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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C.  20549**

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**FORM10-Q**

**(Mark One)**

| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------------|

**For the quarterly period ended June 30, 2001**

**OR**

| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE** **SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------------------------------------------------------------------------------------------------------|

**For the transition period from ____to ____**

**Commission File Number: 0-19902**

 

**Provell,Inc.******(Exact name of Registrant as specified inits charter)
| **Minnesota**                                                          |   | **41-1551116**                                             |
|------------------------------------------------------------------------|--------|------------------------------------------------------------|
| (State or other jurisdiction  of incorporation  or organization)       |   | (IRS Employer  Identification Number)                      |
|                                                                   |   |                                                       |
| **301 Carlson Parkway, Suite 201  Minneapolis, Minnesota  55305** |   | **952-258-2000**                                           |
| (Address  of principal executive offices)                              |   | (Registrant’s  telephone number  including area code) |

**Not Applicable**(Former name, former address and formerfiscal year, if changed since last report)

Indicate by check mark whether theRegistrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months; and (2) hasbeen subject to such filing requirements for the past 90 days.**Yes****ý****No****o**

**On August 9, 2001, there were6,916,513 shares of Class A Common Stock and no shares of Class B Common Stockoutstanding.**

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**PROVELL,INC.**

**INDEX**

 

| **Part  I.**                                                             | **FINANCIAL  INFORMATION** |
|--------------------------------------------------------------------------|----------------------------|
|                                                                     |                       |
|                                                                     | Item  1:                   | Financial  Statements |
|                                                                     |                       |   |
|                                                                     |                       | Consolidated  Statements of Operations (unaudited) For  the three and six months ended June 30, 2001 and July 1, 2000 |
|                                                                     |                       |   |
|                                                                     |                       | Consolidated Balance Sheets  As  of June 30, 2001(unaudited) and December 31, 2000 |
|                                                                     |                       |   |
|                                                                     |                       | Consolidated  Statements of Cash Flows (unaudited) For  the six months ended June 30, 2001 and July 1, 2000 |
|                                                                     |                       |   |
|                                                                     |                       | Condensed  Notes to Consolidated Financial Statements |
|                                                                     |                       |   |
|                                                                     | Item  2:                   | Management's  Discussion and Analysis of Financial Condition and Results of Operations |
|                                                                     |                       |   |
|                                                                     |                       |   |
| **Part II.**                                                             | **OTHER INFORMATION**      |
|                                                                     |                       |
|                                                                     | Item 1:                    | Legal Proceedings |
|                                                                     |                       |   |
|                                                                     | Item  4:                   | Submission  of Matters to a Vote of Security Holders |
|                                                                     |                       |   |
|                                                                     | Item 6:                    | Exhibits  and Reports on Form 8-K |
|                                                                     |                       |   |
|              |                       | Signature |

 

**CONSOLIDATED STATEMENTS OF OPERATIONS****(Unaudited)**

|                                                                                                            | Three  months ended                                    |   | Six  months ended |   |
|-----------------------------------------------------------------------------------------------------------------|--------------------------------------------------------|--------|-------------------|--------|
|                                                                                                            |                                                        |   |                   |   |
|                                                                                                            | June  30,                                              |   | July  1,          |   | June  30, |   | July  1, |   |
|                                                                                                            | 2001                                                   |   | 2000              |   | 2001 |   | 2000 |   |
|                                                                                                            |                                                        |   |                   |   |  |   |  |   |
|                                                                                                            | (Amounts  in thousands except per share data)          |   |
|                                                                                                            |                                                   |   |              |   |   |   |   |   |
| **Net revenues**                                                                                                | $                                                      | 34,793 |              | $      | 34,044 |   | $ | 67,741 |   | $ | 70,183 |   |
|                                                                                                            |                                                   |   |              |   |   |   |   |   |
| **Costs and expenses:**                                                                                         |                                                   |   |              |   |   |   |   |   |
| Operating and  marketing expenses                                                                               | 36,457                                                 |   | 18,814            |   | 70,389 |   | 39,046 |   |
| General and  administrative expenses                                                                            | 4,588                                                  |   | 5,606             |   | 10,092 |   | 10,143 |   |
|                                                                                                            |                                                        |   |                   |   |  |   |  |   |
|                                                                                                            | Total costs and  expenses                              | 41,045 |              | 24,420 |   | 80,481 |   | 49,189 |   |
|                                                                                                            |                                                        |   |                   |   |  |   |  |   |
|                                                                                                            |                                                   |   |              |   |   |   |   |   |
|                                                                                                            | **Operating (loss) income**                            | (6,252 | )                 | 9,624  |   | (12,740 | ) | 20,994 |   |
|                                                                                                            |                                                   |   |              |   |   |   |   |   |
| Other (expense)  income, net                                                                                    | (6                                                     | )      | (13               | )      | 1 |   | (69 | ) |
|                                                                                                            |                                                        |   |                   |   |  |   |  |   |
|                                                                                                            |                                                   |   |              |   |   |   |   |   |
| **(Loss) income before  interest, income taxes and other**                                                      | (6,258                                                 | )      | 9,611             |   | (12,739 | ) | 20,925 |   |
|                                                                                                            |                                                   |   |              |   |   |   |   |   |
| Interest expense, net                                                                                           | 759                                                    |   | —            |   | 887 |   | — |   |
| Amortization of  discount on Senior Convertible Notes                                                           | 2,599                                                  |   | —            |   | 14,084 |   | — |   |
|                                                                                                            |                                                        |   |                   |   |  |   |  |   |
| (**Loss) income from continuing  operations before income taxes and cumulative effect of change in accounting** | (9,616                                                 | )      | 9,611             |   | (27,710 | ) | 20,925 |   |
|                                                                                                            |                                                   |   |              |   |   |   |   |   |
| Income tax benefit  (provision)                                                                                 | 2,157                                                  |   | (3,646            | )      | 4,423 |   | (7,763 | ) |
|                                                                                                            |                                                        |   |                   |   |  |   |  |   |
| **(Loss) income from continuing  operations before cumulative effect of change in accounting**                  | (7,459                                                 | )      | 5,965             |   | (23,287 | ) | 13,162 |   |
| Loss from discontinued  operations, net of taxes of $9,504 and $20,463, respectively                            | —                                                 |   | (14,783           | )      | — |   | (33,940 | ) |
| Cumulative effect of  change in accounting, net of taxes of $8,703                                              | —                                                 |   | —            |   | — |   | (14,201 | ) |
|                                                                                                            |                                                        |   |                   |   |  |   |  |   |
|                                                                                                            | **Net loss**                                           | (7,459 | )                 | (8,818 | ) | (23,287 | ) | (34,979 | ) |
|                                                                                                            |                                                   |   |              |   |   |   |   |   |
| Preferred stock dividends  and amortization                                                                     | (862                                                   | )      | —            |   | (1,652 | ) | — |   |
|                                                                                                            |                                                        |   |                   |   |  |   |  |   |
|                                                                                                            | **Net loss available to common shareholders**          | $      | (8,321            | )      | $ | (8,818 | ) | $ | (24,939 | ) | $ | (34,979 | ) |
|                                                                                                            |                                                        |   |                   |   |  |   |  |   |
|                                                                                                            |                                                   |   |              |   |   |   |   |   |
| Basic and diluted loss  per common share:                                                                       |                                                   |   |              |   |   |   |   |   |
|                                                                                                            | (Loss) income before interest,  income taxes and other | $      | (1.04             | )      | $ | 1.67 |   | $ | (2.14 | ) | $ | 3.67 |   |
|                                                                                                            | Interest and  amortization                             | (.56   | )                 | — |   | (2.51 | ) | — |   |
|                                                                                                            | Income tax benefit  (provision)                        | .36    |              | (.63   | ) | .74 |   | (1.36 | ) |
|                                                                                                            | Loss from discontinued  operations, net of tax         | — |              | (2.57  | ) | — |   | (5.95 | ) |
|                                                                                                            | Cumulative effect of  change in accounting, net of tax | — |              | — |   | — |   | (2.49 | ) |
|                                                                                                            | Preferred stock  dividends and amortization            | (.14   | )                 | — |   | (.28 | ) | — |   |
|                                                                                                            |                                                   |        |              |        |   |  |   |  |   |
|                                                                                                            | Net loss available to  common shareholders             | $      | (1.38             | )      | $ | (1.53 | ) | $ | (4.19 | ) | $ | (6.13 | ) |
|                                                                                                            |                                                   |        |              |        |   |  |   |  |   |
|                                                                                                            |                                                   |   |              |   |   |   |   |   |   |
|                                                                                                            | Weighted average  common shares outstanding            | 6,016  |              | 5,761  |   | 5,954 |   | 5,702 |   |
|                                                                                                            |                                                        |   |                   |   |  |   |  |   |

