors—yellow, magenta, and cyan—along the entire length of the ribbon. There can be additional panels for black and for a protective overlay as well as for printing on both sides of the card. During printing, a ceramic printhead containing hundreds of thermal elements heats the dyes on the ribbon which then vaporize and diffuse into the surface of either the card (for direct-to-card printing) or the HDP film. A separate pass is made for each of the panels on the ribbon. By combining the colors of each panel and by varying the heat used to transfer these colors, the printer is able to produce millions of photo realistic colors.

        Resin thermal transfer is the process our printers use to print sharp solid color, typically black, text and bar codes. Resin thermal transfer is required to create machine readable bar codes that can be

4

read by infrared bar code scanners. Like dye sublimation, this process uses the same thermal printhead to transfer color from the ribbon roll to the card or the HDP film. The difference, however, is that solid dots of color are transferred in the form of a resin-based ink which adheres to the surface of the card when heated. This produces single color images. Resin black panels are included on many of our full color dye sublimation ribbons so that you can automatically print both dye sublimation and resin images on the same card. This gives cards the benefits of both print methods. Resin-only ribbons are also available for use with our direct-to-card printers for printing economical one-color cards in as fast as 5 seconds. These ribbons consist of a continuous roll of a single resin color and can produce up to 1,000 cards per ribbon. Black and a variety of other resin ribbon colors are available.

        Data encoding.    In addition to printed photographs, text and bar codes, our concept of card personalization also includes encoding of personalized data on magnetic stripes, proximity cards and smart cards. Data encoding capabilities are available on most of our card personalization systems. Magnetic stripe technology is the oldest and most widely used technology for encoding identification and stored value data on cards and is available in all of our systems. Digitized data is stored on a magnetic stripe by altering the polarity of microscopic particles (usually iron oxide) embedded in a resin. Our systems encode data on magnetic stripes in a binary format, with the polarity of the particles shifting from north-south to south-north as the recording mechanism in our systems progresses down the stripe. When the cards are swiped through a reader, the polarity changes are detected, which allows the data to be interpreted.

        The term "smart card" commonly refers to any plastic card with an embedded integrated circuit microchip or an on-board microprocessor. Smart card data is accessed by direct electrical contact with a smart card reader that makes physical contact with a gold plate on the card face and then reads and transmits data electronically. Contactless smart cards have an electronic microchip and an antenna embedded inside that allow the card to communicate with an antenna/coupler unit without physical contact. A smart card data encoding option is available on most of our systems to electronically record data on smart chips as the cards are processed through our systems. On several of our new Professional Series printers, either a contact or contactless option is available.

        Proximity cards have embedded electronic circuits that store data that can be read by a proximity reading device without the need for the card to make physical contact with the reader. Users can leave their proximity cards inside their wallet or purse while the reader processes the code, making the convenience of proximity cards increasingly popular for access control applications. We are working with leading proximity card manufacturers, such as HID Systems Inc. in the United States, and technologies more popular outside of the United States such as Mifare and Legic, to incorporate proximity encoding operations into our Professional line of printers.

        Through the Fargo Technology Alliance, an industry group of vendors that we brought together to provide solutions in smart cards and proximity cards, we are working with manufacturers and developers of various methods of encoding biometric data — such as fingerprints or voice recognition features — on cards through our systems.

5

Our Products

        We currently manufacture four different product lines with a variety of options within each product line as illustrated in the following chart.

        We sell our products to resellers who offer our products to end users typically as part of an integrated system that may also include a digital camera, a computer with card design software and other equipment manufactured by other companies. All of our systems are designed to be interoperable with the hardware, software and other equipment most often used by our resellers.

        In addition to manufacturing card personalization systems, a significant portion of our business is supplying our independent distributors and resellers with consumable supplies that are engineered to work compatibly with our printers, such as ribbons and overlaminates. Sales of these consumable supplies accounted for approximately 56%, 57% and 51% of our net sales of card personalization products in 2001, 2000 and 1999, respectively. Our consumable supplies business provides us with recurring revenues because most of our supplies are proprietary and unique to our systems. We engineer these supplies in cooperation with the manufacturers of these materials and some are specially designed and manufactured to produce superior cards and prevent operator errors. Printer ribbons have a panelized appearance and are used to create the images on the cards. Each ribbon prints a fixed number of cards so that an end user or distributor can calculate the number of ribbons needed to print

6

a certain number of cards. Overlaminates are applied after the printing process and increase the durability of the cards. These overlaminates are offered in clear material, a standard holographic material, and in a custom holographic application where the end user may customize the holograph in the overlaminate in order to increase security as well as durability. In order to mitigate some of the difficulties that card systems experience in printing on uneven or dirty cards, we sell blank cards that are optically scanned to ensure that they are as clean and defect free as reasonably possible. Both the ribbons and the overlaminates include proprietary technology owned by their respective manufacturers and, in some cases, technology owned by us. Blank cards, however, are essentially a commodity item that may be purchased through a variety of sources. We also sell, as part of our supplies business, replacement parts for the systems and extended warranties.

Sales and Marketing

        Distribution channels.    We market and sell our products through a distribution channel of independent distributors and resellers in more than 100 countries worldwide. We believe that our distribution network is the largest and most dedicated in our industry. We believe, however, that the announcement in July 2001 of our proposed acquisition by Zebra Technologies and the nearly eight-month delay due to the Hart-Scott-Rodino antitrust review prior to termination of the transaction in March 2002 has had an adverse effect on our distributorship and reseller relationships and consequently our sales.

        In conjunction with the introduction of our Professional Series systems in September of 2000, we implemented an exclusive distribution strategy for these premium systems in the United States. As with our international distributors, our domestic distributors and resellers that wish to sell our Professional Series product line must commit to a distribution arrangement which requires, among other things, that our products constitute 80% of our resellers' total dollar volume of sales of card personalization systems and that our distributors sell exclusively Fargo products. Our Professional Series is currently sold through five exclusive distributors and approximately 200 value-added resellers who have agreed to meet the 80% volume requirement. We believe, however, that many of our resellers are not currently in compliance with this 80% volume requirement due to the uncertainty caused by our delayed and now terminated transaction with Zebra Technologies Corporation. As we seek to strengthen our distribution network, we will evaluate when and how to more aggressively enforce these volume requirements.

        Our Persona Series, which is our line of lower priced value systems, is available on a non-exclusive basis to all our distributors and resellers. In the United States, our Persona Series distribution network currently includes approximately 265 direct resellers, as well as nine distributors who distribute our products to their approximately 1,500 resellers nationwide.

        Our international distribution network includes 67 resellers and 48 distributors throughout Europe, Asia, Africa, Latin America and Australia. Although doing business in developing regions involves risks of political and economic instability, we are generally able to terminate our arrangements with our international distributors and resellers upon short notice in order to mitigate such risks. Additional information about our international sales is also included in Note 11 to our financial statements on page F-18 of this report.

        Our largest ten distributors and resellers accounted for a combined total of 43%, 41% and 41% of sales in 2001, 2000 and 1999, respectively. One customer accounted for more than 10% of our sales in 2000, while no single customer accounted for more than 10% of our sales in 2001 and 1999. We support our distribution network and end-user customers through our offices in Eden Prairie, Minnesota. As of December 31, 2001, we directly employed 44 individuals engaged in sales, marketing and technical support.

        Resellers sell a variety of identification and access control components from different manufacturers, and customize systems for end-user applications as part of their systems integration

7

business. Because these sales channels provide specific equipment, software, configuration, installation, integration and support services required by end users within various market segments, these relationships allow us to reach end users worldwide in a broad variety of industries. We do not compete with our distributors or resellers by selling directly to end users.

