Robert N. Kaplan, Esq. KAPLAN, KILSHEIMER & FOX LLP 805 Third Avenue - 22nd Floor New York, NY 10022 Phone: 212-687-1980 Sandy A. Liebhard, Esq. BERNSTEIN LIEBHARD & LIFSHITZ 10 East 40th Street 22nd Floor New York, NY 10016 Phone: 212-779-1414 Jeffrey S. Krinsk Howard Finkelstein FINKELSTEIN & KRINSK 501 West Broadway Suite 1250 San Diego, CA 92101-2498 Phone: 619-238-1333 PLAINTIFFS' CO-LEAD COUNSEL

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

______________________________________

Master File No.

In re REVLON, INC. 99-CV-10192 (SHS) SECURITIES LITIGATION

______________________________________

AMENDED CLASS ACTION COMPLAINT FOR VIOLATIONS

OF THE FEDERAL SECURITIES LAWS

This Document Relates To:

ALL ACTIONS

JURY TRIAL DEMANDED

______________________________________

Plaintiffs have alleged the following based upon the investigation of plaintiffs' counsel, which included a review of United States Securities and Exchange Commission ("SEC") filings by Revlon, Inc. (together with its subsidiaries, "Revlon" or the "Company"), as well as regulatory filings and reports, securities analysts' reports and advisories about the Company, press releases and other public statements issued by the Company, media reports about the Company and information learned from persons knowledgeable about the cosmetics industry and Revlon's operations. Plaintiffs believe that substantial additional evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery.

NATURE OF THE ACTION

1. This is a securities class action on behalf of all purchasers of Revlon securities between October 29, 1997, and October 1, 1998, inclusive (the "Class Period"), alleging violations of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Securities and Exchange Commission ("SEC") Rule 10b-5. Defendants are Revlon and the following persons who held the positions indicated during the Class Period: Chairman of the Board Ronald O. Perelman ("Perelman"); President and Chief Executive Officer George Fellows ("Fellows"); Senior Executive Vice President and until January 15, 1998 Chief Financial Officer William J. Fox ("Fox"); and Executive Vice President and after January 15, 1998 Chief Financial Officer Frank J. Gehrmann ("Gehrmann").

2. In 1986, Perelman acquired Revlon in one of the most hotly contested takeovers of that era through a leveraged buy-out that saddled the Company with huge amounts of debt and corresponding debt service requirements. Defendants wanted to refinance a large portion of that debt at favorable interest rates over a further extended time period. This could be accomplished only if Revlon could be made to appear to have ever increasing revenues and to be generating operating profits, despite the crushing debt load.

3. However, by the beginning of the Class Period, it was known internally at Revlon that its business was in serious decline and that it was facing increased competition from, among others, Oil of Olay, Neutrogena, L'Oreal and Clairol. In order to cover this up and to be able to refinance its debt in 1998, defendants intentionally made Revlon's results look better than they were. To make Revlon's results look better in the short term, defendants intentionally artificially increased sales and purposely deferred and reduced expenses. Defendants knew that these practices would make Revlon's short-term results look better during the Class Period even though they would be harmful to Revlon in the long term and that inevitably Revlon's financial results would collapse.

4. Defendants artificially increased sales by the following practices, among others:

a. At the end of each quarter, defendants placed enormous pressure on the Revlon sales staff to generate targeted sales numbers regardless of customer demand. Repeated e-mails and telephone calls were made to sales personnel in a desperate attempt to pump up sales. Each quarter, defendants increased sales quotas and constantly increased shipments into the sales channel even though defendants knew from sell-through reports they received that customers' inventories of Revlon products were bulging, growing, and bursting at the seams with Revlon merchandise. Revlon was selling much more to its customers than the customers were able to sell. Revlon constantly needed to push out more and more sales since it was constantly borrowing larger and larger amounts of sales from future periods. Customers knew that Revlon was desperate for end of quarter sales. Accordingly, they knew that if they waited until late in the quarter to place orders they would receive better deals. Consequently, customers waited later and later to place orders, the deals became richer and richer and the quarters more and more back-end loaded. Defendants knew that this Ponzi scheme would inevitably collapse.

b. In order to increase revenues, Revlon continuously went "down market" with its products which cheapened the Revlon brand. It did this by selling its products to less desirable types of customers. These lower-end customers sold Revlon products more cheaply and accordingly Revlon earned lower margins from these sales. When Revlon started to sell certain of its lines to down-market retailers, this cheapening of the line caused upscale retailers to no longer want to sell Revlon's products. Revlon knew this, but nevertheless opened up new, downscale outlets to increase sales in the short term. However, as set forth above, defendants knew that this would hurt Revlon in the long term.

c. For example, Revlon's Ultima II line was its top-of-the-line cosmetics product. Revlon's distribution of this product had been directed to department stores, and many consumers were not familiar with it since there had not been extensive advertising for this product. However, in order to boost short-term revenues, Revlon began to sell Ultima II to mass merchandisers. In late 1997, Revlon began to sell its Ultima II line to Walgreens and CVS, which rolled out the Ultima II line to 1500 stores. Revlon promised these two mass merchandisers the exclusive right to sell Ultima II in the mass merchandise market. However, having maximized revenue in the third and fourth quarters of 1997, Revlon breached this agreement. Also it hurried the release of Ultima II to the mass merchandise

market, without sufficient advertising or marketing support needed by the mass-merchandise market. Moreover, defendants had not done adequate testing of the mass merchandise market for Ultima II. Defendants knew that the release of Ultima II to Walgreens and CVS would be a temporary boost of revenues in the third and fourth quarters of 1997, but that ultimately, much of this merchandise would be returned, which in fact happened in late 1998 and 1999.

d. Despite its agreement with Walgreens and CVS, during the first quarter of 1998, Revlon rolled out Ultima II to other mass merchandisers in order to continue to boost its revenue. For instance, in this time period it rolled out Ultima II to Longs Drugstores, which it shipped with a right to return the merchandise after one year. In 1999, Longs returned much of the Ultima II merchandise which it had purchased from Revlon.

5. Revlon also used "down market" and grey market retailers to dump Revlon merchandise at the end of quarters during the Class Period to show sales increases. Stan Hirsh was in charge of this effort for Revlon and dumped product at Quality King and at various other discount stores such as Odd Lot, and Job Lot Trading. Hirsh also sold Revlon products into the international grey market. This further cheapened the Revlon brand and created sales resistance at Revlon accounts since discount stores were competing against other Revlon retailers.

6. Revlon also utilized the Cosmetic Center Inc. ("CCI"), a company in which Revlon had an 85% ownership interest to ship old, outdated products. Two weeks before the end of each quarter during the Class Period, the senior vice president of marketing and merchandising at CCI was instructed by Revlon to purchase more products from Revlon regardless of whether CCI needed the products. Some of the Revlon products sold to CCI were top-of-the-line products which were sold by this discounter at cut-rate prices. However, much of the Revlon products sold to CCI were old and outdated. Revlon utilized CCI to hold excess and overvalued inventory. CCI sent weekly reports to Revlon's Operations Committee, which showed that CCI's inventory was growing by a material amount and listed the products, including obsolete products, which CCI was holding. Defendant Fox met regularly with CCI and was apprised of these facts. Since CCI did not need the merchandise it was buying from Revlon, CCI could not pay for it and Revlon arranged for and guaranteed a line of credit for CCI to sustain its ability to absorb excess and obsolete Revlon inventory. After Revlon sold its ownership interest in CCI, as set forth hereafter, Revlon took charges against income, and CCI filed for bankruptcy.

7. At the end of quarters in order to artificially boost revenues, Revlon gave special discounts to its customers, which became progressively richer as the Class Period progressed. In early 1998, it instituted a reduced rate plan and offered 8-15% discounts for purchases made before the end of a quarter. As channel inventory increased, the discount programs grew to the point that later in 1998 customers could buy one Revlon item and receive a second Revlon item free. Also, at the end of quarters, Revlon gave retailers rebates in order to have them purchase before the end of the quarter. However, Revlon did not book or pay these rebates until after the end of the quarter.

8. At the end of quarters in order to artificially boost revenues, Revlon also released new products and told customers that if they wanted the new products they also had to purchase older products that were difficult to resell.

9. Until October 1997, Revlon sold directly to accounts, regardless of their size. Revlon sales persons visited the accounts and stocked their Revlon displays. Because of the great pressures placed on the sales force at the end of quarters, Revlon's sales persons routinely overstocked the customers in order to make ever increasing mandated quotas, told the accounts that they could not refuse part of an order, and that they had to purchase certain promotional items.