*See accompanying condensednotes to consolidated financial statements.*

* *

**CONSOLIDATED BALANCE SHEETS****(Unaudited)**

ASSETS

|                                                                                                                                              | June  30,                                                                                                                                                                                                                       |     | December  31, |    |
|---------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|---------------|---------|
|                                                                                                                                              | 2001                                                                                                                                                                                                                            |     | 2000          |    |
|                                                                                                                                              |                                                                                                                                                                                                                                 |     |               |    |
|                                                                                                                                              | (Amounts  in thousands except  per share data)                                                                                                                                                                             |     |
| Current Assets:                                                                                                                                   |                                                                                                                                                                                                                            |     |          |    |
|                                                                                                                                              | Cash and cash  equivalents                                                                                                                                                                                                      | $        | 52            |    | $ | 13,107 |   |
|                                                                                                                                              | Trade accounts  receivable, net                                                                                                                                                                                                 | 35,166   |          | 39,586  |   |
|                                                                                                                                              | Deferred membership  solicitation costs                                                                                                                                                                                         | 61,143   |          | 57,136  |   |
|                                                                                                                                              | Deferred income taxes                                                                                                                                                                                                           | 26,490   |          | 26,490  |   |
|                                                                                                                                              | Other                                                                                                                                                                                                                           | 1,817    |          | 1,731   |   |
|                                                                                                                                              |                                                                                                                                                                                                                            |          |          |         |   |
|                                                                                                                                              | Total current assets                                                                                                                                                                                                            | 124,668  |          | 138,050 |   |
|                                                                                                                                              |                                                                                                                                                                                                                            |     |          |    |
| Property and  equipment, net                                                                                                                      | 4,447                                                                                                                                                                                                                           |     | 3,959         |    |
| Other assets, net                                                                                                                                 | 1,421                                                                                                                                                                                                                           |     | 50            |    |
| Noncurrent deferred  income taxes                                                                                                                 | 19,086                                                                                                                                                                                                                          |     | 14,665        |    |
|                                                                                                                                              |                                                                                                                                                                                                                                 |     |               |    |
|                                                                                                                                              | Total assets                                                                                                                                                                                                                    | $        | 149,622       |    | $ | 156,724 |   |
|                                                                                                                                              |                                                                                                                                                                                                                            |          |          |         |   |
|                                                                                                                                              |                                                                                                                                                                                                                            |     |          |    |
| LIABILITIES  AND SHAREHOLDERS’ DEFICIT                                                                                                       |                                                                                                                                                                                                                            |
| Current Liabilities:                                                                                                                              |                                                                                                                                                                                                                            |     |          |    |
|                                                                                                                                              | Borrowings under  revolving credit facility                                                                                                                                                                                     | $        | 14,176        |    | $ | 5,150 |   |
|                                                                                                                                              | Accounts payable                                                                                                                                                                                                                | 15,111   |          | 20,387  |   |
|                                                                                                                                              | Accrued liabilities                                                                                                                                                                                                             | 55,318   |          | 56,601  |   |
|                                                                                                                                              | Deferred membership  revenue                                                                                                                                                                                                    | 53,665   |          | 55,683  |   |
|                                                                                                                                              | Net liabilities of  discontinued operations, current                                                                                                                                                                            | 13,036   |          | 23,830  |   |
|                                                                                                                                              |                                                                                                                                                                                                                            |          |          |         |   |
|                                                                                                                                              | Total current  liabilities                                                                                                                                                                                                      | 151,306  |          | 161,651 |   |
|                                                                                                                                              |                                                                                                                                                                                                                            |     |          |    |
| Net liabilities of  discontinued operations, long-term                                                                                            | 1,482                                                                                                                                                                                                                           |     | 2,696         |    |
|                                                                                                                                              |                                                                                                                                                                                                                            |     |          |    |
| Series D redeemable  convertible preferred stock, liquidation preference $25,000, net of  unamortized discount of $2,633 and $3,583, respectively | 17,367                                                                                                                                                                                                                          |     | 16,417        |    |
| Series E redeemable  convertible preferred stock, liquidation preference $18,107, net of  unamortized discount of $988                            | 13,498                                                                                                                                                                                                                          |     | —        |    |
|                                                                                                                                              |                                                                                                                                                                                                                            |     |          |    |
| Commitments and  contingencies (Note 7)                                                                                                           |                                                                                                                                                                                                                            |     |          |    |
|                                                                                                                                              |                                                                                                                                                                                                                            |     |          |    |
| Shareholders’ Deficit:                                                                                                                       |                                                                                                                                                                                                                            |     |          |    |
|                                                                                                                                              | Class A Common Stock,  $.01 par, 77,000 and 20,000 shares authorized at June 30, 2001 and December  31, 2000, respectively; 6,016 and 5,857 shares issued and outstanding at June  30, 2001 and December 31, 2000, respectively | 60       |          | 58      |   |
|                                                                                                                                              | Class B Common Stock,  $.01 par, 2 million shares authorized; none issued or outstanding                                                                                                                                        | --       |          | —  |   |
|                                                                                                                                              | Series C Junior  Participating Preferred Stock, $.01 par, 400 shares authorized; none issued  or outstanding                                                                                                                    | --       |          | —  |   |
|                                                                                                                                              | Paid-in capital                                                                                                                                                                                                                 | 71,725   |          | 58,594  |   |
|                                                                                                                                              | Common stock warrants                                                                                                                                                                                                           | 2,800    |          | 2,800   |   |
|                                                                                                                                              | Preferred stock  dividends payable                                                                                                                                                                                              | 329      |          | 165     |   |
|                                                                                                                                              | Accumulated deficit                                                                                                                                                                                                             | (108,945 | )             | (85,657 | ) |
|                                                                                                                                              |                                                                                                                                                                                                                            |          |          |         |   |
|                                                                                                                                              | Total shareholders’  deficit                                                                                                                                                                                               | (34,031  | )             | (24,040 | ) |
|                                                                                                                                              |                                                                                                                                                                                                                            |          |          |         |   |
|                                                                                                                                              | Total liabilities and  shareholders’ deficit                                                                                                                                                                               | $        | 149,622       |    | $ | 156,724 |   |
|                                                                                                                                              |                                                                                                                                                                                                                            |          |          |         |   |
|                                                                                                                                                   |                                                                                                                                                                                                                                 |          |               |         |  |  |  |  |  |  |  |  |