        Marketing activities.    Our marketing operations include customer relations, specification development and market research functions, marketing communications, and technical and training services. Our marketing group works closely with our research and development personnel to develop ideas for new products and product enhancements to better meet the needs of end users. As part of our strategic planning, we are continually analyzing the market for our products and evaluating our strengths and weaknesses compared with our competition. Our distribution partners have been a valuable source for ideas and information and we communicate regularly with our distribution channel to solicit their input and gather feedback from end users.

        We routinely conduct promotional efforts targeted at distributors and resellers, as well as directly to potential end users such as corporations, schools, hospitals and others. Most of our promotional efforts are directed at end users. Our web site provides visitors with information about the company and our systems, allows them to contact us via e-mail, and also allows special access to our authorized distribution network to obtain detailed product specifications, pricing information and technical updates. We also actively participate in industry trade shows, both as an exhibitor at larger trade shows and with our distribution partners at smaller, regional trade shows. All leads generated by our marketing activities are referred to an appropriate authorized distributor or reseller.

        We provide training and technical support to our distributors and resellers to assist them in marketing and servicing our systems. Our on-site training workshops, instructional videos and live telephone support assist our resellers in helping end users make the purchasing decision that best suits their particular needs. Our repair times are three business days for personalization systems that are sent to us, whether or not those systems are covered by a warranty. In addition, our resellers are able to become Authorized Service Providers so that they can provide technical support directly to their customers. Many of them also offer their customers maintenance and support contracts for their integrated card personalization solutions.

        End users and applications.    Our card personalization systems are used to create personalized cards for a wide variety of applications by end users in many different vertical markets, as illustrated below:

8

Research and Product Development

        Our research and development strategy is to apply new technologies into our systems so that our products remain the highest quality and most advanced systems available. We have adopted a design and development approach that we believe will allow us to integrate new technologies into our product offering quickly and efficiently. We believe that emerging technologies, such as smart cards and biometrics, will provide us with new opportunities to differentiate our systems from those of our competitors. We strive to involve our independent resellers to help us determine the needs of end users, assess our systems and better assure market acceptance of new products.

        We have assembled a highly trained staff of electrical, mechanical and chemical engineers and we devote significant resources to developing new card printing solutions and compatible proprietary supplies for our target markets, as well as maintain high standards of quality and reliability. As of December 31, 2001, we had 34 employees engaged in new product design, engineering and development.

        We continue to implement our strategy to invest significant engineering resources in product development. Our research and development costs were approximately 6.6%, 8.5%, and 7.3% of net sales in 2001, 2000 and 1999, respectively.

Intellectual Property

        Portions of our manufacturing processes and the mechanical and electronic designs of our systems are proprietary and we attempt to protect our systems and processes through a combination of patents, copyright, trademark and trade secret laws, employee and third-party nondisclosure agreements and similar means. We seek patents from time to time on our products and processes. The decision to seek additional patents is based on our analysis of various business considerations such as the cost of obtaining a patent, the likely scope of patent protection and the benefits of patent protection relative to relying on trade secrets and other protection. We also rely on technical know-how and continuing technological innovations to develop and maintain our competitive position.

        As of December 31, 2001, we held 18 United States patents related to our card business. We have also filed applications for approximately 60 additional United States patents that are currently pending. Our existing patents expire during the period between January 2009 and September 2020. We consider our most important patents to be those covering our methods for driving our printheads, our lamination methods and our method of identifying dye sublimation and thermal transfer ribbons. We also rely on proprietary manufacturing processes and techniques, materials expertise and trade secrets applicable to the manufacture of our systems. We believe that these proprietary rights may provide us with a competitive advantage as important as, if not more important than, patent protection. We seek to maintain the confidentiality of this proprietary information by requiring employees who have access to it to sign confidentiality and non-competition agreements and by limiting access by outside parties to such information. We file some patents in counties outside the United States, again depending on our analysis of various business considerations such as the cost of obtaining a patent, the likely scope of patent protection and the benefits of patent protection relative to relying on trade secrets and other protection. We recognize that some countries in which we do business do not offer the same level of protection for intellectual property as does the United States.

Manufacturing and Sources of Supply

        We outsource assembly of certain component parts such as circuit boards, wire harnessing and cabling to a manufacturer in Jamaica. These components are then shipped to our manufacturing facility in Eden Prairie, Minnesota for final assembly. We also purchase component parts, printheads and ribbons from a number of vendors located in the United States and Japan. The terms of supply contracts are negotiated separately with each vendor and we believe that our present vendors have sufficient capacity to meet our requirements and that alternate production sources for most

9

components are generally available without undue interruption. We have not experienced any difficulty in the past in purchasing component parts or engaging contractors.

        To keep our inventory costs low, we try to manage our production of systems by not maintaining any significant inventory of completed systems and we maintain only limited inventories of component parts and consumable supplies. We enter into purchase agreements with certain suppliers that require us to purchase minimum amounts of inventory. We endeavor to produce systems as they are ordered, which causes us to forecast production based on past sales and our estimates of future demand rather than stocking finished goods. While most components are available from multiple vendors, certain components used in our systems are only available from single or limited sources. In common with most of our competitors, we rely on Kyocera, based in Japan, to supply us with printheads. A disruption in the supply of printheads, such as the occurrence of a catastrophic event affecting Kyocera or its decision to limit or cease production, would affect the entire industry, including us.

Competition

        Many companies are engaged in the design and manufacture of personalization systems. We design and manufacture desktop thermal dye sublimation systems primarily for the on-demand personal identification card market. Competition in our market is intense and we expect it to increase. We expect to compete with a number of companies, some of which have greater financial, technical and marketing resources than we do. Our ability to compete successfully depends on many factors, some of which are outside of our control. Factors affecting our ability to compete include:

•

the price, quality and performance of our systems relative to our competitors;

•

our success in developing new systems and the timing of new product introductions;

•

the adequacy of our manufacturing capacity and supply of components and materials;

•

the efficiency of manufacturing operations and the cost of manufacturing;

•

the effectiveness of our distribution network;

•

our relationships with our suppliers; and

•

general market and economic conditions.

        We believe that we compete favorably with respect to each of these factors. Although the prices of our Professional systems are generally higher than those of our competitors, we have been able to maintain these prices because of our reputation for quality and performance and our favorable relationships with our independent resellers. Our Persona line of printers is very price competitive.

        The card personalization industry includes approximately 25 companies that manufacture digital card printers; and although the market is fragmented, there are six strong competitors: Datacard, Fargo, Zebra (Eltron), Atlantek, Nisca and MagiCard. We believe that Fargo has the largest revenue of digital card personalization systems when both systems and consumables (but not software) are included. We also compete with manufacturers of analog lamination systems, such as Polaroid Corporation, which we believe continues to be the leading seller of card products. Competition also includes general use ink jet printers that print onto Teslin, an ink jet receptive surface manufactured by Pittsburgh Paint and Glass. As the result of the termination in March 2002 of our proposed acquisition by Zebra, it is possible that Zebra may be a more vigorous competitor in our business.

Employees

        As of March 15, 2002, we employed approximately 189 persons, of whom 91 are engaged in manufacturing, 39 in research and development, 44 in sales, marketing and technical support and the balance in management and administrative positions. None of our employees are represented by a

10

labor union or covered by a collective bargaining agreement. We have not experienced any work stoppages and consider relations with our employees to be good.

        All employees are required to sign a confidentiality and non-competition agreement prior to beginning employment with us. The confidentiality obligations do not expire and the non-competition restrictions are typically for a period of 12 months for most employees and 18 months for key employees and all engineers.

(d)    Financial Information About Geographic Areas

        See Note 11 on page F-18 of our financial statements for information about export sales.