10. Accounting for many of the sales practices which Revlon used to artificially boost its reported revenues violated Generally Accepted Accounting Principles ("GAAP"). The following are some examples:

a. Defendants caused Revlon to (1) routinely ship to customers at the end of quarters product that had not been ordered or product that had been requested by the customers to be shipped at a future date in a subsequent quarter and (2) to book those shipments as revenue in the current quarter. When customers complained about this, defendants instructed the sales personnel to "blame the plant" which had shipped the product. In most instances, the product that had not been ordered or had been requested to be shipped at a later date was returned to Revlon, and, as set forth hereafter, defendants instituted a scheme at Revlon to delay issuing credit memoranda to customers in order to overstate reported revenues. In December 1997, defendants caused Revlon to ship to Walmart a substantial order in excess of $40 million, which Walmart had requested be shipped at a later date. Revlon booked the revenue in December 1997 and did not provide a reserve for any returns. Subsequently, Walmart returned that product to Revlon. Because of the early shipping of products and the shipping of products which had not been ordered, many customers became angry with Revlon and refused to accept orders or terminated the relationship. For instance, Safeway, which had received many shipments that had not been ordered or had been requested to be shipped at a later date, posted signs at its stores stating "Do not accept shipments from Revlon." Later in 1998, because of these practices, Safeway's stores in southern California stopped purchasing from Revlon.

b. At times, defendants caused Revlon to book revenue where products had not been shipped. Among other things, Revlon engaged in these "bill-and-hold" transactions with Quality King. In these bill-and-hold transactions, Revlon generated an invoice and booked the revenue but the products were held in a Revlon warehouse and not shipped to the customer by the end of the quarter. In some instances no products were ever shipped. Also, in France at the end of quarters, Revlon invoiced retailers but did not ship the product until after the end of the quarter.

c. Much Revlon product was sold with an unlimited right of return. When an account placed an order, Revlon sales persons could check a box on the order form to ensure that the store could return the merchandise at a later date if it were not sold. The order forms were set up in this fashion and the sales persons were given this authority so that when

they pressured their accounts at the end of quarters to take more product than the accounts needed, the Revlon sales persons agree that the product was sold with a right of return.

11. While Revlon was booking revenue in violation of GAAP, also during the Class Period, at defendants' direction, it undertook various actions to decrease expenses in order to artificially boost results in the short term. Defendants knew this would be harmful in the long term. Among other things, defendants did the following:

a. After loading up smaller accounts with merchandise during the third quarter of 1997, in October 1997, Revlon stopped servicing smaller accounts directly and instructed them by form letter, without warning, that they would thereafter have to purchase through a distributor, Rita Ann. The smaller accounts found themselves overstocked with Revlon products at the same time they no longer were serviced by a Revlon sales representative, who had provided these smaller accounts with fixtures, had offered promotional deals and incentives and maintained and stocked displays and reordered merchandise. Moreover, the smaller stores were faced with paying higher prices to Rita Ann than they had paid to Revlon. As a result, many of the smaller accounts began to reduce Revlon shelf space and/or cancel purchases of Revlon product.

b. With respect to the larger, mass-merchandiser accounts, Revlon had employed "rotators." These persons visited each of the mass merchandisers and cleaned and stocked their Revlon display racks, maintained their planograms (merchandise placement) and unpacked the Revlon merchandise which had been delivered to the stores. In October 1997, Revlon fired its rotators. As a result, by the autumn of 1998, mass-market retailers including Target, Walmart and K-Mart complained to Revlon that displays in their stores had not been replenished or cleaned and that sales had declined. Accordingly, some of these mass merchandisers such as Walmart retaliated by reducing some of their Revlon store displays from 30 feet to 20 feet. Some Target stores cut back their Revlon wall display space from 20 feet to 12 feet. CVS, Eckerd and Rite-Aid also decreased space allotted to Revlon. By September 1998, the situation was so bad that Revlon instituted a program that it called "Operation Retail Storm" to attempt to salvage its relationships with the mass-market retailers. In order to do this, it used personnel from many of its departments, including some from the finance department. However, the relationships with the mass merchandisers could not be saved and continued to deteriorate. Among other things, some of the mass merchandiser stores had old Revlon merchandise on the shelves and boxes of unopened, unpacked, Revlon merchandise in storage. Other Revlon products were stored in tractor-trailers outside the stores. At Albertson's, Winn-Dixie and Drug Emporium, much of this unopened Revlon merchandise was outdated and could not be sold.

12. At the same time that Revlon reduced expenses by laying off sales representatives to service the smaller accounts and rotators to service the mass merchandisers, it also did other things which boosted the bottom line in the short term, but which defendants knew would adversely affect the Company's earnings and growth in the long term. Among other things, starting in the summer of 1997, it drastically decreased its advertising and

marketing budgets. Advertising and marketing were crucial for the mass merchandiser market and became increasingly more crucial as Revlon continued to go "down market." Moreover, this decrease in advertising and marketing expenditures occurred at a time when Revlon was about to launch its top-of-the-line Ultima II line into the mass merchandiser market.

13. Revlon's scheme to delay issuing credits to customers who were returning massive quantities of product commenced in late 1997, when Revlon contracted with Genco Distribution Systems, a third-party return center located in Columbia, Maryland, to process and hold returned product.

14. When Revlon products were received by Genco, they were graded into one of three categories: "A," which was pristine; "B," minor damage to packaging, such as nicked labels; and "C," more seriously damaged or opened product. Stan Hirsh, a Revlon employee, spent several days per week on site at Genco. He directed that Genco hold "A" grade returns for long periods of time before shipping them to Revlon manufacturing centers in Phoenix or North Carolina for redistribution. This intentionally delayed the issuance of credits by Revlon, because Revlon did not issue the customer a credit until it received the returned product at its facilities, causing Revlon's results appear to be better than they were. Hirsh also sold "B" and "C" product to outlet stores such as Odd Lot and Job Lot Trading at substantial discounts. Sometimes, he also had "A" product shipped to outlet stores at substantial discounts.

15. There were extremely high levels of returns to Genco in late 1998 and 1999. Many of the returns were received at Genco in their original shipping cartons and in immaculate condition. The product returned had never been opened by the customer and, in some cases, had never been unloaded from its original shipping pallets or containers. For example, in October 1998, Genco received a return from Marc Glassman Inc. of Ohio consisting of 30 pallets of unopened and untouched Revlon merchandise. Each pallet held four tall store display units. The returns filled one full trailer load and one LTL (less than full load). This large, unopened return contained enough Revlon product to supply the needs of 120 stores which were more stores than there were in the Marc Glassman chain. At the direction of Revlon, Genco held this return for months (to delay issuing credits) before it was finally shipped to a Revlon manufacturing center. Similarly, in early 1999 a trailer load of lipstick was returned completely unopened from Israel. Again, Genco was instructed to hold this shipment for many months before it shipped it to a Revlon manufacturing center for redistribution and for credits to be issued.

16. As a result of defendants having propped up Revlon's revenue and earnings, on February 2, 1998, Revlon was able to issue and sell $900 million in senior notes at 8 5/8% and 8 1/8% interest. This allowed Revlon to redeem $815 million in senior notes at 10 1/2% and 9 3/8% interest and to extend by five years the maturity date on both sets of notes.

17. The house of cards collapsed at the end of the third quarter of 1998 when Revlon disclosed on October 2, 1998, that it would miss its expected quarterly sales figure by

almost $100 million and its expected earnings per share by 90%. The price of Revlon's stock plunged 44% from $27 13/16 to $15 7/16 per share on volume of 2,322,100 shares that day and then declined to about $12 per share. On October 5, 1998, The Wall Street Journal reported:

"How does this happen? How do you go from 73 [cents per diluted share] to seven [cents]? PaineWebber Inc. analyst Andrew Shore said. "You understand when they miss by a little, but this is beyond comprehension. It defies all rational explanation." ...

Revlon said it receives sales information from its retailers late in the quarter, so it couldn't have known until just recently the extent of the sales slowdown. Analysts, however, were skeptical of Revlon's explanation. According to PaineWebber's Mr. Shore, missing a sales target by $100 million is like the difference between using an abacus and a computer. "Whatever the explanations are that might seem reasonable inside Revlon, outside to the investment community there is no real logical explanation," he said.

(Emphasis added.)

18. The price of Revlon stock has not recovered and currently trades for less than $10 per share.

JURISDICTION AND VENUE

19. This Court has jurisdiction over the subject matter of this action pursuant to Section 27 of the Exchange Act, 15 U.S.C. 78aa, and 28 U.S.C. § 1331. The claims asserted herein arise under §§ 10(b) and 20(a) of the Exchange Act, 15 U.S.C. § 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder by the SEC, 17 C.F.R. §240.10b-5.

20. Venue is proper in this District pursuant to § 27 of the Exchange Act, and 28 U.S.C. § 1391(b). Revlon conducts significant business in this District and the acts charged herein, including the preparation and dissemination of materially false and misleading information, occurred in substantial part in this District. Revlon's principal executive offices are at 625 Madison Avenue, New York, New York.

21. In connection with the acts alleged in this complaint, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to, the mails, interstate telephone communications and the facilities of the national securities markets.

PARTIES

22. a. Lead Plaintiffs Binary Traders, Inc., Union Planters Trust and Investment Co., and Irving Bottner purchased Revlon securities during the Class Period, as set forth on Exhibit A attached hereto, and have been damaged thereby.

b. There are 147 additional plaintiffs who purchased Revlon securities during the Class Period, as set forth on Exhibit B attached hereto, and have been damaged thereby.