 *See accompanying condensed notes to consolidatedfinancial statements.*****CONSOLIDATEDSTATEMENTS OF CASH FLOWS****(Unaudited)**
 Six  Months Ended    June  30, July  1,  2001 2000     (Amounts  in thousands) **OPERATING ACTIVITIES:**     Net loss available to  common shareholders$(24,939)$(34,979) Adjustments to  reconcile net loss to net cash provided by (used for) continuing operations:    Discontinued  operations, net of tax— 33,940  Cumulative effect of  change in accounting, net of tax— 14,201  Preferred stock  dividends and amortization1,652 —  Depreciation and  amortization1,510 413  Amortization of note  discount14,084 —  Interest expense on  senior convertible note286 —  Deferred income taxes(4,423)7,763  Loss on disposal of  property and equipment— 19  Changes in working  capital items:     Trade accounts  receivable, net4,420 9,242  Deferred costs and  other current assets(4,342) (2,118)  Accounts payable and  accrued liabilities(7,283)(5,726) Deferred membership  revenue(2,018)(14,166)          Net cash (used for)  provided by operating activities(21,053)8,589          **INVESTING ACTIVITIES:**     Property and equipment  additions, net(1,239)(573) Other— (8)          Net cash used for  investing activities(1,239)(581)         **FINANCING ACTIVITIES:**     Borrowings under  revolving credit facility, net9,026 11,543  Net proceeds from  issuance of Senior Convertible Notes/Series E Preferred Stock13,133 —  Payment of loan  origination fees(943)—  Dividends paid(165)—  Net proceeds from  exercise of stock options35 1,753            Net cash provided by  financing activities21,086 13,296            Net cash used for  discontinued operations(11,849)(24,791)           Net decrease in cash  and cash equivalents(13,055)(3,487) Cash and cash  equivalents, beginning of period13,107 3,927          Cash and cash  equivalents, end of period$52 $440         **SUPPLEMENTAL CASH FLOW  INFORMATION:**     Interest paid during  the period$427 $540      Income taxes paid  during the period$3 $1,874     
 *See accompanying condensed notes to consolidatedfinancial statements.
**CONDENSED NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**Note 1.****Basis of Presentation**

             Theunaudited consolidated financial statements included herein have been preparedby Provell, Inc., formerly Damark International, Inc. (the “Company”), pursuantto the rules and regulations of the Securities and Exchange Commission (“SEC”).  The information furnished in these financialstatements includes normal recurring adjustments and reflects all adjustmentswhich are, in the opinion of management, necessary for a fair presentation ofsuch financial statements.  Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with generally accepted accounting principles have beencondensed or omitted pursuant to such rules and regulations.  Although the Company believes that the disclosuresare adequate to make the information presented not misleading, it is suggestedthat these financial statements be read in conjunction with the consolidatedfinancial statements and notes thereto included in the Company’s most recentAnnual and Quarterly Reports on Form 10-K and Form 10-Q as filed with the SEC. 

             TheCompany's fiscal year ends on December 31; however, each quarter ends on thelast Saturday of a thirteen-week period. As a result, the operating results for the first half of 2001 and 2000included 181 and 183 days, respectively. Management believes that the difference in days does not materiallyaffect the comparability of financial results for the periods presented.  

**Note 2.  Revenue andSolicitation Costs Recognition**

             TheCompany adopted Staff Accounting Bulletin No. 101 - Revenue Recognition inFinancial Statements (“SAB 101”) effective January 1, 2000 and recorded anon-cash charge of $22.9 million ($14.2 million net of taxes).  Under SAB 101, the Company defers allmembership revenues, net of estimated returns, and amortizes them into revenueon a straight-line basis after the trial period has elapsed and over theremaining membership period, generally eleven months.  The allowance for returns is based on the Company’s most recent returnexperience and is updated each quarter.  The majority of the Company’s members can return their memberships atany time prior to expiration of the membership term and receive either apro-rated or full refund for the remaining portion of the membership period. 