Item 1A.    CAUTIONARY STATEMENT REGARDING FUTURE RESULTS, FORWARD-LOOKING INFORMATION AND CERTAIN IMPORTANT FACTORS

        Fargo makes written and oral statements from time to time regarding its business and prospects, such as projections of future performance, statements of management's plans and objectives, forecasts of market trends, and other matters that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements containing the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimates," "projects," "believes," "expects," "anticipates," "intends," "target," "goal," "plans," "objective," "should" or similar expressions identify forward-looking statements, which may appear in documents, reports, filings with the Securities and Exchange Commission, news releases, written or oral presentations made by officers or other representatives of Fargo to analysts, stockholders, investors, news organizations and others, and discussions with management and other representatives of Fargo. For such statements, Fargo claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

        The future results of Fargo, including results related to forward-looking statements, involve a number of risks and uncertainties. No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statement made by or on behalf of Fargo speaks only as of the date on which such statement is made. Fargo's forward-looking statements are based upon assumptions that are sometimes based upon estimates, data, communications and other information from suppliers, government agencies and other sources that may be subject to revision. Fargo does not undertake any obligation to update or keep current either (i) any forward-looking statement to reflect events or circumstances arising after the date of such statement, or (ii) the important factors that could cause Fargo's future results to differ materially from historical results or trends, results anticipated or planned by Fargo, or which are reflected from time to time in any forward-looking statement which may be made by or on behalf of Fargo.

        In addition to other matters identified or described by Fargo from time to time in filings with the SEC, there are several important factors that could cause Fargo's future results to differ materially from historical results or trends, results anticipated or planned by Fargo, or results that are reflected from time to time in any forward-looking statement that may be made by or on behalf of Fargo. Some of these important factors, but not necessarily all important factors, include the following:

Our agreement to be acquired by Zebra Technologies Corporation has been terminated, which means that shares tendered by our stockholders in the tender offer will be returned without payment of the tender offer price or any interest and our stockholders may be unable to sell their shares at an equivalent or higher price in the future.

        On March 27, 2002, Fargo and Zebra agreed to terminate the acquisition agreement between the parties. Based on discussions with representatives of the Federal Trade Commission, Fargo and Zebra concluded that the FTC would not approve the acquisition of Fargo by Zebra. As a result of the termination of the transaction, the shares tendered by our stockholders in the tender offer will be

11

returned to them without payment by Zebra of the $7.25 per share tender offer price or any interest. Our stock price, as reported by the Nasdaq National Market, could be subject to volatility following the announcement that our acquisition agreement with Zebra had been terminated. Our stockholders may be unable to sell their shares in the future at a price equal to or higher than the price previously offered in the tender offer.

The delay and uncertainty caused by the Federal Trade Commission's review of our proposed acquisition by Zebra Technologies, and the termination of the proposed transaction due to the failure to obtain regulatory approval, has inhibited our growth and negatively impacted our business.

        We believe that the announcement in late July 2001 of our proposed acquisition by Zebra Technologies and the nearly eight-month delay due to the Hart-Scott-Rodino antitrust review prior to termination of the transaction in March 2002 has had an adverse affect on our distributorship and reseller relationships and, consequently, our sales. All of our revenue comes from sales through our distributor and reseller network and we do not sell our products directly to end-users. Although our distributors and resellers have made certain contractual commitments to us, they are independent businesses that we do not control. We believe that the announcement of our proposed acquisition by Zebra Technologies and the delay due to the regulatory review process has caused our distribution network to take actions to protect their business interests against the uncertainty inherent in such transactions. These actions have included taking on competing product lines, devoting their efforts to other products in different markets, reducing or discontinuing sales of our products or failing to devote the resources necessary to provide effective sales and marketing support of our products. We believe that these types of reactions by our distribution network to the uncertainty and delay surrounding the proposed transaction with Zebra has inhibited our growth and negatively impacted our business. The continuation of these actions, even though the proposed transaction with Zebra has now been terminated, could have a continuing material adverse effect on our financial condition and results of operations. We are dependent upon the continued viability and financial stability of these distributors and resellers, and if they choose to move away from purchasing products from us, this will negatively affect our sales.

We rely on sole and single-source suppliers, which could cause delays, increases in costs or prevent us from completing customer orders, all of which could materially harm our business.

        We rely on outside vendors to manufacture or develop products and consumable supplies that are used in our systems. We purchase critical components for our systems, including printheads, dye sublimation printer ribbons and microprocessors from separate single source suppliers. Our inability to obtain adequate deliveries or alternative sources of supply could cause delays, increases in costs and lower gross profit margins. Currently, our sole supplier of printheads is Kyocera, based in Japan, our current sole supplier of ribbons is Dai Nippon, also based in Japan and our current supplier of most of the microprocessors that run our printers is Motorola. If any of these suppliers is unable to ship critical components, we, together with others in our industry, would be unable to manufacture and ship products to our customers. If the price of printheads, ribbons or microprocessors increases for any reason, or if these suppliers are unable or unwilling to deliver, we may have to find another source, which could result in interruptions, increased costs, delays and quality control problems. War, natural disaster, trade embargoes or economic hardship in Japan could also result in a disruption in shipments from our Japanese suppliers which could require us, together with the entire card personalization industry, to develop new sources of these supplies or else cause us to be unable to complete and ship orders to our customers.

12

We do not maintain significant inventories of component parts or finished goods and our failure to adequately forecast demand could result in shortages and damage our business.

        We try to manage our production of systems by maintaining no significant inventory of completed systems. We enter into purchase agreements with certain suppliers that require us to purchase minimum amounts of inventory. We maintain only limited inventories of component parts and consumable supplies. We endeavor to produce systems as they are ordered, which causes us to forecast production based on past sales and our estimates of future demand. In the event that we significantly underestimate our needs or encounter an unexpectedly high level of demand for our systems or our suppliers are unable to deliver our orders of components in a timely manner, we may be unable to fill our product orders on time which could harm our reputation and result in reduced sales.

We do not manufacture a diverse array of products and our business success depends on the continued demand for digital card personalization systems.

        Because we sell only digital card personalization systems and related consumable supplies, our business depends on the continued demand from our customers for cards for identification and access control purposes. Demand for our products could decline if businesses and organizations use alternative technologies, such as biometric technologies that use physical characteristics of a person such as voice, fingerprints or eyes as a means of identification, or reduce their dependence on identification cards. We cannot assure you that changes in the business environment or competition from current and potential competitors will not significantly erode the demand for our systems and cause our business to suffer.

Technology in our industry evolves rapidly, potentially causing our products to become obsolete, and we must continue to enhance existing systems and develop new systems or we will lose sales.

        Rapid technological advances, rapidly changing customer requirements and fluctuations in demand characterize the market for our current products. Our existing and development-stage products may become obsolete if our competitors introduce newer or better technologies. To be successful, we must constantly enhance our existing systems and develop and introduce new systems. If we fail to anticipate or respond to technological developments or customer requirements, or if we are significantly delayed in developing and introducing products, our business will suffer lost sales and a smaller market share.

All of our sales are made through our distributors and resellers, over which we have limited control, and if they do not effectively market or sell our products, our sales will be reduced.

        All of our revenue comes from sales through our distributor and reseller network, and we do not sell our products directly to end users. Although our distributors and resellers have made certain contractual commitments to us, they are independent businesses that we do not control. We cannot be certain that they will continue to market or sell our systems effectively. In particular, our agreements with distributors and resellers of our Persona Series line of systems are typically non-exclusive, so our distributors and resellers could carry competing product lines, devote their efforts to other products in different markets, reduce or discontinue sales of our products or fail to devote the resources necessary to provide effective sales and marketing support of our products, which could have a material adverse effect on our financial condition and results of operations. In addition, we have moved to an exclusive distribution strategy for our Professional Series line of systems, so we rely on fewer distributors and resellers to sell our premium products. The failure of any one or more of these distributors or resellers of our Professional Series systems to effectively market and sell these products could impede our exclusive distribution strategy and negatively affect our sales. We are dependent upon the continued viability and financial stability of these distributors and resellers, many of which are small organizations with limited capital. We believe that our future growth and success will continue to depend in large part upon the success of our distributors in operating their own businesses.

