UPGRADE INTERNATIONAL CORP /FL/, 10KSB, EX-10.9, 2001-01-16

UPGRADE INTERNATIONAL CORP /FL/
10KSB, EX-10.9, 2001-01-16
NON-OPERATING ESTABLISHMENTS

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[Logo] SCIVAC
Vacuum Systems for the New Generation

January 31, 2000

Don Mann, Chief Technical Officer
UltraCard, Inc,
1550 S. Bascom Ave., Suite 100
Campbell, CA 95008-0656

Dear Don:

This letter is intended to document our discussions of January 27,2000 regarding
the continuing business relationship between SciVac and UltraCard, Inc. I have
filled in some additional details beyond what we discussed that I believe are
consistent with our mutual intent.

UltraCard will extend the Development Agreement between SciVac and UltraCard,
Inc. Dated July 23, 1999 for a period of six months commencing February 1,2000,
at a rate of $50,000 per month, unless cancelled by either party with thirty
days notice. Under the terms of the original agreement UltraCard paid SciVac
$150,000 for ninety days of development activities through October 1999.
UltraCard subsequently extended this agreement for one additional month with the
payment to SciVac of an additional $50,000 as payment for services rendered
through UltraCard's Comdex launch in November 1999. Since this time SciVac has
continued to work on the program, albeit at a reduced level. We respectively
request that SciVac be paid $25,000 for services rendered during the two-month
period ending January 31, 2000. SciVac agrees to continue to assign equipment
and technologist to UltraCard's development project and to provide office and
lab space for Dr. Bruce Lairson during the duration of the Development Agreement
extension.

UltraCard has agreed in principal to purchase a sputtering system from SciVac
for the production of thin film coatings for magnetically encoded credit cards
at a fair market price based upon what other vacuum system companies change for
similar equipment. SciVac and UltraCard will work jointly on the architecture of
the system. Once the system specifications and price are agreed to, UltraCard
shall place an order with SciVac for delivery of the system under SciVac's
standard payment terms (40% down with order, 45% due upon shipment and 15% due
upon acceptance). SciVac has agreed to assemble the system at UltraCard's
Northern California facility. A seven-month design and manufacturing schedule is
anticipated after receipt of order. Installation and process qualification at
UltraCard's facility will likely require two additional months. It is
anticipated the system will be priced in the range of $3 to $6 million depending
on the agreed upon configuration and required throughput.

SciVac has agreed to become a second source for the production of magnetically
encoded credit cards manufactured to UltraCard's specifications and has further
agreed to set aside sufficient capacity to meet 20% of UltraCard's requirements,
provided UltraCard gives SciVac orders for at least 20% of their production
requirements and provides reasonable lead time. The price of such Cards will be
mutually agreed to once the production methodology is better understood. Cards
made by UltraCard or third parties that employ SciVac technology will continue
be subject to the royalty provisions of the Development Agreement dated July 23,
1999.

Please let me know if your comments on the terms outlined in this letter by
either indicating changes or by co-signing below. Thank you for your ongoing
Interest in SciVac. We look forward to a continuing strong working relationship.

Sincerely,
Agreed to:
/s/ David B. Pearce
David B. Pearce
President &CEO /s/ Don Mann
--------------
SciVac Don Mann, Chief Technical Officer
UltraCard, Inc.

<PAGE>
[Logo] SCIVAC
Vacuum Systems for the New Generation

February 10, 2000

Dan Kehoe, CEO
UltraCard, Inc.
1550 Bascom Avenue
Campbell, CA 95008-0656

Dear Dan:

I have had several conversations with Don Mann regarding a vacuum system for
producing magnetically encoded cards. We are now at the point the process
development that we have a good understanding of the sputtering requirements,
although the composition of some of the layers may change. We believe a
13-chamber in-line system is required for the process. SciVac recently quoted a
15-chamber in-line sputtering system to Samsung at a price of $7.4 million. A
similar system, configured for UltraCard's requirements, is likely to cost at
least $8 million. Whether it be from SciVac of another vacuum systems supplier.
While we would love to sell you a $6 million system, I feel there is some risk
with approach in that the substrate material has not been finalized. In-line
vacuum systems offer the most flexibility for substrate material as they can
cost individual cards or large size sheets of thin material for later
processing. If UltraCard knew for certain that thin material in a web format
would be the substrate of choice a drum web coater might be optimal. Since the
substrate material is not defined, an in-line system is the best choice as it
can process virtually any substrate format.