             Inaccordance with SAB 101, the cost of membership kits and vouchers are expensedwhen distributed.  Direct responseadvertising costs (i.e., telemarketing and direct mail), refundable fees forcommissions paid to clients and transaction processing costs, net of expectedrefunds, are capitalized as part of deferred membership solicitation costs andare amortized as expense in the same manner in which the related revenue isrecognized.  Other direct and indirectcosts incurred with enrolling customers are expensed when incurred.  Deferred membership solicitation costsincurred to obtain new members are generally less than the associatedmembership fees charged to customers. However, if deferred membership solicitation costs were to exceed expectedmembership fees, an adjustment would be made to the extent of any impairment.
             Secondquarter and first half activity in the deferred membership income and accruedmembership returns accounts is summarized as follows (in thousands): 
**Quarter ended:**Balance  at Beginning of Period Additions Reductions Adjustments  (1) Balance  at End of Period       Deferred membership  revenue:           June 30, 2001$55,998 27,272 (32,216)2,611 $53,665  July 1, 2000$48,067 25,754 (30,657)3,385 $46,549 Accrued membership  returns:           June 30, 2001$31,637 45,610 (44,220)(1,078)$31,949  July 1, 2000$26,501 24,265 (22,243)(4,984)$23,539            **Six months ended:**          Deferred membership  revenue:           June 30, 2001$55,683 59,665 (62,151)468 $53,665  July 1, 2000$24,749 43,568 (62,943)41,175 $46,549 Accrued membership  returns:           June 30, 2001$40,339 95,190 (104,591)1,011 $31,949  July 1, 2000$16,911 55,338 (52,432)3,722 $23,539 
(1)Adjustmentsrelate primarily to the initial adoption of SAB 101 on January 1, 2000 andreclassifications between accrued returns and deferred revenue. 

             Duringthe second quarter and first half of 2000, the Company recognized $10.6 millionand $27.4 million, respectively, of net revenue which was included as acomponent of the “cumulative effect of change in accounting” adjustment.  

**Note 3.  DiscontinuedOperations**

             InJanuary 2000, the Company announced its plans to wind-down its non-membercatalog marketing and related merchandising activities. The wind-down wassubstantially completed by the end of the second quarter of 2000 and catalogmailings are now limited to members of the Company’s shopping clubs.  The order capture, product fulfillment andcustomer service capabilities developed by the Company were re-deployed into asubsidiary named ClickShip Direct, Inc. (“ClickShip”), which was formed inJanuary 2000. The Company had planned to spin-off ClickShip as an independentcompany.  In December  2000, the Company announced that substantial negative changes in capital marketconditions prevented the Company from obtaining sufficient capital to permit aspin-off of ClickShip to shareholders on an acceptable basis and the Companytherefore adopted a plan to liquidate the ClickShip business.  Accordingly, both the former non-membercatalog business and ClickShip, as well as specific items reported under the corporatesegment, are reported as discontinued operations at June 30, 2001 and December31, 2000.  The prior year consolidatedfinancial statements have been restated to report separately the netliabilities and operating results of the discontinued businesses.  Prior to the fourth quarter of 2000, thesebusinesses had been reported by the Company as the “Catalog Retail” segment. 

             Netliabilities of discontinued operations include the following (in thousands): 
Assets: June  30,  2001 December  31, 2000 Net current assets$279 $1,909 Property and  equipment, net of estimated loss on disposal— 500 Lease deposit and  other1,939 2,312 Note receivable from  former officer912 871      Liabilities:    Accounts payable(3,305)(6,529)Future lease  obligations(4,923)(6,906)Operating losses  through disposal date(192)(4,000)Interest(885)(1,300)Other wind-down  related expenses(8,343)(13,383)    Net liabilities of  discontinued operations(14,518)(26,526)Less: Current portion(13,036)(23,830)    Net liabilities of  discontinued operations, long-term$(1,482)$(2,696)    
             The note receivable from a formerofficer is due on January 2, 2003, bears interest on the unpaid principalbalance at the Company’s borrowing rate and is secured by future payments owingto the former officer.

             TheClickShip operation was closed in February of 2001.  The Company funded $11.8 million of net liabilities for alldiscontinued operations during the first half of 2001 and will continue tosettle obligations for the remainder of 2001, with certain amounts continuingthereafter.  As of June 30, 2001, theCompany believes that the balance sheet reserves established for theliquidation of its discontinued operations are adequate to cover remaining obligations.

             Summaryoperating results of the discontinued operations for the quarter and six monthsended July 1, 2000 are as follows (in thousands): 
 Quarter Six  months    Net revenues$17,729 $57,112 Operating loss(23,995)(53,840)Interest expense and  other(292)(563)   Loss before taxes(24,287)(54,403)Tax benefit9,504 20,463    Net loss$(14,783)$(33,940)   
 **Note 4.  Earnings Per Common Share**

             Basicincome per share is computed based on the weighted average shares of commonstock outstanding during the applicable periods while diluted earnings pershare assumes conversion of potentially dilutive securities to shares of commonstock outstanding during the applicable periods. Potentially dilutive securitiesinclude stock options that have been granted to employees and directors of theCompany, convertible preferred stock and warrants. 

             AtJune 30, 2001 and July 1, 2000, options to purchase 2.1 million and 1.5 millionshares of the Company’s Class A Common Stock (the “Common Stock”),respectively, were not included in the computation of diluted loss per share astheir effect would be anti-dilutive.  AtJune 30, 2001, 7.7 million shares issuable upon conversion of the Series Dpreferred stock and exercise of the related common stock warrants and 4.8million shares issuable upon conversion of the Series E Preferred Stock werealso excluded from the calculation of diluted loss per share.

**Note 5.  FinancingArrangements**

             OnMarch 27, 2001, the Company entered into a $20.0 million revolving creditagreement.  This facility expires onSeptember 27, 2002, and is available for working capital and general corporateneeds. Borrowings outstanding under the credit facility bear interest at theprime rate of interest plus 3.0% (9.75% at June 30, 2001) and are secured byall assets of the Company.  The creditfacility includes covenants which require the Company to satisfy certainquarterly financial tests, including minimum earnings before interest and taxesand net worth. As of June 30, 2001 there was a $4.3 million reserve againstborrowing availability under the credit agreement for future expendituresassociated with the liquidation of ClickShip. At June 30, 2001, the Company had $14.2 million outstanding under thecredit facility and was in compliance with all covenant requirements.

             InFebruary 2001, the Company terminated its $10.0 million commercial creditfacility which was available for working capital and general corporateneeds.  Borrowings outstanding underthis line of credit bore interest at the federal funds rate of interest plus0.5%, bank prime or LIBOR plus 3.25% and were secured by all assets of theCompany except real property.  

**Note 6.****Preferred Stock**

             OnFebruary 27, 2001, the Company completed a private placement with fiveinstitutional investors of $14.2 million in 10% Senior Convertible Notes dueFebruary 4, 2002 (“Notes”).  Followingthe satisfaction of certain specified conditions, the Notes plus accruedinterest were converted into 144,856 shares of the Company's Series E PreferredStock on June 8, 2001.  The Series EPreferred Stock has a stated value of $100 per share and is convertible intothe Company’s Common Stock at $3.00 per share subject to certain adjustmentsfor future dilutive events.  The Companyreceived $10.0 million of the proceeds at closing and the balance, lesstransaction fees of approximately $1.1 million, was received in June 2001.      