23. Defendant Revlon, Inc. is a Delaware corporation with its principal executive offices located at 625 Madison Avenue, New York, New York. Revlon, Inc. is a holding company formed in April 1992 that conducts its business through its direct subsidiary Revlon Consumer Products Corporation and its subsidiaries. Revlon Consumer Products Corporation was formed in April 1992 and, on June 24, 1992, succeeded to assets and liabilities of the cosmetic and skin care, fragrances and personal care products business of its then parent company, whose name was changed from Revlon, Inc. to Revlon Holdings Inc. Revlon claims to be the number one manufacturer of mass-market color cosmetics in the United States and a world leader in cosmetics, skin care, fragrance, and personal, hair and nail care products. Revlon's brands include, among others, Revlon, ColorStay, Age Defying, Almay, Ultima II, StreetWear, Charlie, Flex, Outrageous, Mitchum and Creme of Nature, and, according to the Company, are sold in approximately 175 countries. During the Class Period, Revlon common stock traded in an efficient market on the New York Stock Exchange ("NYSE").

24. Defendant REV Holdings, Inc. ("REV Holdings") was formed in 1997 by the merger of Revlon Worldwide Corporation into Revlon Worldwide (Parent) Corporation, with Revlon Worldwide (Parent) Corporation surviving the merger and changing its name to REV Holdings, Inc. It conducts its business exclusively through its indirect subsidiary, Revlon Consumer Products Corporation and its subsidiaries. REV Holdings has had no business operations of its own and its only material asset is its ownership of approximately 83.0% of the outstanding shares of capital stock of Revlon, Inc. (which represents approximately 97.4% of the voting power of those outstanding shares). REV Holdings is an indirect wholly-owned subsidiary of Revlon Holdings Inc. and an indirect wholly-owned subsidiary of MacAndrews & Forbes Holdings Inc., a corporation wholly owned indirectly by defendant Ronald O. Perelman ("Perelman") through Mafco Holdings Inc. Throughout the Class Period, REV Holdings filed Form 10-Ks and 10-Qs in which it incorporated the results of Revlon and its subsidiaries.

25. The individual defendants identified below (the "Individual Defendants"), served, at all times relevant to the claims set forth herein, as senior officers or directors of Revlon in the positions set forth opposite their names:

Name Position

Perelman Chairman of the Executive Committee until June 16, 1998; Chairman of the Board of Directors from June 16, 1998; and Director

Fellows President, Chief Executive Officer and Director

Fox Senior Executive Vice President; Chief Financial Officer until January 15, 1998; Director

Gehrmann Vice President and Executive Vice President and Chief Financial Officer, Revlon Operating Groups until January 15, 1998; Executive Vice President, Chief Financial Officer from January 15, 1998

26. Perelman through several corporations owned, during the relevant period, 83% of the Company's outstanding shares of common stock and had approximately 97.4% of the combined voting power of the outstanding shares. Perelman therefore had the power to control and direct or cause the direction of the management and policies of Revlon.

27. Because of the Individual Defendants' positions with, and shareholdings in, the Company, they participated in the day-to-day management and overall direction of the Company and in the preparation of the statements alleged to be false herein. Each was privy to confidential proprietary information concerning the Company and its business, operations, products, growth, financial statements, and financial condition. The Individual Defendants were each actively involved in preparing, reviewing, authorizing and disseminating Revlon's publicly reported false financial statements for the quarterly periods ended September 30, 1997, March 31, 1998 and June 30, 1998, and the fiscal year ended December 31, 1997, financial press releases and other group-published corporate reports. In particular, Fox signed the Report on Form 10-Q for the quarterly period ended September 30, 1997; Gehrmann signed the Reports on Form 10-Q for the quarterly periods ended March 31, 1998 and June 30, 1998; Perelman, Fellows, Fox and Gehrmann each signed the Report on Form 10-K for the fiscal year ended December 31, 1997; and Perelman, Fellows, Fox and Gehrmann each signed the March 12, 1998 Registration Statement. Each Individual Defendant was provided with copies of the documents alleged herein to be misleading prior to or shortly after their issuance and had the ability and opportunity to prevent their issuance or cause them to be corrected. Accordingly, each of the Individual Defendants is responsible for the accuracy of the public reports and releases detailed herein and is therefore primarily liable for the representations contained therein.

USE OF SECURITIES ANALYSTS AS A CONDUIT TO FEED FALSE INFORMATION TO THE SECURITIES' MARKETS

28. Analysts employed by securities firms prepare written reports and make recommendations about public companies such as Revlon. Revlon has been followed by securities analysts employed by several firms that have issued reports concerning Revlon. Among the firms following Revlon were Bear, Stearns & Co. ("Bear Stearns"), Credit Suisse First Boston Corp. ("Credit Suisse"), J. P. Morgan Securities Inc. ("Morgan"), Merrill Lynch Capital Markets ("Merrill Lynch"), PaineWebber, Inc. ("PaineWebber") and Prudential Securities, Inc. ("Prudential").

29. In writing their reports about Revlon, these analysts relied in substantial part upon information provided to them by the defendants and assurances by the defendants that information in the analysts' reports was not at material variance with the Company's internal knowledge of their operations and prospects.

30. As part of the fraudulent scheme, Revlon had certain of its executives, including defendants Fellows, Fox and Gehrmann, communicate regularly with securities analysts. These communications included telephone conference calls, meetings, written financial releases and analyst briefings where Revlon representatives discussed many aspects of the Company's operations and prospects, including revenues, earnings and distribution of Revlon products. When defendants engaged in these communications with securities analysts, they knew that their statements would be publicly disseminated by the securities analysts to the market in periodic reports that securities analysts prepared and disseminated. Reports by securities analysts are instantaneously disseminated worldwide to thousands of investors over the First Call computer network and otherwise. Defendants' communications with analysts predated the beginning of the Class Period and continued throughout the Class Period.

31. The purpose of these communications by defendants was to disseminate publicly favorable information concerning Revlon's performance and prospects and to provide detailed "guidance" and direction to the analysts concerning the Company's business and expected short-term and long-term revenues and earnings. Revlon and the Individual Defendants knew and expected that by participating in these regular, periodic communications with analysts, they would publicly disseminate information to the investment community upon which investors would rely and act to make purchases of the Company's stock. Revlon's executives communicated with analysts to cause them to issue favorable reports about Revlon during the Class Period and used these communications to present to the marketplace falsely the business and prospects of Revlon, thus artificially inflating the market price of Revlon securities. Revlon was fully aware of the contents of securities analysts' reports and maintained files containing these analyst reports. The investment community and investors relied and acted upon the information communicated in these reports and advisories.

32. The information about Revlon contained in the various securities analysts' reports was obtained from or based on information obtained from the Company and the Individual Defendants. Copies of drafts of these securities' analysts' reports were provided from time to time to Revlon and certain of its senior officers before they were released, and those drafts were reviewed and approved by such senior officers. Defendants knew of these reports and their contents, knew that they were based on information provided by Revlon, and knew that they would be issued to members of the investing public, would be circulated throughout the investment community, and would affect the trading price of Revlon's securities. Defendants endorsed these reports, adopted them as their own and placed their imprimatur on them as well as the statements contained therein.

33. The role of the securities analysts who wrote reports on Revlon became that of conduits by and through which defendants provided false information to the marketplace in order to deceive investors and artificially inflate the price of Revlon securities. Acting through, or by means of, securities analysts, defendants were able to manipulate the price of Revlon securities and to deceive investors in contravention of §10(b) of the Exchange Act, which makes it unlawful to employ any manipulative or deceptive device or contrivance without regard to whether the manipulation or deception is accomplished directly or indirectly and without regard to whether the defendant acts personally or through or by means of any other person.

SUBSTANTIVE ALLEGATIONSBackground Facts

34. In 1986, Perelman acquired Revlon for $1.7 billion as the result of a hostile takeover. Perelman financed the acquisition through the issuance of high-risk, high-yield "junk bonds" which post-acquisition saddled Revlon with crushing debt and debt service.

35. The debt included Revlon's $260 million aggregate principal amount of 9 3/8% Senior Notes due 2001 (the "9 3/8% Notes"), which could be redeemed on and after April 1, 1998.

36. The debt also included Revlon's $555 million aggregate principal amount of 10 1/2% Senior Subordinated Notes due 2003 (the "10 1/2% Notes"), which could be redeemed on or after February 15, 1998.

37. The debt also included $1.115 billion in zero coupon Senior Secured Discount Notes of Revlon Worldwide Corporation issued by MacAndrews & Forbes Holdings Inc. due March 15, 1998, secured by the stock of Revlon owned by Perelman and his entities. Because MacAndrews & Forbes Holdings Inc. was wholly owned indirectly by Perelman, these notes were an obligation of Perelman, not Revlon.

38. On March 5, 1996, Perelman sold approximately 15% of the Company, or 8,625,000 shares of Revlon Class A common stock, in an initial public offering for $24.00 per share and used the offering proceeds of $187.8 million to reduce a portion of Revlon's debt.