Another issue UltraCard faces is lead-time. A fully designed system typically
takes 6-9 months to manufacture. Additional time must be allowed for
installation and process development. It's my understanding that UltraCard
needs some production capacity by the forth quarter of this year. The time to
start a system has already passed.

I believe we have a solution to these issues. Last year SciVac acquired a large
in-line vacuum system from Hoya. The system had been used for manufacturing
magnetic hard disks. Our plan when we purchased the system was to strip it down
to its stainless steel vacuum chambers and completely rebuild the system with
SciVac's proprietary process stations. The system was expected to remain in
house for component production. We subsequently purchased a second used in-line
system for R&D and limited component production and this week we finalized an
agreement with Seagate to obtain excess vacuum system component from them. We
are currently well into the reconfiguration of the Hoya system and are therefore
able to offer it as an option for UltraCard. Due to our favorable cost basis
for this system we could offer it to UltraCard for $3 million rather than the $6
million cost of a totally new system. SciVac would fully warrant the system
with our standard twelve-month warranty. The UltraCard process requires more
layers than a conventional thin film disk process, therefore we will have to
manufacture four additional stainless steel chambers. At this stage we can
reconfigure this system for UltraCard's needs with minimal changes. The system
could be completed in the April/May time frame, which would allow for a couple
of months of process development prior to shipping the system to your new
facility. SciVac still has its R&D system on which it will continue to develop
processes concurrently for transfer to the larger system.

What SciVac needs to proceed with this plan is a purchase order for $3 million
with our standard 40% deposit. (This deposit amount is standard in the hard disk
industry.) SciVac's standard terms

<PAGE>
Dan Kehoe
February 10, 2000 Page 2

are 40% with order, 50% with shipment and 10% on acceptance. Since the system
could be completed prior to your new facility space being available, there would
be a good window for process development and system characterization prior to
reinstallation. Based on the fact that the process work and system qualification
would be done at SciVac, I suggest modified payment terms of 40% down, 30% on
completion and 30% after installation at UltraCard.

One of my motivations in offering to sell you our in-house system is that SciVac
will benefit by getting a quick deal done. SciVac is very close to completing
its DWDM filter process and when completed the valuation of the company will
change significantly. We intend to initiate an IPO process as soon as we
commence volume production. Due to uncertainty of the timing for producing
filters we are considering another private equity round. UltraCard's deposit
would buy us additional time to complete the filters and thus potentially
eliminate the need for the financing. It would also give SciVac added revenue
that would look good for an IPO. (For your information we were just awarded a
$1.6 million contract with Honeywell and we also received a $0.7 million
follow-on order from Seagate for additional magnetrons. We are also negotiating
a major joint venture agreement with Toolex.)

I am sure that UltraCard is in need of temporary office space to accommodate
approximately ten people until your new facility is available this summer.
Fortunately, SciVac just expanded its space this week. I propose SciVac provide
nine cubicles, one office and up to 2,000 square feet of lab space for
UltraCard's use through July of this year. In the sprit of working together, we
are please to offer this space to you free of charge.

I look forward to your response.

Regards,

/s/ David B. Pearce
David B. Pearce
President & CEO

<PAGE>
QUOTATION
[SciVac Logo] Quote Number 10013
Date February 25, 2000

UltraCard PLEASE REFERENCE THIS QUOTATION TO YOUR ORDER
1550 Bascom Avenue SciVac, Incorporated
Campbell, CA 95008-0656 871 Fox Lane
Attn.: Dan Keho San Jose, CA 95131
Attn.: David Pearce
Phone: Phone: (408) 456-5700
Fax: Fax: (408) 456-5701

<TABLE>
<CAPTION>
RFQ Type Terms and Conditions Quote Expires In: FOB Approximate Delivery
Verbal See Page 2 60 days San Jose, CA June 1, 2000
Item Qty Description Unit Price Extended Price
---- --- ------------------------------------------------------------- ------------- ---------------
<S> <C> <C> <C> <C>
1 1 SciLine 1200 Vertical In-line sputtering system per SciVac $3,000,000.00 $ 3,000,000.00
System specification SS A-1200v1.0 with the following
major components.
- Rebuilt and Modified Leybold ZB1200 system
- Rebuilt Vacuum Pumping System
- Vertical transport and mounting of substrates onto pallet
system
- Control System
- Pallet return system for single and production operation

Final System Price Including Discount: $ 3,000,000.00
---------------
</TABLE>

Note: This quote is contingent upon review and acceptance of all
customer specifications. If no customer specifications are
provided, SciVac's performance specifications will be used.