             Becausethe conversion price on the Notes was less than the stock price on the date ofissuance, the Company recorded a $14.2 million beneficial conversion feature asadditional paid-in-capital and as a discount on the original noteobligation.  Prior to the conversion toSeries E Preferred Stock, the discount was being amortized ratably over theoriginal term of the Notes using the effective interest method.  During the second quarter and first half of2001, the Company recorded charges of $2.6 million and $14.1 million,respectively, or $0.43 and $2.37 per share, respectively, of amortizationexpense pertaining to the note discount. These amounts are not deductible for income tax purposes.

             Theunamortized note discount of $0.1 million plus unamortized transaction fees ofapproximately $0.9 million reduced the basis of the Series E Preferred Stockrecorded upon conversion of the Senior Convertible Notes.  This preferred stock discount is beingamortized ratably from the conversion date to the mandatory redemption date ofFebruary 27, 2003 using the effective interest method. 

             TheSeries E Preferred Stock is redeemable at 125% of the outstanding principalamount or stated value plus interest upon the occurrence of a triggering event(such as failure to maintain an applicable resale registration statementcovering the Company's Common Stock issuable upon conversion of the Series EPreferred Stock or inability to maintain Nasdaq listing of the Company’s CommonStock) or a major transaction (such as a sale or merger of the Company) asdefined in the Certificate of Designations, Preferences and Rights for theSeries E Preferred Stock. Unless converted to Common Stock, the Series EPreferred Stock will be redeemed on February 27, 2003 at the stated value ofthe shares in cash or, at the Company’s option, for shares of the Company'sCommon Stock valued at 90% of the then current market price. The Series EPreferred Stock ranks pari passu with the Series D Preferred Stock issued inSeptember 2000. 

             OnSeptember 29, 2000, the Company completed a $20.0 million private placement ofSeries D Preferred Stock with four institutional investors.  The Company issued 200,000 shares of SeriesD Preferred Stock with a par value of $0.01 per share and a stated value of$100 per share.  The net proceeds wereused to supplement working capital needs. Initially the Series D Preferred Stock was convertible at any time atthe option of the holder into the Company’s Common Stock at $12.94 per share,subject to certain adjustments for future events.  In February 2001, the conversion price was reset to $3.00 inconjunction with the sale of the Notes. The Series D Preferred Stock has a dividend rate of 6.5% per annumpayable quarterly in cash or, at the Company’s option, shares of the Company’sCommon Stock valued at 90% of its then current market price.  Unless previously converted to Common Stock,the Series D Preferred Stock will be redeemed on September 29, 2002 at thestated value of the shares in cash or, at the Company’s option, for shares ofthe Company’s Common Stock valued at 90% of its then current market price.  The Company may also be required to redeemthe Series D Preferred Stock at the stated value plus a 25% premium and accrueddividends for cash at any time following a consolidation or merger with anothercompany or the occurrence of other triggering events as detailed in theCertificate of Designations, Preferences and Rights of the Series D PreferredStock.

             Inaddition, the Company issued Common Stock Purchase Warrants (“Warrants”) to thepurchasers of the Series D Preferred Stock for an aggregate of 772,798 sharesof Common Stock at an exercise price of $16.17 per share, subject toadjustments similar to the Series D Preferred Stock.  As a result of the issuance of the Notes in February 2001, theexercise price was adjusted to $11.65 per share and the number of shares ofCommon Stock subject to the Warrants increased to 1,072,815 shares.  The Company allocated the net proceeds of$18.9 million (cash proceeds of $20.0 million net of transaction costs of $1.1million) from the issuance of the Series D Preferred Stock and Warrants betweenthe relative fair values of the preferred stock and Warrants.  The value allocated to the Warrants, $2.8million, is reflected as a component of shareholders’ deficit.  The preferred stock is being accreted to itsredemption value of $20.0 million over the two year period ending on themandatory redemption date. 

             InJuly, 2001, 10,800 shares of Series D Preferred Stock and 13,500 shares ofSeries E Preferred Stock were converted into 360,833 shares and 450,000 shares,respectively, of Common Stock.  

**Note 7.  Legal Matters**

             OnAugust 29, 2000, the Company was served with a complaint styled as a classaction in Minnesota State Court.  Thecomplaint is similar to complaints previously settled by the Company with theMinnesota Attorney General on December 3, 1999, but also contends that certainbusiness practices violate other Minnesota consumer protection laws.  The Company believes it has strong factualand legal defenses and is vigorously defending the allegations both on themerits and in regard to class status. The case is currently in the discovery stage.  Management believes that the resolution of this action will nothave a material adverse effect on the financial condition or results ofoperations of the Company. 

             OnApril 17, 2001, a complaint styled as a class action was filed in FederalDistrict Court in Minnesota against the Company by four former ClickShipemployees alleging that the Company failed to provide appropriate notice toemployees and pay annual performance bonuses when ClickShip's operations wereterminated.  The Company is vigorouslydefending the allegations and a motion to dismiss is currently pending.Management believes that the resolution of this action will not have a materialadverse effect on the financial condition or results of operations of theCompany.

             TheCompany is party to various claims, legal actions and other complaints arisingin the ordinary course of business and in connection with the wind-down ofClickShip.  Management believes that anylosses which may occur are adequately covered by insurance or are otherwiseprovided for and the ultimate outcome of these matters will not have a materialadverse effect on the financial position or operations of the Company.  

**PROVELL, INC.**

**MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**General**

             Provelldevelops, markets, and manages leading edge membership and customerrelationship management programs.  TheCompany’s proprietary programs provide purchase price discounts and otherbenefits related to consumer and small business needs in areas of shopping,travel, hospitality, entertainment, health/fitness, and finance.  

**Results of Continuing Operations**

             Grossnew member acquisitions during the second quarter of 2001 increased 66.7% overthe comparable prior year period from 0.6 million in 2000 to 1.0 million in2001.  At June 30, 2001, the Company’smembership count was 2.7 million members as compared to 2.2 million members atJuly 1, 2000, a 22.7% increase.  Thesignificant increase in membership acquisitions was driven by the Company’seffort to grow its membership base and replace membership acquisition leadslost due to the wind-down of its non-member catalog retail business through newor expanded relationships with financial services and catalog retailclients.  The Company’s client rosternow includes several of the nation’s largest credit card issuers, as well as anumber of premier consumer marketing organizations.  Member acquisitions from client business accounted for 97.7% ofthe new member acquisitions during the second quarter of 2001 as compared to80.0% during the second quarter of 2000. 