39. On January 30, 1997, Revlon announced its thirteenth consecutive quarter of growth in net sales, operating income and earnings before interest expense, taxes, depreciation and amortization ("EBITDA") compared with the corresponding quarter of the prior year. 1996 was also Revlon's first full year with net income following several years of net losses.

40. As a result of Revlon's several-year record of improving operating performance, Revlon Worldwide (Parent) Corporation, on March 7, 1997, placed $770 million aggregate principal amount at maturity of zero coupon Senior Secured Discount Notes due in 2001, netting $505 million. Those proceeds, together with approximately $600 million cash from MacAndrews & Forbes Holding Co. generated by pledging stock of News Corp. which Perelman had received for selling the New World Communications Group, were used on August 2, 1997, to pay off the $1.15 billion Senior Secured Discount Notes of Revlon Worldwide Corporation.

Revlon Improperly And Artificially

Inflated Revenues And Earnings

41. In connection with its September 30 and December 31, 1997 and March 31 and June 30, 1998 financials, as detailed herein, defendants aggressively stuffed Revlon's sales channels with excess inventory of Revlon's products, and offered promotions, special deals, rebates and marketing incentives, such as unlimited rights of return, especially at the end of quarters, in an effort artificially to inflate its reported operating results, thereby enabling defendants to report increased sales and earnings and to fraudulently maintain the appearance that Revlon's business was growing.

42. Defendants maintained close relationships with Revlon's customers, were kept apprised of Revlon's customers' sell-through of Revlon products, and continuously monitored and assisted in the management of the inventories of Revlon products held by such customers. Accordingly, the defendants knew the effect of the promotions, special deals, rebates and marketing incentives on the Revlon inventory held by Revlon's customers. They also knew that inventory of Revlon products in the channel was growing materially and that Revlon's sales to its customers greatly exceeded its customers' sales of Revlon products.

43. The excess loading of its sales channels and marketing incentives caused the inventories of Revlon's customers to balloon to extraordinary levels. As a result of these bloated inventory levels, Revlon's customers would inevitably have to return material amounts of Revlon products and significantly decrease orders in the future so as to bring their inventory levels in line with actual sell-through for Revlon products. The impending inventory correction, and the adverse ramifications it would have for Revlon and its

financial results, were known to, or recklessly disregarded by, defendants at all relevant times.

44. By the end of the Class Period, Revlon was no longer able to continue to stuff product into its distribution channels and was forced to announce a massive almost $100 million sales shortfall for the third quarter of 1998 and acknowledge, among other things, that it would be reducing product shipments, purportedly due to changing "inventory" practices of its customers. In effect, defendants admitted that the primary reason for Revlon's apparent growth during the Class Period was the Company's excess loading of its sales channels and marketing activities without recording appropriate inventory and return reserves, and the Company's improper recognition of revenue.

Revlon Delayed The Writedown Of Outdated And Unsalable Inventory

45. One of Revlon's subsidiaries was Prestige, which operated 198 retail stores in outlet malls nationwide, selling cosmetics, fragrances and health and beauty products. A major portion of Prestige's inventory was provided by Revlon. By the start of the Class Period, Prestige held tens of millions of dollars of old, excess inventory, which it had acquired from Revlon and which was of diminishing value.

46. CCI operated 68 specialty retail stores in the middle Atlantic region and Chicago offering a broad range of brand name prestige and mass-merchandised cosmetics.

47. On October 1, 1996, Revlon and CCI announced the signing of a non-binding letter of intent for the acquisition of CCI and its merger into Prestige. Revlon represented that it intended to combine Prestige's and CCI's operations and ultimately to sell its interest and exit the retail business. On November 27, 1996, the parties signed a definitive agreement for the merger. On April 25, 1997, CCI stockholders approved the transaction. After the merger, Revlon held approximately 85% of the common stock of CCI, the surviving combined entity.

48. However, following the merger, defendants continued to sell obsolete and nearly worthless product from Revlon to CCI at full value. Defendants failed to write down the value of CCI's inventory and failed to disclose that the value of that inventory was impaired by at least $5 million during the quarter ended September 30, 1997, by at least $10 million during the quarter ended December 31, 1997, and by at least $5 million during the quarter ended March 31, 1998. In addition, Revlon failed to timely recognize in the second quarter ended June 30, 1998 additional impairment losses with respect to its disposition of CCI in June 1998 of at least $10 million. Belatedly, Revlon took additional write-downs on the disposal of CCI of an additional $32.7 million in the fourth quarter ended December 31, 1998.

September 1997 Rumors Of Softer Sales

49. Throughout the summer of 1997 until September 17, 1997, Revlon stock had traded in the range of $46 1/8 per share to $54 1/8 per share on daily volume averaging about 50,000 shares. On September 17, 1997, the stock closed at $52 11/16.

50. Rumors of softer Revlon sales in the third quarter of 1997 began to spread Thursday morning, September 18, 1997. Trading in Revlon shares surged to 1,028,700 shares and the price per share dropped $3 5/8 or almost 7%. Defendants reacted immediately by using promotions, special deals, rebates and marketing incentives, such as unlimited rights of return, and the other improper activities set forth above to ship material amounts of product to Revlon's customers at the end of the September 1997 quarter, without recording appropriate reserves against these shipments.

Materially False And Misleading Statements Made During The Class Period

Third Quarter 1997 Misrepresentations

51. On October 29, 1997, Revlon issued a press release announcing its financial results for the third quarter of 1997, the period ended September 30, 1997. The Company reported a purported sixteenth consecutive quarter of growth in net sales, operating income and EBITDA compared with the corresponding quarter of the prior year. It reported net sales of $623.5 million, an asserted increase of 11.5%; EBITDA of $96.3 million, an asserted increase of 13.4%; and operating income of $71.2 million, an asserted increase of 9.7%. Defendants represented that net income was $33.1 million or $.65 per share, a 57.6% increase. Defendant Fellows was quoted as saying, "We are pleased to report record earnings per share for the quarter." The press release reported:

Even though consumer sell-through for the Revlon and Almay brands has increased by double-digit growth rates, the Company's sales to its customers have been and may continue to be impacted by retail inventory balancing and reductions resulting from the consolidation in the chain drugstore industry.

52. On November 13, 1997, Revlon filed with the SEC its Report on Form 10-Q for the quarter ended September 30, 1997 signed by defendant Fox. In the 10-Q, the Company stated that all adjustments necessary for a fair presentation of its financial statements had been made. The Company repeated the figures for net sales, EBITDA, operating income, and net income quoted in the previous paragraph. It falsely attributed the increase in net sales, among other things, to "increased demand in the United States" and "increased distribution internationally into the expanding self-select distribution channel." Regarding United States sales, the Company repeated the representation quoted in the previous paragraph concerning consumer sell-through for the Revlon and Almay brands and the impact of inventory balancing and reductions.

53. The representations described in the previous two paragraphs, including the increases in net sales, EBITDA, operating income and net income despite consolidation in the chain drugstore industry and retail inventory balancing, were each materially false and misleading when issued, because they (a) failed to disclose that the increases in net sales, EBITDA, operating income and net income were due to (i) improper revenue recognition in violation of GAAP, and (ii) promotions, special deals, rebates and marketing incentives, such as unlimited rights of return, for which inadequate reserves had been established in violation of GAAP, and (b) failed to adjust in accordance with GAAP the impaired value of the inventory in CCI of at least $5 million. Specifically, defendants failed to disclose that in the third quarter of 1997:

a. Defendants caused Revlon to ship to customers at the end of the quarter product that had not been ordered or that had been requested by the customers to be shipped at a future date in a subsequent quarter. For example, Revlon engaged in "bill-and-hold" transactions with Quality King, for which Revlon generated an invoice and booked the revenue, but the products were held in a Revlon warehouse and not shipped to the customer by the end of the quarter. In some instances no products were ever shipped. Revlon improperly recognized revenue during the quarter ended September 30, 1997 by at least $15 million as a result of Revlon's recording of sales in violation of GAAP as set forth above.

b. Revlon loaded up small accounts with merchandise during the third quarter of 1997, but, in October 1997, Revlon stopped servicing smaller accounts directly and instructed them by form letter, without warning, that they would have to purchase through a distributor, Rita Ann. The smaller accounts found themselves overloaded with Revlon products at the same time they no longer were serviced by a Revlon sales representative, who had provided these smaller stores with fixtures, had offered promotional deals and incentives and maintained displays and reordered merchandise. Moreover, the smaller stores were faced with paying higher prices to Rita Ann than they had paid to Revlon.

c. During the third quarter of 1997, Revlon began to sell its Ultima II line to Walgreens and CVS. This boosted revenues in the short term, but damaged Revlon's future sales of Ultima II to department stores.

d. Much Revlon product was sold with an unlimited right of return. When an account placed an order, Revlon sales persons could check a box on the order form to ensure that the store could return the merchandise at a later date if it were not sold, in essence providing customers with product on a consignment basis. The order forms were set up in this fashion and the sales persons were given this authority so that when they pressured their accounts at the end of quarters to take more product than the accounts currently needed the Revlon sales persons could state that the customer had no exposure for unsold product.