13

Our competitors have substantial resources. Competition may result in price reductions, lower gross profits and loss of market share.

        We face significant competition in developing and selling our systems. Our principal competitors have substantial marketing, financial, development and personnel resources. To remain competitive, we believe that we must continue to provide:

•

technologically advanced systems that satisfy the demands of our customers,

•

superior customer service,

•

high levels of quality and reliability, and

•

dependable and efficient distribution networks.

        We cannot assure you that we will be able to compete successfully against our current or future competitors. Zebra Technologies has been a significant competitor of ours in the past, and may be a more vigorous competitor in the future as a result of the termination of the agreement under which Zebra was to acquire Fargo. Increased competition from manufacturers of systems or consumables may result in price reductions, lower gross margins and loss of market share and could require increased spending by us on research and development, sales and marketing and customer support. Some of our competitors may make strategic acquisitions or establish cooperative relationships with suppliers or companies that produce complementary products such as cameras, computer equipment, software or biometric applications. If any technology that is competing with ours becomes more reliable, higher performing, less expensive or has other advantages over our technology, then the demand for our products and services could decrease. Any of these factors could reduce our earnings.

We sell a significant portion of our products internationally and purchase important components from foreign suppliers, which exposes us to currency fluctuations and other risks.

        We sell a significant amount of our products to customers outside the United States, particularly in Europe and Asia. International sales accounted for 37%, 38%, and 36% of our net sales in 2001, 2000, and 1999, respectively. We expect that shipments to international customers, including customers in Europe and Asia, will continue to account for a significant portion of our net sales. The economic and financial instability that has occurred in Asia in the past has not had a material adverse affect on our business, although a recurrence of such instability could have a negative effect in the future. Sales outside the United States involve the following risks, among others:

•

foreign governments may impose tariffs, quotas and taxes;

•

political and economic instability may reduce demand for our products;

•

restrictions on the export or import of technology may reduce or eliminate our ability to sell in certain markets;

•

potentially limited intellectual property protection in certain countries, such as China, may limit our recourse against infringing products or cause us to refrain from selling in certain markets;

•

we may face difficulties in managing international operations;

•

our contracts with foreign distributors and resellers do not fully protect us against political and economic instability;

•

we may face difficulties in collecting receivables; and

•

we may not be able to control our international distributors' efforts on our behalf.

        We do not hedge against foreign currency fluctuations and, because we denominate our international sales in U.S. dollars, currency fluctuations could also cause our products to become less affordable or less price competitive than those of foreign manufacturers. These factors may have a

14

material adverse effect on our international sales. Any adverse impact on our international sales would affect our results of operations and would cause our business to suffer.

        In addition, we purchase components from a number of foreign suppliers and outsource certain manufacturing tasks to foreign manufacturers. In February of 2001, we entered into a new agreement with our supplier of dye sublimation ribbons to make our purchases in dollars rather than yen. Although this agreement will reduce the risks of increased purchasing costs if the value of the dollar declines relative to the yen, we will not be able to benefit from the full potential cost savings if the value of the dollar increases relative to the yen.

If we are unable to effectively manage our growth, we may experience operating inefficiencies and have difficulty meeting the demand for our products.

        We have rapidly and significantly expanded our operations and anticipate that further expansion could be achieved. This expansion could place a significant strain on our management, product and support operations, sales and marketing personnel and other resources, and we may experience difficulty fulfilling the demand for our products which could harm our business. We cannot assure you that our systems, procedures or controls will be adequate to support the potential growth in our operations.

Our products depend on technologies that we do not own and we could lose revenue if we are unable to obtain these technologies in the future.

        Our products incorporate technologies over which we have no control, including thermal printhead technology, dye sublimation ribbons, software and microprocessors. The owners of these technologies are free to sell or license these technologies to our competitors, agree to supply these technologies exclusively to a third party or enter the market for our systems as our competitor. If any of these events occur, the owners of these technologies could choose not to continue to supply us with vital system components, which would result in the diversion of our research and development resources and could result in lost revenue, inability to ship products and harm to our reputation. Some of these technologies are incorporated into new systems and if these systems are not able to ship due to the unwillingness of the owners of these technologies to supply our requirements, we will see a material adverse impact to our revenues in the foreseeable future.

If our systems fail to comply with domestic and international government regulations such as import and export restrictions, or if these regulations result in a barrier to our business, we could lose sales.

        Our systems must comply with various domestic and international laws, regulations and standards. In the event that we are unable or unwilling to comply with any such laws, regulations or standards, we may decide not to conduct business in certain markets. Particularly in international markets, we may experience difficulty in securing required licenses or permits on commercially reasonable terms, or at all. Failure to comply with existing or evolving laws or regulations, including export and import restrictions and barriers, or to obtain timely domestic or foreign regulatory approvals or certificates could result in lost sales.

The complex design of our systems could result in manufacturing delays and other problems that cause us to fail to meet the demand for our systems on a timely basis, increase the cost of our systems or both.

        We have experienced manufacturing problems with some of our systems in the past. Similar problems in the future could lead to production delays that could cause our distribution network to choose to sell competing systems. In addition, manufacturing problems could result in higher material, labor and other costs which could increase the total cost of our systems and could decrease our profit margins.

15

Our systems may have manufacturing or design defects that we discover after shipment, which could negatively affect our revenues, increase our costs and harm our reputation.

        Our systems are complex and may contain undetected and unexpected defects, errors or failures. If these product defects are substantial, the result could be product recalls, an increased amount of product returns, loss of market acceptance and damage to our reputation, all of which could increase our costs and cause us to lose sales. We carry general commercial liability insurance, including product liability, with a coverage limit of $2 million per occurrence plus an umbrella policy with a $5 million limit. It is possible that our insurance may be insufficient to protect us against losses caused by severe defects in our products.

Our quarterly operating results may be volatile as a result of many factors and this may cause our stock price to fluctuate.

        We have experienced fluctuations in our quarterly operating results and we expect those fluctuations to continue due to a variety of factors. Some of the factors that influence our quarterly operating results include:

•

the number and mix of products sold in the quarter;

•

the availability and cost of components and materials;

•

timing, costs and benefits of new product introductions;

•

customer order size and shipment timing; and

•

seasonal factors affecting timing of purchase orders.

        Because of these factors, our quarterly operating results are difficult to predict and are likely to vary in the future. We have traditionally experienced lower net sales in the first quarter and higher net sales in the third quarter. If our earnings are below financial analysts' expectations in any quarter, our stock price is likely to drop.

We may not be able to adequately protect or enforce our domestic or international intellectual property rights, which would allow our competitors to offer similar products which could depress our prices and gross margins.

        We believe that protecting our proprietary technology is important to our success and competitive positioning. We currently rely on a combination of patents, trademarks, license agreements and contractual provisions to establish and protect our intellectual property rights. Our failure to protect our intellectual property rights could have a material adverse effect on our business, results of operations and financial condition. We cannot be certain that the steps we take to protect our intellectual property will adequately protect our proprietary rights, that others will not independently develop or otherwise acquire equivalent or superior technology or that we can maintain any of our technology as trade secrets. The laws of some of the countries in which our systems are or may be sold may not protect our systems and intellectual property to the same extent as the United States or at all.

We may not be able to adequately protect ourselves against infringement claims of others, which if successfully brought could require us to redesign or cease marketing our products.