             Grossrevenues before deferral were $75.5 million for the second quarter of 2001 ascompared to $51.0 million for the second quarter of 2000, a 48.0%increase.  For the six months ended June30, 2001 gross revenues before deferral were $157.8 million and $96.1 millionfor the prior year comparable period, a 64.2% increase.  The significant increase in year-to-daterevenues over the prior year resulted from the Company’s aggressive efforts toexpand its client business and from higher average membership fees.  The average membership fee in the secondquarter of 2001 was $82 compared to $62 for the second quarter of 2000.  Increased revenues generated by increasedacquisition levels and average membership fees were partially offset by a shiftin mix between renewal and acquisition revenue as compared to the prior year.  Total renewal counts for the first half of2001 were 23% lower than renewal counts for the first half of 2000.  Through June 30, 2001, approximately 39% ofthe Company’s forecasted renewal counts for the year have been recognized. Themajority of the second half renewals are expected to fall in the fourthquarter. Second quarter and first half 2001 net revenues were $34.8 million and$67.7 million, respectively, while second quarter and first half 2000 netrevenues were $34.1 million and $70.2 million, respectively. 

             TheCompany reported an operating loss of $6.3 million for the second quarter of2001 as compared to operating income of $9.6 million for the prior yearcomparable period.   For the first halfof 2001, the Company reported an operating loss of $12.7 million as compared tooperating income of $21.0 million for the first half of 2000.  The loss this quarter and for the first halfof this year is attributed primarily to aggressive acquisition marketing,combined with the cost overhang associated with the heavier front-end loadedcommission structures that characterized name acquisition activities in priorquarters, as well as a shift in mix between acquisition and renewal revenue.During the second quarter of 2001, the Company made significant progress inreducing its acquisition cost per net name acquired, a 35% reduction quarterover quarter.  This was accomplishedthrough contract renegotiations with major clients, a greater mix of clientinbound business which increased to 12% of member enrollments in second quartercompared to 6% in first quarter, and targeted increases in membership fees. TheCompany also continued to build its book of renewal business in the secondquarter of 2001, reducing its reliance on the former Damark house file.  The house file accounted for 44% of grossrenewal revenue in the second quarter of 2001 as compared to 69% in thecomparable quarter of 2000. 

             Netlosses of $8.3 million and $8.8 million were reported for the second quartersof 2001 and 2000, respectively.  For thefirst half of 2001 and 2000, net losses of $24.9 million and $35.0 million,respectively, were reported.  Secondquarter 2001 net results were impacted by a $2.6 million, non-cash charge foramortization of the note discount related to the private placement of SeniorConvertible Notes in February 2001.  The2001 first half impact of this charge was $14.1 million.  Second quarter 2000 earnings included $14.8million of operating losses, net of taxes, from the Company’s discontinuedoperations.  First half 2000 earningsincluded $33.9 million of operating losses, net of taxes, from the Company’sdiscontinued operations and a $14.2 million after tax non-cash charge relatedto the cumulative effect of adopting SAB 101. 

             TheCompany’s effective tax rate was 22.4% for the second quarter of 2001 and 16.0%for the first half of 2001.  The netloss for the second quarter and first half of 2001 included non-deductiblecharges of $3.1 million and $14.8 million, respectively, for the amortizationof discount and interest associated with the Senior Convertible Notes whichhave been treated as permanent differences for tax purposes.  The effective tax rate excluding thesecharges was 33.1% for the second quarter of 2001 and 34.4% for the first halfof 2001. 

             Asof June 30, 2001, the Company has recorded on its consolidated balance sheet anet deferred tax asset of $45.6 million. Despite incurring net losses in recent quarters and becoming subject tolimitations on net operating loss (NOL) utilization, the Company has not recordeda deferred tax valuation allowance since management believes that it is morelikely than not that its operating strategies will allow the Company togenerate sufficient taxable income in current and future years to realize thisasset.  Should the Company’s operatingstrategies fail to produce sufficient current and future taxable income, or iffuture changes in circumstances further limit NOL utilization, the Company willrecord a valuation allowance in the appropriate future reporting period for allor a portion of its net deferred tax asset, as required by generally acceptedaccounting principles. 

**Discontinued Operations**

             Theaggregate loss from discontinued operations includes losses from the Company’snon-member catalog marketing and merchandising activities and from itssubsidiary ClickShip Direct, Inc. (“ClickShip”) as well as certain corporateexpenses.  The net loss for the secondquarter 2000 was $14.8 million, net of taxes of $9.5 million.  The net loss for the first half of 2000 was$33.9 million, net of taxes of $20.5 million.

             Summaryoperating results of the discontinued operations for the quarter and first halfended July 1, 2000 are as follows (in thousands): 
 Quarter Six  months    Net revenues$17,729 $57,112 Operating loss(23,995)(53,840)Interest expense and  other(292)(563)   Loss before taxes(24,287)(54,403)Tax benefit9,504 20,463    Net loss$(14,783)$(33,940)   
             Net liabilities of discontinuedoperations include the following (in thousands): 
 June  30,  2001 December  31, 2000 Assets:  Net current assets$279 $1,909 Property and  equipment, net of estimated loss on disposal— 500 Lease deposit and  other1,939 2,312 Note receivable from  former officer912 871      Liabilities:    Accounts payable(3,305)(6,529)Future lease  obligations(4,923)(6,906)Operating losses  through disposal date(192)(4,000)Interest(885)(1,300)Other wind-down  related expenses(8,343)(13,383)    Net liabilities of  discontinued operations(14,518)(26,526)Less: Current portion(13,036)(23,830)    Net liabilities of  discontinued operations, long term$(1,482)$(2,696)   
             Thenote receivable from a former officer is due on January 2, 2003, bears intereston the unpaid principal balance at the Company’s borrowing rate and is securedby future payments owing to the former officer. 

             TheClickShip operation was closed in February of 2001.  The Company funded $11.8 million of net liabilities for alldiscontinued operations during the first half of 2001 and will continue tosettle obligations for the remainder of 2001, with certain amounts continuingthereafter.  As of June 30, 2001, theCompany believes that the balance sheet reserves established for the liquidationof its discontinued operations are adequate to cover remainingobligations.  

**Liquidity and Capital Resources**

**General**

             Currently,the Company’s liquidity needs arise primarily from funding the growth of itscontinuing membership services business, liquidating its discontinuedoperations, and capital expenditures. Management believes that cash expected tobe generated from continuing operations, proceeds from the issuance of SeniorConvertible Notes (see below) and availability under its credit facility (seebelow) provides improved liquidity to fund the operations of the Company,anticipated capital expenditures and the net liquidation costs for exiting theClickShip business in 2001.  However,there can be no assurance that the cash generated from these sources will besufficient to meet these funding needs.