54. Defendants' statements about increased sell-through and "retail inventory balancing and reductions" were also false. The statements made it appear that Revlon's record results had been achieved despite "retail inventory balancing and reductions," when in

fact the results were achieved by inflating sales in violation of GAAP and when in fact due to special end-of-quarter incentives and programs, Revlon's sales to its customers greatly exceeded actual demand for Revlon product. Defendants failed to disclose the existence of known trends, events or uncertainties that they reasonably expected would have a material unfavorable impact on net revenues or income or that were reasonably likely to result in the Company's liquidity decreasing in a material way in violation of Item 303 of Regulation S-K under the federal securities laws (17 C.F.R. 229.303). These trends included, among others, the fact that sales by Revlon to its customers (into the channel) greatly exceeded sell-through (sales by its customers at retail out of the channel) and that future sales would be reduced accordingly and that sales of Ultima II products to Walgreens and CVS would damage sales to department stores.

55. As a result of defendants improper recognition of revenue and overstatement of Revlon's inventory valuation Revlon's publicly disseminated income from operations and net income for the quarter ended March 31, 1998 as follows:

(000's)

Reported Restated % Overstated

Income from $24,500 $12,000 104%

Operations

Net Income <Loss> $<58,100 $<70,600> 22%(1)

56. As a result of defendants improper recognition and overstatement of Revlon's inventory valuation at September 30, 1997, defendants materially overstated Revlon's publicly dissemination income from operations and net income for the quarter ended September 30, 1997 as follows:

(000's)

Reported Restated % Overstated

Income from $71,200 $55,700 28%

Operations

Net Income 31,100 17,600 88%

Fourth Quarter And Full Year 1997 Misrepresentations

57. On January 22, 1998, Revlon issued a press release announcing its financial results for the full year and fourth quarter of 1997, the period ended December 31, 1997. The Company reported record performance for the full year and the seventeenth consecutive quarter of growth in net sales, operating income and EBITDA compared with the corresponding quarter of the prior year. It reported net sales for the fourth quarter of $702.1 million, an asserted increase of 14.2%; EBITDA (after a non-recurring gain) of $106.0 million, an asserted increase of 7.0%; and operating income (after a non-recurring gain) of $81.1 million, an asserted increase of 5.7%. Defendants represented that net income was $41.4 million or $.81 per share, an asserted increase of 32.3%.

58. In the press release, the Company reported that net sales for 1997 increased 10.2% to $2.391 billion, that EBITDA increased 12.3% to $318.0 million (before non-recurring charge), that operating income rose 10.1% to $220.9 million (before non-recurring charge) and that net income was $58.5 million or $1.14 per share (before an extraordinary charge). Defendant Fellows commented in the press release on the results:

We are extremely proud to report record earnings per share for the year. ... By all significant measures, including net sales and operating income, EBITDA and net income before non-recurring charges, Revlon grew at double digit rates. ... Our U.S. operation continued its strong growth based upon our existing products and introduction of successful new product offerings. Our International operation increased Revlon's global presence with the success of Revlon branded color cosmetics, new launches and expanded distribution.

The press release reiterated:

As previously reported, while consumer sell-through for the Revlon and Almay brands was strong in 1997, the Company's sales to its retail customers have been and may continue to be impacted by retail inventory balancing and reductions resulting from the consolidation in the chain drugstore industry.

59. On March 4, 1998, Revlon filed with the SEC its Report on Form 10-K for the year ended December 31, 1997 signed by defendants Perelman, Fellows, Fox and Gehrmann. In the 10-K, the Company repeated the figures for net sales, EBITDA, operating income, and net income for the fourth quarter and year ended December 31, 1997 quoted in the

previous two paragraphs. It falsely attributed the increase in net sales, among other things, to "increased demand in the United States" and "increased distribution internationally into the expanding self-select distribution channel." Regarding United States sales, the Company stated that the increase in net sales was, among other things, a result of general improvement in consumer demand for the Company's color cosmetics. The Company further stated:

Even though consumer sell-through for the REVLON and ALMAY brands, as described below in more detail, has increased significantly, the Company's sales to its customers have been during 1997 and may continue to be impacted by retail inventory balancing and reductions resulting from consolidation in the chain drugstore industry in the U.S.

60. The representations described in the previous three paragraphs, including the increases in net sales, EBITDA, operating income and net income, despite consolidation in the chain drugstore industry and retail inventory balancing, were each materially false and misleading when issued, because they (a) failed to disclose that at least $40 million of the increases in net sales, EBITDA, operating income and net income were due to (i) improper revenue recognition in violation of GAAP, and (ii) promotions, special deals, rebates and marketing incentives, such as unlimited rights of return, for which inadequate reserves had been established in violation of GAAP, and (b) failed to adjust in accordance with GAAP the impaired value of the inventory in CCI of at least $10 million. Since CCI's quarterly financial results were consolidated in Revlon's, this resulted in an overstatement of Revlon's purported inventory and operating income of at least $10 million.

61. As a result of defendants improper recognition of revenue and overstatement of Revlon's inventory valuation at December 31, 1997, defendants materially overstated Revlon's publicly disseminated income from operations and net income for the quarter and fiscal year ended December 31, 1997 as follows:

Qtr. (000's) FYE (000's)

Reported Restated %Overstated Reported Restated % Overstated

Income from $81,200 $45,200 80% 213,300 $172,300 24%

Operations

Net Income 41,500 5,500> 655% 43,500 8,500 412%

62. The representations contained in ¶¶58 -60 were also false and misleading for the reasons set forth in ¶4 and for failing to disclose the following:

a. In December 1997, defendants caused Revlon to ship to Walmart more than $40 million of Revlon product, which Walmart had requested be shipped at a later date.

Revlon booked the revenue in December 1997; however, Walmart subsequently returned the product.

b. In the fourth quarter of 1997, Revlon shipped early to many other accounts and also expanded its shipments of Ultima II to Walgreens and CVS, knowing that there had been insufficient market testing or advertising for sales of Ultima II in the mass market.

c. In January 1998 a tremendous amount of Revlon gift sets which had purportedly been sold for Christmas 1997 (and the revenue had been booked in the fourth quarter) was returned to Revlon. Indeed, for several months starting in January 1998 up to five tractor-trailers of gift sets per day were returned to Revlon.

63. Defendants' statements about increased sell through and "retail inventory balancing and reductions" were also false. The statements made it appear that Revlon's record results had been achieved despite "retail inventory balancing and reductions," when in fact the results were achieved by inflating sales in violation of GAAP and when in fact, due to special end-of-quarter incentives and programs, Revlon's sales to its customers greatly exceeded retail demand for Revlon products. Defendants also failed to disclose the existence of known trends, events or uncertainties that they reasonably expected would have a material, unfavorable impact on net revenues or income or that were reasonably likely to result in the Company's liquidity decreasing in a material way in violation of Item 303 of Regulation S-K under the federal securities laws (17 C.F.R. 229.303). These trends included, among others, the fact that sales by Revlon to its customers (into the channel) greatly exceeded sell-through (sales by its customers out of the channel) and that future sales would be reduced accordingly and that sales of Ultima II products to Walgreens and CVS would damage sales to department stores.

The Note Refinancing

64. After the announcement of Revlon's seemingly "record" financial results, on February 2, 1998, the Company, through Revlon Escrow Corp., issued and sold in a private placement $650 million aggregate principal amount of 8 5/8% Senior Subordinated Notes due 2008 (the "8 5/8% Notes") and $250 million aggregate principal amount of 8 1/8% Senior Notes due 2006 (the "8 1/8% Notes"). The proceeds from the sale of the 8 5/8% and 8 1/8% Notes were used to finance the redemption of the 9 3/8% Notes and 10 1/2% Notes on March 4, 1998 and April 1, 1998, respectively, and for working capital.

65. Pursuant to the terms of the private placement, on March 12, 1998, the Company filed a joint Registration Statement/Prospectus, signed by defendants Perelman, Fellows, Fox and Gehrmann, with the SEC effective April 3, 1998 to offer to exchange the 8 5/8% and 8 1/8% Notes for registered notes with substantially identical terms. Additionally, on April 4, 1998, the Company filed with the SEC an amendment to its March 12 Registration Statement signed by defendants Perelman, Fellows, Fox and Gehrman (collectively the "Prospectus"). The Prospectus obligated Revlon, pursuant to Regulation S-K of the Securities Act of 1933, to disclose the adverse factors then affecting the Company's operations and finances, but it failed to (a) disclose that the increases in net

sales, EBITDA, operating income and net income in 1997 were due to (i) improper revenue recognition in violation of GAAP, and (ii) promotions, special deals, rebates and marketing incentives, such as unlimited rights of return and extended payment terms, for which inadequate reserves had been established in violation of GAAP and (b) to adjust the impaired value of the inventory in CCI, whose financial results were consolidated in Revlon's. In addition, the financial statements set forth in the Prospectus were false and misleading for the reasons set forth in ¶¶6-11.