/s/ David Pearce
-----------------------------
David Pearce, President & CEO

<PAGE>
QUOTATION
[Logo] SciVac TM Quote Number 10013
Date February 25, 2000

UltraCard PLEASE REFERENCE THIS QUOTATION TO YOUR ORDER
1550 Bascom Avenue SciVac, Incorporated
Campbell, CA 95008-0656 871 Fox Lane
Attn.: Dan Keho San Jose, CA 95131
Attn.: Steve Schultheis
Phone: Phone: (408) 456-5700
Fax: Fax: (408) 456-5701

SYSTEM PRICE INCLUDES:
a) 12 Month Warranty
b) Warranty excludes consumable and damage due to customer negligence
c) Process and Equipment demonstration after installation
d) Training in San Jose during pre-ship acceptance and at customer upon
installation
SPECIAL TERMS AND CONDITIONS
1 SHIPMENT :
a) FOB SciVac factory shipping dock
b) Freight-collect
c) By air-ride van
Delivery date is subject to customer requested engineering specials
2 PAYMENT TERMS:
a) 40% due with order
b) 30% due upon system completion at SciVac, net 30 days
30% due upon installation at UltraCard and formal acceptance or 60 days
from shipment whichever occurs first assuming no fault of SciVac
3 TERMS AND CONDITIONS:
This quotation is subject to SciVac Terms and Conditions
4 VALIDITY :
This quotation is valid for 90 days from the date of quotation
5 INSTALLATION :
System will be initially built and installed at SciVac factory for the test
and use by UltraCard personnel until UltraCard Campbell, CA facility is
completed. Upon shipment to UltraCard facility, SciVac personnel will
perform the installation and system start-up. UltraCard is responsible for
all facilities, riggers, test instruments and materials at UltraCard
facility in order to complete installation and system acceptance.

-----------------------------
David Pearce, President & CEO

<PAGE>
SCILINE 1200

SYSTEM DESCRIPTION AND SPECIFICATION

FOR ULTRACARD

SS A-1200V1.0

SCIVAC, INCORPORATED

871 FOX LANE

SAN JOSE, CA 95131 USA

Vacuum Systems for the Next Generation

Page 1 of 6
<PAGE>
SCILINE1200
SYSTEM DESCRIPTION

1.0 OVER VIEW
The Sciline 1200 system provides the advanced technology required for the
sputtering of materials for Ultra Card's magnetically encoded cards. The system
is a used and SciVac modified Laybold ZB1200 vertical in-line system which
utilizing Leybold vacuum chamber and pallet transfer technology. The entire
pumping system consists of rebuilt pumps described later in this document.

The system consists of thirteen (13) process modules with a load and unloads
station at each end with a pallet return system for single sided system load and
unload operation. The system's process concept consists of the following process
modules.

Module Module Description

1 Load Lock Module with Heater
System
2 Heating Buffer Module
3 Heating Module
4 Dual Rotary Cylindrical Magnetron
5 Dual Rotary Cylindrical Magnetron
6 Heating Module
7 3-Planar Magnetrons
8 3-Planar Magnetrons
9 High Vacuum Buffer Module
10 High Vacuum Buffer Module
11 Dual Rotary Cylindrical Magnetron
12 High Vacuum Buffer Module
13 Unload Lock Module

All of the modules are constructed of stainless steel and have the same inside
dimensions. The Layout of the vacuum chamber modules is shown in Figure 1.

The SciLine 1200 core platform includes:

- In-Line Pallet Transfer System
- Manual loading and unloading of pallets at pallet load and return station
- Optical sensors for monitoring pallet positioning within the vacuum system
- Allen Bradley PLC with Control Logic operating system
- Vacuum pumping system

Page 2 of 6
<PAGE>
2.0 CHAMBER MODULES

2.1 LOAD LOCK MODULE
The Load Lock Module provides atmospheric isolation to the high vacuum process
modules. Additionally, heaters are incorporated to provide moisture out gassing
of the substrates prior to any subsequent processing steps.