**Cash Flow**

             TheCompany used $21.1 million of cash for operations during the first half of 2001as compared to generating $8.6 million of cash from operations during the firsthalf of 2000.   Cash usage in the firsthalf of 2001 reflects aggressive acquisition marketing, funding of returns fromrecord acquisition quarters in the last half of 2000, and a shift in mixbetween renewals and acquisitions year over year as the Company focuses on levelingits book of renewal business for future quarters.  In addition, reserves required by key business partners increasedsignificantly compared to the same period a year ago.  The Company also made significant reductions in accounts payablethat had built up during the first part of 2001 prior to the Company closing onits new credit facility and experienced growth in accounts receivable caused bynew membership acquisitions weighted toward the end of the quarter. 

**Capital Expenditures**  

             Duringthe first half of 2001, the Company incurred capital expenditures of $1.2million as compared to $0.6 million during the first half of 2000.  The investment in 2001 was primarily relatedto its management information systems. Management estimates that the Company willinvest $4.0 million in capital expenditures during 2001, principally related tocomputer hardware and software. 

**Financing**  

             OnMarch 27, 2001, the Company entered into a $20.0 million revolving creditagreement.  This facility expires onSeptember 27, 2002, and is available for working capital and general corporateneeds. Borrowings outstanding under the credit facility bear interest at theprime rate of interest plus 3.0% (9.75% at June 30, 2001) and are secured byall assets of the Company.  The creditfacility includes covenants which require the Company to satisfy certainquarterly financial tests, including minimum earnings before interest and taxesand net worth. As of June 30, 2001 there was a $4.3 million reserve againstborrowing availability under the credit agreement for future expendituresassociated with the liquidation of ClickShip Direct.  At June 30, 2001, the Company had $14.2 million outstanding underthe credit facility and was in compliance with all covenant requirements. 

             OnFebruary 27, 2001, the Company completed a private placement with fiveinstitutional investors of $14.2 million in 10% Senior Convertible Notes dueFebruary 4, 2002 (“Notes”).  Followingthe satisfaction of certain specified conditions, the Notes plus accrued interestwere converted into 144,856 shares of the Company's Series E Preferred Stock onJune 8, 2001.  The Series E PreferredStock has a stated value of $100 per share and is convertible into theCompany’s Common Stock at $3.00 per share subject to certain adjustments forfuture dilutive events.  The Companyreceived $10.0 million of the proceeds at closing and the balance, lesstransaction fees of approximately $1.1 million, was received in June 2001.

             Becausethe conversion price on the Notes was less than the stock price on the date ofissuance, the Company recorded a $14.2 million beneficial conversion feature asadditional paid-in-capital and as a discount on the original noteobligation.  Prior to the conversion toSeries E Preferred Stock, the discount was being amortized ratably over theoriginal term of the Notes using the effective interest method.  During the second quarter and first half of2001, the Company recorded charges of $2.6 million and $14.1 million,respectively, or $0.43 and $2.37 per share, respectively, of amortizationexpense pertaining to the note discount. These amounts are not deductible for income tax purposes. 

             Theunamortized note discount of $0.1 million plus unamortized transaction fees ofapproximately $0.9 million reduced the basis of the Series E Preferred Stockrecorded upon conversion of the Senior Convertible Notes.  This preferred stock discount is beingamortized ratably from the conversion date to the mandatory redemption date ofFebruary 27, 2003 using the effective interest method. 

             TheSeries E Preferred Stock is redeemable at 125% of the outstanding principalamount or stated value plus interest upon the occurrence of a triggering event(such as failure to maintain an applicable resale registration statement coveringthe Company's Common Stock issuable upon conversion of the Series E PreferredStock or inability to maintain Nasdaq listing of the Company’s Common Stock) ora major transaction (such as a sale or merger of the Company) as defined in theCertificate of Designations, Preferences and Rights for the Series E PreferredStock. Unless converted to Common Stock, the Series E Preferred Stock will beredeemed on February 27, 2003 at the stated value of the shares in cash or, atthe Company’s option, for shares of the Company's Common Stock valued at 90% ofthe then current market price. The Series E Preferred Stock ranks pari passuwith the Series D Preferred Stock issued in September 2000.

             OnSeptember 29, 2000, the Company completed a $20.0 million private placement ofSeries D Preferred Stock with four institutional investors.  The Company issued 200,000 shares of SeriesD Preferred Stock with a par value of $0.01 per share and a stated value of$100 per share.  The net proceeds wereused to supplement working capital needs. Initially the Series D Preferred Stock was convertible at any time atthe option of the holder into the Company’s Common Stock at $12.94 per share,subject to certain adjustments for future events.  In February 2001, the conversion price was reset to $3.00 inconjunction with the sale of the Notes. The Series D Preferred Stock has a dividend rate of 6.5% per annumpayable quarterly in cash or, at the Company’s option, shares of the Company’sCommon Stock valued at 90% of its then current market price.  Unless previously converted to Common Stock,the Series D Preferred Stock will be redeemed on September 29, 2002 at thestated value of the shares in cash or, at the Company’s option, for shares ofthe Company’s Common Stock valued at 90% of its then current market price.  The Company may also be required to redeemthe Series D Preferred Stock at the stated value plus a 25% premium and accrueddividends for cash at any time following a consolidation or merger with anothercompany or the occurrence of other triggering events as detailed in theCertificate of Designations, Preferences and Rights of the Series D PreferredStock. 

             Inaddition, the Company issued Common Stock Purchase Warrants (“Warrants”) to thepurchasers of the Series D Preferred Stock for an aggregate of 772,798 sharesof Common Stock at an exercise price of $16.17 per share, subject toadjustments similar to the Series D Preferred Stock.  As a result of the issuance of the Notes in February 2001, theexercise price was adjusted to $11.65 per share and the number of shares ofCommon Stock subject to the Warrants increased to 1,072,815 shares.  The Company allocated the net proceeds of$18.9 million (cash proceeds of $20.0 million net of transaction costs of $1.1million) from the issuance of the Series D Preferred Stock and Warrants betweenthe relative fair values of the preferred stock and Warrants.  The value allocated to the Warrants, $2.8million, is reflected as a component of shareholders’ deficit.  The preferred stock is being accreted to itsredemption value of $20.0 million over the two year period ending on themandatory redemption date. 

             InJuly, 2001, 10,800 shares of Series D Preferred Stock and 13,500 shares ofSeries E Preferred Stock were converted into 360,833 shares and 450,000 shares,respectively, of Common Stock. 

**Seasonality**

             Followingthe wind-down of the Catalog Retail Segment, management expects the seasonalvariation in consumer demand to have less of an impact on the operations ofProvell; however, as the Company enters into more marketing arrangements withretailers and catalog companies, seasonality could have a greater impact on theCompany. 

**Inflation**

             Inflationhas not had, and the Company does not expect it to have, a material impact onoperating results. There can be no assurances, however, that the Company'sbusiness will not be negatively affected by inflation in the future.