Analysts Are Used To Reinforce The Impression

That Revlon Is Continuing To Grow

66. By April 9, 1998, the price of Revlon common stock had climbed back to $50 15/16 per share. On that date, Prudential issued a widely disseminated analyst report based on and repeating the defendants' representations regarding Revlon's operations and purported growth. Prudential rated Revlon common stock a "Buy," and encouraged its customers to purchase Revlon stock. In making its recommendation, Prudential's analyst repeated the following representations made by Revlon executives:

We estimate total sales growth of 9%, as the company should still benefit from the Cosmetics Center merger. ...

We expect this quarter to be the last one affected by retailer inventory destocking as a result of the consolidation of drug retailers and SKU rationalization. ...

67. The representations described in the previous paragraph were materially false and misleading when issued in suggesting that the previous quarters' financial results would have been even better had it not been for retailer inventory destocking; in stating that the second quarter 1998 would be the final quarter affected by consolidation of drug retailers; and for the reasons set forth in paragraphs 10 and 11.

First Quarter 1998 Misrepresentations

68. On April 29, 1998, Revlon issued a press release announcing its financial results for the first quarter of 1998, the period ended March 31, 1998. The Company reported an eighteenth consecutive quarter of growth in net sales, operating income and EBITDA compared with the corresponding quarter of the prior year. It reported net sales of $534.3 million, an asserted increase of 8.4%; EBITDA of $51.2 million, an asserted increase of

28.6% after including the non-recurring charge in the first quarter of 1997; and operating income of $24.5 million, an asserted increase of 42.4% after including the non-recurring charge in the first quarter of 1997. Commenting on these results, defendant Fellows was quoted as follows:

This quarter Revlon became the #1 manufacturer in the United States mass market color cosmetics category. This achievement reflects the continued success of both the Revlon and Almay franchises and demonstrates the effectiveness of our long-term business strategies.

The press release also stated that "consumer sell-through for the Revlon and Almay brands was strong in the first quarter of 1998."

69. On May 12, 1998, Revlon filed with the SEC its Report on Form 10-Q for the quarter ended March 31, 1998 signed by defendant Gehrmann. In the 10-Q, the Company stated that all adjustments necessary for a fair presentation of its financial statements had been made. The Company repeated the figures for net sales, EBITDA, operating income, and net income quoted in the previous paragraph. It falsely attributed the increase in net sales, among other things, to "increased demand in the United States" and "increased distribution internationally." Regarding United States sales, the Company stated:

Even though consumer sell-through for the REVLON and ALMAY brands, as described below in more detail, has increased, the Company's sales to its customers have been and may continue to be impacted by retail inventory balancing and reductions resulting from consolidation in the chain drugstore industry in the U.S.

70. The representations described in the previous two paragraphs, including the increase in net sales, EBITDA and operating income despite consolidation in the chain drugstore industry and retail inventory balancing, were each materially false and misleading when issued, because they (a) failed to disclose that the increases in net sales, EBITDA and operating income were due to (i) improper revenue recognition in violation of GAAP, and (ii) promotions, rebates and marketing incentives, such as unlimited rights of return for which inadequate reserves had been established in violation of GAAP, and (b) failed to adjust in accordance with GAAP the impaired value of the inventory in CCI of at least $5 million. Since CCI's quarterly financial results were consolidated in Revlon's, this resulted in an overstatement of Revlon's purported inventory and operating income of at least $5 million.

71. In addition, the representations contained in ¶¶68 - 69 were false and misleading for the reasons set forth in ¶¶4, 10, 11. Moreover, during the first quarter of 1998, Revlon,

despite its agreement with CVS and Walgreens, expanded its distribution of Ultima II to the mass market merchandisers. Among others, it sold Ultima II to Longs Drugstores, with an unlimited right-of-return. Accordingly, defendants improperly recognized revenue during the quarter ended March 31, 1998 by at least $10 million as a result of Revlon's recording of sales in violation if GAAP.

72. Defendants' statements about increased sales through and "retail inventory balancing and reductions" were also false. The statements made it appear that Revlon's record results had been achieved despite "retail inventory products and balances and reductions" when in fact the results were achieved by inflating sales in violation of GAAP and by the fact that due to special end of quarter incentives and programs, Revlon's sales to its customers greatly exceeded retail demand for Revlon products. The representations also failed to disclose that Revlon's customers' inventories of Revlon products were significantly growing and bringing the day of reckoning for the improper revenue recognition and excess loading of its sales channels ever closer. Defendants also failed to disclose that customers were returning product in massive quantities, recognition of which was being delayed by the credit memoranda deferral scheme discussed above. Defendants failed to disclose the existence of known trends, events or uncertainties that they reasonably expected would have a material unfavorable impact on net revenues or income or that were reasonably likely to result in the Company's liquidity decreasing in a material way in violation of Item 303 of Regulation S-K under the federal securities laws (17 C.F.R. 229.303). These trends included the fact that sales by Revlon to its customers (into the channel) greatly exceeded sell-through (sales by its customers out of the channel) and that future sales would be reduced accordingly.

73. Following the Company's announcement of earnings for the first quarter of 1998, after detailed "guidance" and direction from Company executives, including the Individual Defendants, concerning the Company's business and expected short-term and long-term revenues and based upon and repeating representations made by Company executives, including the Individual Defendants, analysts continued to promote Revlon's stock and the Company's performance and prospects.

(a) On May 1, 1998, PaineWebber issued a widely disseminated analyst report on Revlon which stated:

We maintain our 1998 and 1999 EPS estimates of $1.85 and $2.50, respectively, and reiterate our attractive (2) rating on the stock. This is in keeping with Revlon's solid fundamentals in terms of revenue growth and cost savings, which are backed by new product activity, increased distribution, marketing savvy, and the lack of serious competition, as well as improved operational efficiencies.

(Emphasis added.)

(b) On May 4, 1998, Credit Suisse issued a widely disseminated analyst report on Revlon in which it rated Revlon common stock a "Buy," and encouraged its customers to purchase Revlon stock. The report stated:

First quarter results exceeded expectations, ... Both sales and profitability were modestly ahead of our forecast. Revlon's market share continues to increase, fueled by an aggressive program of innovative new product introductions; however, revenues do not fully reflect this gain owing to drugstore consolidation and further inventory reductions by mass-volume retailers. Still, the trends are impressive and we expect additional new products throughout the year to drive market share even higher. We maintain our Buy rating on REV shares with a 12-month price target of $60 per share.

(Emphasis added.)

74. On May 15, 1998, senior Revlon management, including defendants Fox and Gehrmann, appeared at the "Prudential Small Cap Conference." At this conference, Company management reiterated the earlier "guidance" to analysts regarding the current condition of the Company and known trends affecting the Company. Following the conference, Prudential issued an analyst report on Revlon, which was widely disseminated, based upon and repeating representations made by Fox on May 15, 1998. Prudential continued to rate Revlon common stock a "Buy," and encouraged its customers to purchase Revlon stock. Prudential stated:

Given the outlook for continued new products (8-10 more to come this year), the initial results from the new products launched in the first quarter, the strength of Revlon's market shares, the robust category growth, combined with continuing operating efficiency improvements, we believe that 1998 looks to be another strong year for Revlon. We continue to rate the shares a Buy with a 12-month price target of $60. ...

75. The representations made by defendants described in the previous two paragraphs (including subparagraphs) which were repeated in the analysts' reports were each materially false and misleading when issued in suggesting that the previous revenues would have been better had it not been for drugstore consolidation and inventory reductions by mass-volume retailers and for the reasons set forth in paragraphs 4 and 11.

The representations also failed to disclose that sell-through for Revlon's core Revlon and Almay brands and for Ultima II was decreasing significantly and contributing to the build-up of such products in the distribution channel and bringing the day of reckoning for the improper revenue recognition and excess loading of its sales channels ever closer. Defendants failed to disclose the existence of known trends, events or uncertainties that they reasonably expected would have a material unfavorable impact on net revenues or income or that were reasonably likely to result in the Company's liquidity decreasing in a material way in violation of Item 303 of Regulation S-K under the federal securities laws (17 C.F.R. 229.303). These trends included the fact that sales by Revlon to its customers (into the channel) greatly exceeded sell-through (sales by its customers out of the channel) and that future sales would be reduced accordingly.

Revlon Announces The Disposition Of CCI

76. On June 8, 1998, Revlon issued a press release in which the Company announced that it had decided to dispose of its 85% interest in CCI. Commenting on the disposition of a company which Revlon acquired in a stock-swap in April 1997, defendant Fellows stated:

We are implementing our previously announced strategy of withdrawing from operating retail stores. ... The continued success of our core business proves the effectiveness of our long-term business strategies. The transactions announced today demonstrate our continued commitment to strengthen and expand our core businesses and brands.

The press release reported that, in connection with its exit from retail operations, Revlon expected to record a charge of up to approximately $15 million in the second quarter, and would reflect the retail stores as discontinued operations in reported financial results.