        We cannot be certain that we have not infringed the proprietary rights of others. Any such infringement could cause third parties to bring claims against us, resulting in significant costs, possible damages and substantial uncertainty. We could also be forced to develop a non-infringing alternative which could be costly and time-consuming.

16

If we fail to attract and retain highly skilled managerial and technical personnel, we may fail to remain competitive.

        Our future success depends, in significant part, upon the continued service and performance of our senior management and other key personnel, in particular Gary R. Holland, our Chief Executive Officer. Although we have "key man" insurance on Mr. Holland with a death benefit of $3 million, losing the services of Mr. Holland could impair our ability to effectively manage our company and to carry out our business plan. In addition, competition for skilled technical employees in our industry is intense. If we cannot attract and retain sufficient qualified technical employees, we may not be able to effectively develop and deliver competitive products to the market.

We may need to raise additional capital to fund our future operations, and any failure to obtain additional capital when needed or on satisfactory terms could damage our business.

        We may need to raise or borrow additional capital in the future to fund our ongoing operations. Any equity or debt financing, if available at all, may be on terms that are not favorable to us and, in the case of equity offerings, may result in dilution to our stockholders. Any difficulty in obtaining additional financial resources, including the inability to borrow on satisfactory financial terms, could force us to curtail our operations or prevent us from pursuing our growth strategy or otherwise cause us financial harm.

        In addition, we currently have a significant level of debt under our credit facility agreement. This credit facility imposes several restrictive conditions on our ability to incur additional indebtedness and pay dividends. This credit facility, and other future credit facilities, may prevent us from taking steps necessary to further our growth. In addition, this credit facility has a short term (less than 18 months) expiration date. It is possible that our current lenders and other potential lenders may not extend us credit.

Item 2.    PROPERTIES

        We currently lease approximately 90,240 square feet of space for our corporate headquarters and manufacturing facility in Eden Prairie, Minnesota. Our lease for this facility expires in December 2006 and we have the option of extending this lease for an additional two or five year period.

Item 3.    LEGAL PROCEEDINGS

        We do not believe that any legal matters exist that would have a material adverse effect on our business, financial condition or results of operations.

Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matter was submitted for a vote of our security holders during the fourth quarter of the fiscal year covered by this report.

17

Item 4A.    EXECUTIVE OFFICERS OF FARGO

        Gary R. Holland has served as our Chief Executive Officer since February 1998. From May 1997 to February 1998, Mr. Holland was the general manager of Fargo. From 1992 to 1997, Mr. Holland owned and operated two business and strategy consulting firms, Decision Process International and Holland & Associates. From 1982 to 1992, Mr. Holland was the President of Datacard Corporation. From 1979 to 1982, he was the President and Chief Operating Officer of CPT Corporation. Mr. Holland also serves as a member of the boards of directors of Check Technology Corporation and is Chairman of DataKey Corporation.

        Scott Ackerman is our Vice President—Quality and Management Systems, a position he has held since January 2001. He was previously Director of Manufacturing for Fargo, and also served as General Manager of Fargo Electronics Jamaica Ltd., a Jamaican corporation located in Montego Bay, from 1995 through 1996. From 1993 to 1995, he was an Operations Manager at Piper Capital Management, and held various positions within the Audit Practice at the accounting firm KPMG from 1990 through 1993.

        Mark Andersen has been Vice President—Sales since June 2000. He previously was Fargo's director of sales since 1997 and joined Fargo in 1994 as a regional sales manager. Prior to joining Fargo, he served in various computer products sales positions with a division of United Stationers, Inc.

        Tony Dick Acting Chief Financial Officer—a position he has held since February 2002. He was previously Director of Finance since June 2000 and joined Fargo in 1997 as controller. Prior to joining Fargo, he worked for the accounting firm Larson, Allen, Weishair, LLP.

        Kathleen Phillips has been our Vice President—Marketing since June 2000. She joined Fargo in 1993, and has held various management positions at Fargo, including technical support, inside sales, customer service and most recently product marketing. Prior to joining Fargo, she held various positions in research and development, and technical support and services at Northgate Computer Systems from 1989 to 1992.

        Tom Platner has been our Vice President—Engineering and Manufacturing since November 2000. He joined Fargo as Director of Product Development in August 1999. Prior to joining Fargo, he worked as Engineering Manager and Director of Engineering at Rosemount Inc. (division of Emerson Electric) of Eden Prairie from 1995 to 1999. He held various engineering positions at McQuay International of Minneapolis, from 1985 to 1995, and for Carrier Corporation (division of United Technologies) as a Field Application Engineer from 1981 to 1985.

        Jeffrey D. Upin has served as our General Counsel since April 1995 and holds operational duties as Director of Supplies. Mr. Upin was appointed as Fargo's Vice President and Corporate Secretary in September of 2000. Prior to joining Fargo, Mr. Upin served as Vice President of St. Paul Clothiers, a regional retail operation.

18

PART II

Item 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

(a)    Market Information.

        Our common stock is currently traded on the Nasdaq National Market under the symbol "FRGO." The following table sets forth, the high and low sales prices per share as reported by the Nasdaq National Market for each full quarter since our initial public offering of common stock in February 2000.

(b)    Holders.

        As of March 18, 2002, we estimate that there were over 1,500 beneficial owners of shares of our common stock, which shares were held by 84 record holders.

(c)    Dividends.

        We have not declared or paid any cash dividends on our common stock for the past three fiscal years, other than S corporation distributions prior to our conversion to a C corporation in connection with our recapitalization in February 1998. Our Board of Directors presently intends to retain all earnings to repay remaining indebtedness under our credit facility, to support our operations and to finance expansion. Under Delaware law, we are permitted to pay dividends only out our surplus or net profits. In addition, our ability to declare and pay dividends is restricted by the terms of our credit facility.

(d)    Recent Sales of Unregistered Securities.

        We did not sell any equity securities that were not registered under the Securities Act of 1933, as amended, during the fiscal year ended December 31, 2001.

19

Item 6.    SELECTED FINANCIAL DATA.

        The data presented below as of and for the years ended December 31, 2001, 2000 and 1999 are derived from our audited financial statements included elsewhere in this report. The financial data as of and for the years ended December 31, 1998 and 1997 are derived from our audited financial statements that are not included in this report. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this report and our financial statements and related notes beginning on page F-1 and other financial information included elsewhere in this report.

Summary Statements of Operations Data

(in thousands, except per share data)

(1)

Reflects expenses consisting primarily of employee compensation, legal and professional fees incurred by us in connection with our leveraged recapitalization in February 1998. For the year ended December 31, 1998, excluding the recapitalization costs and assuming we had been a C corporation the entire period, net income available to common stockholders would have been $3,709. For the year ended December 31, 1998, basic net income per common share would have been $0.86 and diluted net income per common share would have been $0.43, respectively.

(2)

Reflects expenses consisting primarily for legal, professional, and investment banking fees incurred by us in connection with the now terminated acquisition of Fargo by Zebra Technologies Corporation, which was terminated in March 2002. Excluding these acquisition related costs, net income available to common stockholders would have been $5,510. For the year ended December 31, 2001, basic and diluted net income per common share would have been $0.42.

20

Summary Balance Sheet Data
(in thousands)

Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

        Certain statements contained in this report include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All forward-looking statements in this document are based on information currently available to us as of the date of this report, and we assume no obligation to update any forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors may include, among others, those factors listed in Item 1.A and elsewhere in this report and our other filings with the Securities and Exchange Commission. The following discussion should be read in conjunction with our financial statements and related notes appearing elsewhere in this report.

Overview

        We design, manufacture, sell and support a broad line of products for plastic card personalization and data encoding.

        In February 2000, we completed an initial public offering of 5,000,000 shares of our common stock, resulting in net proceeds of $69,750,000 before offering expenses. We used the proceeds of the offering to repay debt and redeem our redeemable preferred stock. For more information about the use of proceeds from the offering, see Note 3 to our financial statements beginning on page F-10.