2.2 HEATING AND HEATING BUFFER MODULES
The Heating Buffer Module consists of a heating assembly substrate heating.

2.5 DUAL ROTARY CYLINDRICAL MAGNETRON MODULE
The Dual Rotary Cylindrical Magnetron Module utilizes SciVac's proprietary
advanced cylindrical rotary magnetron technology. The cylindrical rotary
magnetron is designed for the deposition of dielectric and metallic films. The
architecture is specifically designed to offer the following advantages over
planer magnetrons.

- Continuous cleaning of the target surface to eliminate poisoning and
redepostion build up
- High target utilization and extended target life time
- Elimination of the disappearing anode problems associated with
reactive coatings
- Ability to operate at high power and low pressure to provide high
deposition rates and improved film nucleation
- High deposition uniformity and excellent controlled process
repeatability
- Reduced substrate heating
- Zero latency dual metal deposition

A DC power supply electrically powers the magnetron. The permanent magnet
assembly can be rotationally orientated to the substrate and is water-cooled.
The cylindrical rotary target rotates around the magnet assembly. When D.C.
power is applied to both targets, the sputtering process begins. A uniform
plasma line discharge running the length of the target occurs. The substrate is
moved in front of the dual cylindrical targets to achieve uniform side-to-side
substrate deposition. As the substrate passes the sputter deposition region, the
target material is deposited on to the substrate. Process argon gas flow, D.C.
power, and target rotation speed are user selectable.

Various target materials will be used dependent upon the location in the system.
Current target materials are Titanium for TIN deposition, Chrome for thick Cr
base, and Carbon as overcoat.

Page 3 of 6
<PAGE>
[figure]

FIGURE 2. CYLINDRICAL ROTARY MAGNETRON SCHEMATIC (TOP VIEW)

2.6 PLANER MAGNETRONS
The planar magnetrons are DC powered. When D.C. power is applied to the target,
the sputtering process begins. A uniform plasma discharge region running the
length of the target occurs. The substrate is moved in front of the planar
magnetron to achieve uniform side-to-side substrate deposition. As the substrate
passes the sputter deposition region, the target material is deposited on to the
substrate. Process argon gas flow, D.C. power, and target rotation speed are
user selectable.

2.7 HIGH VACUUM BUFFER MODULE
The High Vacuum Buffer Module provides vacuum isolation between process and load
lock modules. There are no processing steps to be completed in these modules.

2.8 UNLOAD LOCK MODULE
The Unload Lock Module provides atmospheric isolation to the high vacuum process
modules. Pallets with the substrates previously processed will enter the Unload
Lock Module though entrance isolation door. Once the Load Lock Module is loaded
with a pallet, the entrance isolation door is closed and the module is vented to
atmosphere using nitrogen gas. The Unload Lock module is evacuated with a Roots
blower and turbo molecular pump system.

3.0 CONTROL SYSTEM
The SciLine 1200 electronic and software control system includes :
- Allen Bradley programmable logic controller (PLC) utilizing the
ControLogix operating system. TCP/IP NetWare handles communication
between the PLC and the user interface.

Page 4 of 6
<PAGE>
- The user interface utilizes an industrial grade PC with Windows NT
operating system and view software.
- Full system operation to include process programming, maintenance
operations, and data collection are accomplished through the user
interface.
- Communication to host computer is available using and RS-232, RS-422,
or RS-485 port.
- The RS View software where product and process data is kept is ODBC
compliant, Net DDE compliant and OLE for process control compliant.
The software also supports TCP/IP and UDP/IP communication.
- The PLC communicates to the IO devices and sensors of the system via a
Device Net interface.

4.0 VACUUM SYSTEM
The SciLine 1200 chamber module vacuum system configuration is shown in Table 1
below. All pumps are used and rebuilt and are included with the system at time
of shipment. One-year warranty applies to the entire system including the used
components.

Chamber Turbo Pump Roots Blower Mechanical
Module Pump
1 Leybold Leybold Leybold
TMP 1500 WS251 D60