Second Quarter 1998 Misrepresentations

77. On July 29, 1998, Revlon issued a press release announcing its financial results for the second quarter of 1998, the period ended June 30, 1998. The Company reported a nineteenth consecutive quarter of growth in net sales, operating income and EBITDA compared with the corresponding quarter of the prior year. It reported net sales of $575.3 million, an asserted increase of 7.0% "on an as reported basis" (meaning after treating CCI as discontinued operations and removing its results from 1997 comparable figures); EBITDA of $78.1 million, an asserted increase of 8.5%; and operating income of $51.5 million, an asserted increase of 6.2%. Defendants represented that net income from continuing operations was $11.7 million or $.22 per diluted share, an increase of 39%. The press release quoted defendant Fellows's:

This was an exciting quarter, with strong consumer response to new products and increased global distribution. ... Momentum continues for the Revlon and Almay franchises with strong consumer sales driving the growth in the color cosmetics category.

(Emphasis added.) Revlon stated that it continued as the #1 manufacturer and widened its lead in dollar market share in the United States mass market color cosmetics category. The Company also stated:

As previously reported, while consumer sell-through for the Revlon and Almay brands was strong in the first half of 1998, the Company's sales to its retail customers have been and may continue to be impacted by retail inventory balancing and reductions.

78. On August 12, 1998, Revlon filed with the SEC its Report on Form 10-Q for the quarter ended June 30, 1998 signed by defendant Gehrmann. In the 10-Q, the Company stated that all adjustments necessary for a fair presentation of its financial statements had been made. The Company repeated the figures for net sales, EBITDA, operating income, and net income quoted in the previous paragraph. It falsely attributed the increase in net sales, among other things, to "increased demand in the United States" and "increased distribution internationally." Regarding United States sales, the Company stated:

Net sales improved for the second quarter and first half of 1998, primarily as a result of continued consumer acceptance of new product offerings and general improvement in consumer demand for the Company's color cosmetics. Even though consumer sell-through for the REVLON and ALMAY brands, as described below in more detail, has increased, the Company's sales to its customers have been and may continue to be impacted by retail inventory balancing and reductions.

79. The representations described in the previous two paragraphs, including the increases in net sales, EBITDA, operating income and net income despite retail inventory balancing and reductions, were each materially false and misleading when issued (a) for the reasons set forth in paragraph 4, and because they (b) failed to disclose that the increases in net sales, EBITDA, operating income and net income were due to (i) improper revenue recognition in violation of GAAP in an amount of at least $15 million, and (ii) promotions, rebates and marketing incentives, such as unlimited rights of return, for which inadequate reserves had been established in violation of GAAP, and (c) failed to disclose at least an additional $10,000,000 of impaired value of Revlon's investment in CCI, a discontinued operation that was already disposed of.

80. Defendants' statements about "retail inventory balancing and reductions" were also false. These statements made it appear that Revlon's asserted good results had been achieved despite "retail inventory balancing and reductions" when in fact the results were achieved by inflated sales in violation of GAAP and by the fact that due to special end of quarter incentives and programs, Revlon's sales to its customers greatly exceeded retail demand for Revlon products. The representations also failed to disclose that, as a result of firing its rotators in October 1997, sell-through for mass-market retailers and for Revlon's main Revlon and Almay brands was decreasing significantly as shelf space for Revlon products was being reduced, contributing to the build-up of products in the distribution channels and increasing the number of returns, making the day of reckoning for the improper revenue recognition and excess loading of its sales channels imminent. Defendants failed to disclose the existence of known trends, events or uncertainties that they reasonably expected would have a material unfavorable impact on net revenues or income or that were reasonably likely to result in the Company's liquidity decreasing in a material way in violation of Item 303 of Regulation S-K under the federal securities laws (17 C.F.R. 229.303). These trends included the fact that sales by Revlon to its customers (into the channel) greatly exceeded sell-through (sales by its customers out of the channel), so that, according to a February 9, 1999 PaineWebber report, $100 million in retail inventory had to be "pared down."

81. As a result deductions caused Revlon's reported income from operations to be materially overstated and its reported net loss to be materially understated by at least $20 million and $16 million, respectively. Accordingly, Revlon's reported income from operations was overstated by 63%.

82. Following the Company's announcement of earnings for the second quarter of 1998, after "detailed guidance" and direction from Company executives, including the Individual Defendants, concerning the Company's business and expected short-term and long-term revenues and based upon and repeating representations made by Company executives, including the Individual Defendants, analysts continued to promote Revlon's stock and the Company's performance and prospects. On August 3, 1998, PaineWebber issued a widely disseminated analyst report on Revlon in which it stated:

We are maintaining our 1998 and 1999 EPS estimates of $1.70 and $2.30, respectively, and reiterate our Attractive rating on the stock, in keeping with Revlon's solid fundamentals in terms of revenue growth and cost savings, backed by new product activity, increased distribution, marketing savvy, lack of serious competition, and improved operational efficiencies. ...

(Emphasis added.) PaineWebber, following its guidance from the defendants, estimated net sales for the third quarter of 1998 at $635.6 million and net income of $39.0 million.

83. On September 11, 1998, senior management of Revlon, including but not limited to defendants Fellows and Gehrmann, appeared at the Morgan "High Yield Conference."

The purpose of Fellows's and Gehrmann's appearance was to provide analysts with "guidance" concerning Revlon's operations, performance, systems controls and current and future business practices. No information was disclosed by Revlon that contradicted the earlier EPS statement by analysts and Revlon management failed to disclose that its earlier assessments of reserves for CCI and returns were inadequate.

Revlon's True Financial Condition Is Belatedly Disclosed

84. On October 2, 1998, only three weeks after the Company reassured investors that its revenue generation and business were proceeding according to plan, Revlon shocked the market by issuing a press release, in which it announced that third quarter results would fall materially short of expectations. The consensus analyst estimate was that Revlon would have $635 million in net sales and $.73 earnings per diluted share. According to the press release, for the third quarter of 1998, the Company's reported net sales would be only $540 million and earnings from continuing operations were anticipated to be only $0.07 per diluted share, excluding a gain on the sale of a small non-core business of $0.15 per share. These results compared to reported net sales of $623.5 million and net income of $33.1 million in the third quarter 1997. Commenting on these abysmal results, which were in no way foreshadowed by the prior bullish statements disseminated by defendants, defendant Fellows was quoted in the press release:

Our business in the U.S. has been affected by a number of factors. Among them are a slowdown in the rate of growth in the mass market color cosmetics category as well as a greater than expected seasonal flattening of share caused by a shift in advertising and promotional activity and delays in some product introductions. At the same time, retailers, particularly chain drugstores, driven by recent consolidation, are pursuing efficiencies by reducing inventory levels.

85. The Company further disclosed that, based on the expectation that the conditions would continue, its business plan for the fourth quarter had been revised to show net sales in the range of $630 million to $650 million, and operating income in the range of $0.10 to $0.15 per diluted share, before restructuring costs estimated at $50 million.

86. The stock market's reaction to Revlon's shocking disclosure was punitive and immediate. On October 2, 1998, Revlon shares declined 44%, or $12.38, to close at $15.44 per share, a new 52-week low, 70% off its April 1998 peak. The market for Revlon bonds also collapsed as the price for Revlon bonds dropped 26%. Bloomberg reported:

The Company's zero-coupon bonds due in 2001 tumbled about 19 points, or $190 per $1000 note, to 54, according to one trader. ... The Company's 8 1/8 percent notes due in 2006 fell 4 points to 93 for a yield of about 9.47 percent. The notes which were sold in January, were trading above 100 as recently as mid-August.

87. The following day, October 3, 1998, the Washington Post reported:

The very areas for which analysts have lavished praise on Revlon -- its brash expansion into international markets and its introduction of innovative new products -- have hampered its financial health this year.

Usually voluble analysts at major investment houses, many of whom rated Revlon stock a buy in recent months, were conspicuously silent today, declining to comment on the dive of a stock they had strongly promoted. Defense of the company was left to its own officials.

88. Analysts, however, did not remain silent for long. On October 5, 1998, George Chalhoub, a consumer-products fixed income analyst at Merrill Lynch & Co., was quoted in The Wall Street Journal:

"The announcement was a total surprise [to the market] ... a complete change of direction and signaling. The company entered into the second quarter with good numbers and gave a pretty good guidance for the second half."

(Emphasis added.)

89. The same day, Bear Stearns issued an analyst report in which it also expressed utter disbelief in Revlon's belated disclosure, stating:

Now Revlon can't say how many weeks of inventory it believes the trade holds (primarily chain drug, but also, we presume, the mass market as category growth has slowed). ...

Why were there no hints until after the quarter ended? Management stated that July and August sales were close to budget. This suggests that September represents a huge percentage of the quarter's U.S. sales, far more than 50%, and that orders were canceled (it doesn't sound like there were many returns). But it doesn't make sense to us that it all happened in the last few days of the month.

(Emphasis added.)

90. On October 9, 1998, Women's Wear Daily reported:

Fellows attributes about $20 million of the $100 million shortfall to alterations in inventory situations at the nation's largest mass retail accounts. ...

Although almost every buyer interviewed cited sales growth with Revlon products, many said that they could only afford so many promotions. "You can only buy so much," said Karen Durham, merchandise manager for Duane Reade.

(Emphasis added.)