Results of Operations

        The following table sets forth, for the periods indicated, certain selected financial data expressed as a percentage of net sales:

21

Comparison of Years Ended December 31, 2001 and 2000

        Net sales.    Net sales increased 5.4% to $61.0 million in 2001 from $57.8 million in 2000. The mix of net sales continued to change with sales of plastic card personalization products increasing 5.9% to $60.6 million in 2001 from $57.2 million in 2000. Sales of products not related to plastic card personalization decreased 43.0% to $358,000 in 2001 from $628,000 in 2000. Of the $60.6 million in sales attributable to plastic card personalization products in 2001, sales of equipment increased 9.4% to $27.0 million from $24.7 million in 2000, and sales of supplies increased 3.3% to $33.6 million from $32.5 million in 2000. The increase in sales of equipment is largely attributable to shipment of printers for the Department of Defense "Common Access" Identification Card Project. The increase in sales of supplies was the result of increased unit volume of ribbons.

        International sales increased 0.4% to $22.3 million in 2001 from $22.2 million in 2000 and accounted for 36.6% of net sales in 2001 compared to 38.4% of net sales in 2000. The decrease in international sales as a percent of total sales was principally due to the increase in sales in the United States from the shipment of printers to the Department of Defense for the year ended December 31, 2001. We experienced increased international sales in Canada, primarily the result of increased sales of equipment. This increase in international sales was partially offset by decreased sales in Asia Pacific. Asia Pacific sales were lower mainly due a decrease in sales of equipment.

        Our now terminated agreement to be acquired by Zebra Technologies Corporation was announced on July 31, 2001. We believe that the announcement of the acquisition and the delay in the consummation of the transaction, which was terminated on March 27, 2002, due to the Hart-Scott-Rodino antitrust review has had, and will likely continue to have, an adverse effect on our distributorship and reseller arrangements and, consequently, our sales.

        Gross profit.    Gross profit increased 1.6% to $23.5 million for 2001 from $23.1 million in 2000. Several factors, however, led to a decline in the gross profit margin percent to 38.5% in 2001 from 40.0% in 2000, notably, increases in manufacturing start-up costs associated with our new products, increased discounts and increased sales of lower margin printers in 2001. Lower material costs on supplies partially offset these negative factors.

        Research and development.    Research and development expenses decreased 17.9% to $4.1 million in 2001 from $4.9 million in 2000. Research and development expenses as a percentage of net sales were 6.6% for 2001 compared to 8.5% for 2000. Lower salary expense as a result of lower staffing levels and tighter controls on expenditures for prototype parts contributed to the decrease in research and development expenses.

        Selling, general and administrative.    Selling, general and administrative expenses increased 3.1% to $10.3 million in 2001 from $10.0 million in 2000. As a percentage of net sales, selling, general and administrative expenses were 17.0% in 2001, compared to 17.3% in 2000. The dollar increase is principally attributable to additional legal and professional fees, which include fees paid to outside consultants to improve our manufacturing processes. These increases in fees were partially offset by lower marketing trade show and marketing program expenses.

        Acquisition related costs.    In connection with our now terminated acquisition by Zebra Technologies Corporation, we incurred legal, professional, and investment banking expenses of $1.4 million for the year ended December 31, 2001. As a percent of net sales, acquisition related costs were 2.4% in 2001. We expect to incur additional legal, professional and investment banking expenses in 2002. As a result of the termination of this transaction in March 2002, we may incur additional costs to rebuild our distribution channel, which may have a negative impact on our sales, gross profit, and operating income.

        Operating income.    Operating income decreased 6.4% to $7.6 million in 2001 from $8.2 million in 2000. As a percentage of net sales, operating income was 12.5% in 2001 as compared to 14.1% in 2000.

22

Excluding the acquisition related costs, operating income increased 11.1% to $9.1 million in 2001 from $8.2 million in 2000.

        Interest expense.    Interest expense totaled $1.4 million in 2001 compared to $2.8 million in 2000. The reduction in our outstanding debt combined with reduced interest rates led to the lower interest expense. The weighted average interest rate on our outstanding debt for the year ended December 31, 2001 was 6.5% as compared to 8.7% in 2000.

        Extraordinary loss.    In connection with our initial offering of common stock in February of 2000, we recorded an extraordinary loss, net of tax, of $206,000 for the write-off of deferred financing costs related to the pay-down of senior bank debt. We also recorded an extraordinary loss, net of tax, of $179,000 for the write-off of the remaining deferred financing costs related to the origination of the senior bank debt that was paid in full in September of 2000 using proceeds from a new revolving credit facility.

        Income tax expense.    Income tax expense was $2.2 million in 2001, which results in an effective tax rate of 35.4%, compared to income tax expense of $2.0 million and an effective tax rate of 36.5% in 2000. The decrease in the effective tax rate for 2001 relates to research and experimentation credits we utilized in the fourth quarter of 2001.

Comparison of Years Ended December 31, 2000 and 1999

        Net sales.    Net sales increased 6.9% to $57.8 million in 2000 from $54.1 million in 1999. The mix of net sales continued to change during this period with sales of plastic card personalization products increasing 8.5% to $57.2 million in 2000 from $52.8 million in 1999. Sales of products not related to plastic card personalization decreased 53.6% to $628,000 in 2000 from $1.4 million in 1999. Of the $57.2 million in sales attributable to plastic card personalization products in 2000, sales of equipment decreased 7.1% to $24.7 million from $26.5 million in 1999, and sales of supplies increased 24.2% to $32.5 million from $26.2 million in 1999. The decrease in sales of equipment was principally due to our inability to meet demand caused from our manufacturing difficulties and increased dealer promotional activities. The increase in sales of supplies was the result of increased unit volume of ribbons.

        International sales increased 13.8% to $22.2 million in 2000 from $19.5 million in 1999 and accounted for 38.4% of net sales in 2000 compared to 36.1% of net sales in 1999. The increase in international sales was primarily due to increased demand of printers and supplies in most geographic markets.

        Gross profit.    Gross profit as a percentage of net sales decreased to 40.0% in 2000 from 46.5% in 1999. The decrease was primarily due to manufacturing start-up costs related to our new products, an unfavorable change in the exchange rate on the Japanese yen versus the U.S. dollar which increased our purchasing costs, increased discounts and increased sales of lower margin printers as a percentage of the total printers sold in 2000. The yen impacts our gross margin since we purchase our ribbons from Japanese suppliers. In 2001, we began purchasing ribbons from our Japanese supplier in U.S. dollars.

        Research and development.    Research and development expenses increased 23.0% to $4.9 million in 2000 from $4.0 million in 1999. Research and development expenses as a percentage of net sales were 8.5% for 2000 compared to 7.4% for 1999. The increase in 2000 was primarily due to the continued development of our new high-definition printing (HDP) and direct-to-card (DTC) product lines and other new plastic card personalization technologies, and increased payroll expense. Research and development expenses consist primarily of engineering salaries and prototype component costs.

        Selling, general and administrative.    Selling, general and administrative expenses increased 17.6% to $10.0 million in 2000 from $8.5 million in 1999. As a percentage of net sales, selling, general and administrative expenses were 17.3% in 2000, compared to 15.8% in 1999. The increase in selling,

23

general and administrative expenses was principally attributable to additional marketing expenses to promote our new products and increases in personnel expenses for payroll and benefits.

        Operating income.    Operating income decreased 35.4% to $8.2 million in 2000 from $12.6 million in 1999. As a percentage of net sales, operating income was 14.1% in 2000 as compared to 23.4% in 1999.