**Recently Issued Accounting Pronouncements**

             TheCompany adopted Statement of Financial Accounting Standards (“SFAS”) No. 133,"Accounting for Derivative Investments and Hedging Activities," as ofJanuary 1, 2001.  This accountingstandard establishes accounting and reporting standards for derivativeinstruments, including certain derivative instruments embedded in other contracts,and for hedging activities. The adoption of SFAS No. 133 had no impact on theCompany's financial position or results of operations. 

**Forward-LookingInformation**

             Certainof the matters discussed herein are "forward-looking statements"intended to qualify for the safe harbor provisions from liability provided bythe Private Securities Litigation Reform Act of 1995. Important factors existthat could cause results to differ materially from those anticipated by some ofthe statements herein. Forward-looking statements in this document includeforecasted renewal counts for the year, the adequacy of reserves fordiscontinued operations, and forecasted liquidity and capitalexpenditures.  In addition, the words“believe”, “expect”, “anticipate”, “intend”, “designed”, “goal”, “priority”,“will” and similar expressions identify forward-looking statements. Investorsare cautioned that all forward-looking statements involve risks anduncertainties that could cause actual results to differ materially from expectations,including those identified below: 
•The  economic outlook and its effects on credit availability, interest rates, and  consumer spending patterns;   •Adverse  changes in relationships with vendors and business partners who provide club  benefits or process credit card transactions;   •Increasing  reserve requirements by business partners;   •Inability  to develop replacement shopping club programs;   •Lower  than expected membership renewal rates;   •Higher  than expected membership cancellation and return rates;   •Inability  to profitably expand in the membership services market;   •Excessive  new member acquisition costs;   •Inability  to retain existing clients and attract new clients in the membership services  market;   •Inability  to develop new membership programs;   •Effects  of possible system failures and rapid changes in technology;   •Future  cash outlays to complete the wind-down of ClickShip;   •Externally  mandated changes in accounting guidelines and telemarketing practices;   •Availability  of capital on acceptable terms;   •Availability  of financing on acceptable terms; and   •Inability  to retain Nasdaq listing of the Company’s Common Stock. 
             Shareholders,potential investors and other readers are urged to consider these and otherfactors in evaluating the forward-looking statements made herein, all of whichspeak only as of the date on which they are made and as to which the Companyhas no obligation to update publicly.

**Part II.  Other Information**

**Item 1.              Legal Proceedings**

             OnAugust 29, 2000, the Company was served with a complaint styled as a classaction in Minnesota State Court.  Thecomplaint is similar to complaints previously settled by the Company with theMinnesota Attorney General on December 3, 1999, but also contends that certainbusiness practices violate other Minnesota consumer protection laws.  The Company believes it has strong factualand legal defenses and is vigorously defending the allegations both on themerits and in regard to class status. The case is currently in the discovery stage.  Management believes that the resolution of this action will nothave a material adverse effect on the financial condition or results ofoperations of the Company. 

             OnApril 17, 2001, a complaint styled as a class action was filed in FederalDistrict Court in Minnesota against the Company by four former ClickShipemployees alleging that the Company failed to provide appropriate notice toemployees and pay annual performance bonuses when ClickShip's operations wereterminated.  The Company is vigorouslydefending the allegations and a motion to dismiss is currently pending.Management believes that the resolution of this action will not have a materialadverse effect on the financial condition or results of operations of theCompany. 

             TheCompany is party to various claims, legal actions and other complaints arisingin the ordinary course of business and in connection with the wind-down ofClickShip.  Management believes that anylosses which may occur are adequately covered by insurance or are otherwiseprovided for and the ultimate outcome of these matters will not have a materialadverse effect on the financial position or operations of the Company. 

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

             Thecompany held its Annual  Meeting ofShareholders on May 29, 2001.  Pursuantto Regulation 14 of the Securities Exchange Act of 1934, proxies for suchmeeting were solicited.  The followingmatters were voted on at the meeting: 
  **Votes For****Votes Withheld**  ********a.   To  elect Stephen J. Hemsley as director for a one-year term ending in the year  2002. 5,185,635 426,985b.   To  elect Derek R. Reisfield as director for a two-year term ending in the year  2003. 5,184,961 427,659c.   To  elect Ralph Strangis as director for a three-year term ending in the year  2004. 5,191,635 420,985d.   To  elect Marvin S. Traub as director for a three-year term ending in the year  2004. 5,185,961 426,659
 
  **Votes For****Votes Against****Votes Abstained****Broker  Non-Votes**  ********e.   Approval  of the Provell, Inc. 2001 Stock Option Plan. 5,001,738 606,570 4,312 0f.   Approval  of the issuance of 10% Senior Convertible Notes due February 4, 2002, Series  E Preferred Stock issuable upon conversion of the Senior Convertible Notes  and shares of Class A Common Stock issuable upon the conversion or redemption  of the Senior Convertible Notes or the Series E Preferred Stock.3,948,631    372,047    4,947    1,286,995g.   Approval  of the issuance of the shares of Class A Common Stock issuable upon the  conversion of Series D Preferred Stock at the conversion price as adjusted  for the issuance of the 10% Senior Convertible Notes or any subsequent  adjustment to the conversion price in accordance with the provisions of the  Series D Preferred Stock.3,997,860    323,149    4,616    1,286,995h.   Approval  to amendments to the Company’s restated articles of incorporation to increase  the authorized number of shares of Preferred Stock to 10,000,000 shares and  the authorized number of Class A Common Stock to 75,000,000 shares and to  change the number of directors on the board of directors to not less than  three and no more than nine directors. (1)     8,738,759     586,261     605     1,286,995i.   Ratification  of the appointment of Arthur Andersen LLP as the Company’s independent  auditors for the fiscal year ending December 31, 2001.  5,604,320  6,540  1,760  0
(1)Includes shares of Series D and Series E Preferred Stock

 **Item 6.             Exhibitsand Reports on Form 8-K**
 **a.****Exhibits:**     Exhibit  4.1 – Specimen Certificate of Class A Common Stock         **b.****Reports  on Form 8-K:**     The  Company filed a Report on Form 8-K dated June 4, 2001 to report its rejection  of a bid by Metris Companies, Inc. to purchase the Company for $4 per share.     The  Company filed a Report on Form 8-K dated June 21, 2001 to report the  resignation of Stephen Hemsley from its Board of Directors effective June 19,  2001.
   

**Signature**

        Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized. 
  **PROVELL,  INC.**      Date:  August 10, 2001By:/s/  Kim M. Mageau     Kim  M. Mageau  Senior  Vice President –  Chief  Financial Officer  ** **
** *****