        Interest expense.    Interest expense totaled $2.8 million in 2000 compared to $6.0 million in 1999. Upon completion of the initial public offering of our common stock in February 2000, $33.9 million of the offering proceeds were used to reduce our outstanding debt. This reduction in our debt contributed to the lower interest expense, although the decrease was partially offset by higher interest rates. We also refinanced our then outstanding senior bank debt with a revolving credit facility. The weighted average interest rate on our outstanding debt was 8.7% in 2000 as compared to 8.4% in 1999.

        Extraordinary loss.    In connection with our initial offering of common stock in February of 2000, we recorded an extraordinary loss, net of tax, of $206,000 for the write-off of deferred financing costs related to the pay-down of senior bank debt. We also recorded an extraordinary loss, net of tax, of $179,000 for the write-off of the remaining deferred financing costs related to the origination of the senior bank debt that was paid in full in September of 2000 using proceeds from a new revolving credit facility.

        Income tax expense.    Income tax expense was $2.0 million in 2000, which results in an effective tax rate of 36.5%, compared to income tax expense of $2.6 million and an effective tax rate of 36.5% in 1999.

Liquidity and Capital Resources

        We have historically financed our operations, debt service and capital requirements through cash flows generated from operations. Working capital was $9.2 million, $14.9 million, and $7.6 million at December 31, 2001, 2000, and 1999, respectively. Our current ratio was 1.9, 4.3, and 1.8, at December 31, 2001, 2000, and 1999, respectively. Our working capital and current ratio declined in 2001 from 2000 because a significant portion of long-term debt became current debt in 2001.

        Cash generated from operating activities in 2001 totaled $11.7 million due to net income of $4.1 million and non-cash charges of $3.8 million primarily for deferred income taxes and depreciation and amortization. Decreases in inventories of $2.7 million and an increase in accounts payable and accrued liabilities of $2.0 million also contributed to an increase in cash provided by operating activities. The decrease in inventories is primarily due to management initiatives in 2001 focused on inventory reduction and also due to increased product shipments. The increase in accounts payable and accrued liabilities is mainly due to the timing of purchases and increased revenue activity relative to the fourth quarter of 2000. These cash flows were partially offset by an increase in accounts receivable of $1.0 million primarily related to the timing of sales. Cash used by investing activities was $650,000 exclusively for the purchase of equipment and leasehold improvements. Cash used in financing activities was $8.7 million primarily due to payments on our credit facility.

        Cash generated from operating activities in 2000 totaled $4.5 million due to net income of $3.1 million and non-cash charges of $4.3 million for deferred income taxes, extraordinary items, depreciation and amortization and the provision for obsolete inventories. These cash flows were partially offset by an increase in accounts receivable of $1.3 million and an increase in inventories of $2.1 million. The increase in accounts receivable was primarily related to the timing of sales and the increase in inventories is primarily related to decreased product shipments in relation to forecasted product shipments. Cash used by investing activities was $1.4 million primarily for the purchase of equipment and leasehold improvements. Cash used in financing activities was $3.4 million primarily due to our initial public offering of common stock and payment on our notes payable bank and our revolving credit facility.

24

        As of December 31, 2001, our borrowings consisted of $14.0 million owed under the credit agreement with LaSalle Bank and Harris Bank. In April 2001, we amended our credit facility, which under the terms of the amendment, was converted to a $19.0 million term loan, of which $14.0 million was outstanding at December 31, 2001, and a $5.0 million revolving credit facility, of which there was no outstanding balance at December 31, 2001. We have made debt payments of $8.9 million for the year ended December 31, 2001.

        In February 2002, we further amended our credit facility to extend the maturity date from April 1, 2002 to April 1, 2003. In addition, under the terms of the amended agreement, the interest rates charged on the balance outstanding under the credit facility were increased to the prime rate of interest plus a margin of .25% to .50% or LIBOR plus a margin of 1.75% to 2.00%, based upon the maintenance of certain financial coverage ratios. Interest is payable within 30 to 90 days, as defined by the agreement. The agreement calls for principal repayments of $1.0 million per quarter, with the remaining balance due at maturity on April 1, 2003.

        The credit facility requires, among other things, the maintenance of specified financial ratios including fixed charge coverage and total debt to EBITDA, as defined in the agreement, and restrictions on capital expenditures and the payment of dividends.

        In connection with our now terminated acquisition by Zebra Technologies Corporation, we incurred legal, professional, and investment banking expenses of $1.4 million for the year ended December 31, 2001. We expect to incur additional legal, professional and investment banking expenses in 2002. As a result of the termination of this transaction in March 2002, we may incur additional costs to rebuild our distribution channel, which may have a negative impact on our cash generated from operating activities.

        We believe that funds generated from operations and funds available to us under our revolving credit facility agreement will be sufficient to finance our current operations and planned capital expenditure requirements for at least the next 12 months.

Inflation

        We do not believe that inflation has had a material effect on our results of operations in recent years; however, there can be no assurance that our business will not be adversely affected by inflation in the future.

Recently Issued Accounting Standards

        Effective April 1, 2001, the Company adopted Financial Accounting Standards Board Emerging Issues Task Force (EITF) issue 00-14, "Accounting for Certain Sales Incentives." In accordance with the EITF, the Company has reclassified certain sales incentive expenses totaling $1,255,000 and $800,000 for the years ended December 31, 2000 and 1999, respectively, from selling, general and administrative expenses and shown them as a reduction of net sales.

        In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets" and we adopted these standards effective January 1, 2002. All business combinations under SFAS No. 141 are to be accounted for using the purchase method of accounting. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets upon their acquisition and how they should be accounted for after initial recognition. SFAS No. 142 states that an intangible asset with a finite useful life be amortized over the period the asset is expected to contribute to the future cash flows of the entity. An intangible asset with an indefinite life is not to be amortized. All intangible assets are subject to periodic impairment tests. We have reviewed the requirements of these standards and determined that there is no impact on our financials statements.

25

        In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires an entity to recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred. Upon initial recognition of a liability for an asset retirement obligation, an entity shall capitalize an asset retirement cost by increasing the carrying amount of the related long-lived asset by the same amount as the liability. SFAS No. 143 is effective for financial statements issued for the fiscal years beginning after June 15, 2002.

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets." This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 deals with the recognition and measurement of the impairment of long-lived assets to be held and used and the measurement of long-lived assets to be disposed of. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001.

        We are reviewing the requirements of SFAS No. 143 and No. 144, and we do not expect these standards to have a significant impact on our financial statements.

Accounting Policies

        We have disclosed the accounting policies that we consider to be significant in determining the amounts to be utilized for communicating our financial position, results of operations and cash flows in Note 1 to our financial statements included elsewhere herein.

        In applying our accounting principles, management must often make individual estimates and assumptions regarding expected outcomes or uncertainties. As one would expect, the actual results or outcomes are generally different than the estimated or assumed amounts. These differences are usually minor and are included in the financial statements by management as soon as they are known. The individual estimates and assumptions generally do not involve a level of risk or uncertainty that would be material to the financial statements as a whole because, they generally are relatively immaterial in amount. Many of these estimates and assumptions relate to current assets and liabilities and, accordingly, given the relatively short operating cycle of the company, they are reviewed and updated frequently by our management.

        Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that the Company's financial statements provide a meaningful and fair perspective of the Company. This is not to suggest that other general risk factors, such as changes in worldwide economic conditions, fluctuations in foreign currency exchange rates, achievement of corporate growth objectives, changes in material costs, could not adversely impact the Company's financial position, results of operations and cash flows in future periods.

Item 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

        Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, exchange rates, commodity prices, equity prices and other market changes. Market risk is attributed to all market sensitive financial instruments, including long term debt.

Interest Rate Risk

        Under procedures and controls established by management, we enter into contractual arrangements (derivatives) in the ordinary course of business to hedge our exposure to interest rate

26

risks. The counterparties to these contractual arrangements are major financial institutions. Although we are exposed to credit loss in the event of nonperformance by these counterparties, this exposure is managed through credit approvals, limits and monitoring procedures and, to the extent possible, by restricting the period over which unpaid balances are allowed to accumulate. We do not anticipate nonperformance by counterparties to these contracts, and no material loss would be expected from such nonperformance.

        We manage interest expense using a mix of fixed, floating and variable rate debt. To help manage borrowing costs, we may enter into interest rate swaps. Under these arrangements, we agree to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. We had no interest rate derivatives outstanding at December 31, 2001 and 2000. The fair value of interest rate derivatives outstanding at December 31, 1999, was not material. A one-percentage point adverse change in interest rates, upon which these contracts are based, would not cause these instruments to have a material impact on future earnings.

Foreign Currency Risk

        We denominate all foreign sales in U.S. dollars and do not hedge against currency fluctuations. We purchase components and supplies from several Japanese suppliers. The strengthening of the yen versus the U.S. dollar in 2000 caused the cost of these supplies to increase. To date, currency fluctuations have not had a material effect on our results of operations or financial condition, but could in the future by causing our products to become less affordable or less price competitive than those of foreign manufacturers or by causing the costs of our material supplies to increase. With the implementation of the agreement we made in February of 2001 with our supplier to purchase dye sublimation ribbons in dollars rather than in yen, we believe that we have reduced the risks of increased purchasing costs that would otherwise occur if the dollar weakens relative to the yen. We have foregone the opportunity, however, to benefit from the full potential cost savings if the dollar strengthens relative to the yen.

Equity Price Risk

        We do not generally invest in marketable equity securities. At December 31, 2001, we had approximately $3.6 million in cash and cash equivalents, comprising approximately 7.8% of our total assets. Accordingly, a sustained decrease in the rate of interest earned would not have a material adverse effect on our business.

Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Financial Statements

        Our financial statements and related notes are contained on pages F-1 to F-18 of this report. The index to such items is included in Item 14(a)(1).

27

Quarterly Results

        The following table sets forth certain unaudited quarterly financial data for 2001 and 2000. In our opinion, this unaudited information has been prepared on the same basis as the audited information and includes all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the information set forth therein. The operating results for any quarter are not necessarily indicative of results for any future period.

(1)

March 31, 2000 includes $350 of accrued dividends on series B, 8% redeemable preferred stock.

Item 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

        Not applicable.

28

PART III

Item 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

(a)

Directors of the Registrant.

        The information under the caption "Election of Directors" in our 2002 Proxy Statement is incorporated herein by reference.

(b)

Executive Officers of the Registrant.

        Information concerning our Executive Officers is included in this Annual Report on Form 10-K under Item 4A, "Executive Officers of Fargo."

(c)

Compliance with Section 16(a) of the Exchange Act.

        The information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in our 2002 Proxy Statement is incorporated herein by reference.

Item 11.    EXECUTIVE COMPENSATION.

        The information under the caption "Executive Compensation" in our 2002 Proxy Statement is incorporated herein by reference.

Item 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

        The information under the caption "Security Ownership of Certain Beneficial Owners and Management" in our 2002 Proxy Statement is incorporated herein by reference.

Item 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

        The information under the caption "Executive Compensation—Certain Transactions" in our 2002 Proxy Statement is incorporated herein by reference.

PART IV

Item 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) List of documents filed as part of this report:

(1)

Financial Statements:

        The following financial statements are included in this report on the pages indicated:

29

(2)

Financial Statement Schedule:

        The following financial statement schedule is included herein and should be read in conjunction with the financial statements referred to above:

Report of Independent Accountants on Financial Statement Schedule

Schedule II—Valuation and Qualifying Accounts

        All other schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.

Report of Independent Accountants on
Financial Statement Schedule

To the Stockholders and Board of Directors of Fargo Electronics, Inc.:

        Our audits of the financial statements referred to in our report dated January 30, 2002, except for the third paragraph of Note 5, as to which the date is February 14, 2002, and except for Note 2, as to which the date is March 27, 2002, appearing in the 2001 Annual Report to Stockholders of Fargo Electronics, Inc. (which report and financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements.

/s/ PRICEWATERHOUSECOOPERS LLP

Minneapolis, Minnesota
January 30, 2002, except for the third paragraph of
Note 5, as to which the date is February 14, 2002,
and except for Note 2, as to which the date is March 27, 2002

30

Schedule II
Valuation and Qualifying Accounts

(3)

Exhibits

        The exhibits to this Annual Report on Form 10-K are listed in the Exhibit Index contained on pages E-1 through E-6 of this report.

        We will furnish a copy of any exhibit to a stockholder who requests a copy in writing. We reserve the right to charge a reasonable fee to cover our costs. Requests should be sent to: Tony J. Dick, Acting Chief Financial Officer, Fargo Electronics, Inc, 6533 Flying Cloud Drive, Eden Prairie, MN 55344.

        The following is a list of each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 14(c):

A.

Amended and Restated 1998 Stock Option and Grant Plan (incorporated by reference to Exhibit 10.2 to Fargo's Registration Statement on Form S-1 (File No. 333-90937)).


B.

2001 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.20 to Fargo's Form 10-K for the fiscal year ended December 31, 2000 (File No. 333-90937)).


C.

Form of Restricted Stock Agreement under the Amended and Restated 1998 Stock Option and Grant Plan (incorporated by reference to Exhibit 10.3 to Fargo's Registration Statement on Form S-1 (File No. 333-90937)).


D.

Form of Incentive Stock Option Agreement under the Amended and Restated 1998 Stock Option and Grant Plan (incorporated by reference to Exhibit 10.5 to Fargo's Registration Statement on Form S-1 (File No. 333-90937)).


E.

Form of Non-qualified Stock Option Agreement under the Amended and Restated 1998 Stock Option and Grant Plan (incorporated by reference to Exhibit 10.4 to Fargo's Registration Statement on Form S-1 (File No. 333-90937)).


F.

Form of Indemnification Agreement for directors and executive officers of Fargo (incorporated by reference to Exhibit 10.9 to Fargo's Registration Statement on Form S-1 (File No. 333-90937)).

(b)  Reports on Form 8-K:

        None.

(c)  Exhibits:

        The response to this portion of Item 14 is included as a separate section of this Annual Report on Form 10-K.

(d)  Financial Statement Schedules:

        See Item 14, section (a) 2 above for the financial statement schedules filed herewith.

31

SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

        Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below on April 1, 2002 by the following persons on behalf of the Registrant and in the capacities indicated.

32

Fargo Electronics, Inc.

Index to Financial Statements

Report of Independent Accountants

To the Stockholders and Board of Directors of
Fargo Electronics, Inc.:

        In our opinion, the accompanying balance sheets and the related statements of operations, changes in stockholders' equity (deficiency) and cash flows present fairly, in all material respects, the financial position of Fargo Electronics, Inc. (the Company) at December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PRICEWATERHOUSECOOPERS LLP

Minneapolis, Minnesota
January 30, 2002, except for the third paragraph of
Note 5, as to which the date is February 14, 2002,
and except for Note 2, as to which the date is
March 27, 2002

F-1

Fargo Electronics, Inc.

Balance Sheets

At December 31, 2001 and 2000

(In thousands, except per share amounts)

The accompanying notes are an integral part of the financial statements.

F-2

Fargo Electronics, Inc.

Statements of Operations

For the years ended December 31, 2001, 2000 and 1999

(In thousands, except per share amounts)

The accompanying notes are an integral part of the financial statements.

F-3

Fargo Electronics, Inc.

Statement of Changes in Stockholders' Equity (Deficiency)

For the years ended December 31, 2001, 2000 and 1999

(In thousands)