91. On October 19, 1998, the New York Observer published a story that highlighted the fraud that Perelman and the Company had perpetrated on the investing community. The Observer article stated:

[O]n Oct. 2, the truth finally caught up with the Finagle King [Ronald O. Perelman] and his high flying stock. Capping a slide that had driven it down by 52 percent since mid-July, Revlon's stock price crashed 45 percent more in a single day, to less than $15.50 per share, then sank another 15 percent in the following three days to barely $13 per share. Reason for the wipeout? The belated realization of investors that, once again, they'd been had - this time by month upon month of encouraging "guidance" from the company that its business was growing briskly. In reality, its products had been backing up in the pipeline since midsummer, if not earlier. ...

Though net income swung from a $41.7 million loss in 1995 to a $58.5 million gain in 1997, every cent of the improvement came from the sort of financial fiddling and gamesmanship for which Mr. Perelman is so justly renowned. Meanwhile, down in the engine room of his debt-barnacled dreadnought, where the real operating business of the company took place, the fundamentals were steadily deteriorating.

Though Revlon's earnings seemed to be improving from the moment the company went public, actual revenue growth was shrinking, from a 12 percent rate in 1996 to a 10.3 percent rate in 1997. ... [A] 13 percent swing in revenue growth in the wrong direction is exactly the sort of thing [analysts] should have been looking for an early indicator of trouble. ...

There's a lot more to know about Revlon's finances. ... Yet no analyst on Wall Street -- with the singular exception of Andrew Shore of PaineWebber Inc. -- was saying anything like it, as the company's stock price just kept climbing higher, fueled by the encouraging "guidance" regarding earnings growth being fed to the analysts by Revlon's investor-relations spin team. ...

At 24 times year-ahead earnings, the stock was reflecting the mania of analysts who, on average, were forecasting a 54 percent growth rate in 1998 earnings, to $1.84 per share, based on nothing but "guidance" from the company that things were going swell. ...

Cosmetics Center Inc. -- which the Finagle King had acquired only a year earlier, was shut down for no clear reason ... and though the operation appeared to be contributing no more than about $160 million of revenues to the company, it was certainly bulging with inventories. Indeed, as part of the shutdown, Revlon wrote off a startling $88.6 million of unsold inventories, or 25 percent of everything showing on Revlon's balance sheet.

That's when the stock started to come apart, falling from a high of $55 in late July to under $32 by the end of September, as investors began to realize that Revlon's growth story was an illusion. ...

Yet it wasn't until Oct. 2, with the stock already bleeding on the pavement, that the company declared, lo and behold, all that positive "guidance" it had been giving the analysts had been, uh... misguided ?... and that earnings for the remainder of the year would probably fall at least 90 percent short of Wall Street expectations, and maybe 23 percent short for 1999.

(Emphasis added.)

92. Revlon has continued to report disappointing financial results. On January 28, 1999, the Company reported financial results for the fourth quarter 1998 ended December 31, 1998. Income from continuing operations was $6.5 million, or $0.13 per diluted share, compared to $36.6 million, or $.71 per diluted share in the fourth quarter 1997. The Company also reported that it was undertaking a "restructuring" of the Company in "order to increase efficiency and enhance the Company's competitive" position. On April 29, 1999, the Company reported its financial results for the first quarter 1999 ended March 31, 1999. The loss from continuing operations before restructuring charges was $26.0 million, or $.30 per diluted share, and net sales were $441.1 million, a decrease of 11.4% compared with the year-earlier quarter.

93. On April 5, 1999, the New York Observer published another story on the fraud that Perelman and the Company had perpetrated. The Observer article stated:

* * *

During the April-to-June 1998 period the situation appeared to stabilize somewhat. But then came the July-to-September quarter and sales slipped again, this time not only against the previous quarter but even when measured against the comparable period of the year before. Against that benchmark they fell 13.6 percent to $548 million. And then came 1998's all-important fourth quarter and the slide got even worse, dropping 10.2 percent from the comparable year-earlier quarter to a mere $630 million.

Here's how FK [Perelman] explained all of this in a recent Revlon financial filing with the Securities and Exchange Commission: "[N]et sales for 1998 were impacted by reduced purchases from some retailers, particularly chain drug stores, resulting from inventory management through systems upgrades and inventory reductions following several recent business combinations. The Company expects retail inventory balancing and reductions to continue to affect sales in 1999."

Here's a different way FK might have said the same thing if he'd wanted to try English instead of baffelgab: Our stuff ain't selling so hot -- and the outlook's lousy.

That, at least was how Wall Street sized up the situation, and promptly sent Revlon's stock into a sickening swan dive that knocked 75 percent off of its value between July and October 1998. Finally, the slide stopped at about $13, where it stayed until only a few days ago.

Then, on March 23, rumors started to spread that Unilever P.L.C.-N.V., the Anglo-Dutch soap people, had approached FK with a buyout offer . . .

In Wall Street's current manic mood, the effect on Revlon's stock was like when they put those electricity things on bodies in ER . . . [S]hares in Revlon . . . fibrillat[ed] from $13 to $24 per share in three palpitating days on the expectation that something might actually be in the works. . . .

One clever fellow of my acquaintance who runs a hedge fund in New York told me on March 25 that he now sees little risk in shorting Revlon. "It's like this," he explained. "The company's fundamentals are awful, and there's no turnaround in sight. So it's hard to see the shares going any higher than they already are. The arbs have simply sucked the premium out of the deal before anything was even announced. So if you shorted it at $24 you can take your money and be happy . . . But if no deal gets announced, this puppy will soon be selling for $13 all over again and you'll have made a bundle. . . .

As for what Revlon is really worth, well, here's what Wall Street thinks: A year ago, analysts were pricing the company at $50 -- or about 8.5 times forecast year-ahead earnings of $5.90 per share for 1999. Now they're saying the company will earn only $1.48. Eight and a half times that and you're looking at a $12 stock -- which was where the shares were trading until the buyout rumor got going.

And that's the best case you can make.

(Emphasis added.)

94. Revlon's subsequent quarterly financial results for 1999 exhibited a continuing financial loss. Moreover, Revlon posted a net loss of 309.3 million in 1999. To date, the price of Revlon common stock has not recovered and currently trades below $40.

Revlon's False Financial Statements Violated GAAP

95. Revlon's financial results were falsified by improper revenue recognition of false "sales," the lack of adequate reserves for returns, and the lack of write-downs for excess inventory and inventory obsolescence. Revlon shipped excessive amounts of product with such liberal rights of return and as to approach illusory sales, and further refused to establish timely and adequate reserves for those returns and incentives. Revlon also failed to timely record the impaired value of its investment in CCI. Accordingly, Revlon materially overstated its revenue, net income and EPS in violation of GAAP and SEC rules.

96. GAAP are those principles recognized by the accounting profession as the conventions, rules and procedures necessary to define accepted accounting practice at a particular time. GAAP, as set forth in FASB Statement of Concepts ("Concepts") No. 1, states that one of the fundamental objectives of financial reporting is that it provide accurate and reliable information concerning an entity's financial performance during the period being presented. Concepts No. 1, ¶42 states:

Financial reporting should provide information about an enterprise's financial performance during a period. Investors and creditors often use information about the past

to help in assessing the prospects of an enterprise. Thus, although investment and credit decisions reflect investors' and creditors' expectations about future enterprise performance, those expectations are commonly based at least partly on evaluations of past enterprise performance.

Regulation S-X (17 C.F.R. §210.4-01(a)) states that financial statements filed with the SEC which are not prepared in compliance with GAAP are presumed to be misleading and inaccurate. Regulation S-X requires that interim financial statements must also comply with GAAP, with the exception that interim financial statements need not include disclosure which would be duplicative of disclosures accompanying annual financial statements. 17C.F.R. '210.10-01(a).

97. Revlon's September 30, 1997, December 31, 1997, March 31, 1998 and June 30, 1998 financial statements violated GAAP including, but not limited to, FASB Statement No. 48 (revenue recognition where the right of return exists), FASB Statement No. 5 (accounting for contingencies), Accounting Research Bulletin ("ARB") No. 43, Chapter 4 (inventory pricing), and FASB Statement No. 121 (impairment of long-lived assets).

98. Revlon offered its customers promotions, special deals, rebates and marketing incentives, such as unlimited rights of return to take Revlon's product. When Revlon recognized revenue on shipments under such terms, Revlon was obligated to make a reasonable estimate of and to establish a sufficient reserve to account for the sales incentives and the amount of Revlon products that would be returned after having been previously recognized as sales by Revlon. FASB Statement No. 48 specifically provides that "[s]ales revenue and cost of sales reported in the income statement shall be reduced to reflect estimated returns." In violation of GAAP, Revlon failed to provide adequate reserves for the substantial returns it knew would result.

99. Furthermore, Defendants caused Revlon to engage in the practice of invoicing customers under "bill and hold" programs, and said sales were recorded in violations of GAAP, Revlon's represented revenue recognition policy, and SEC Rules and Regulations. The SEC has set forth explicit criteria that must be met in order to recognize revenue when delivery to a customer has not occurred as follows:

1. The risks of ownership must have passed to buyer;

2. The customer must have made a fixed commitment to purchase the goods, preferably in written documentation;

3. The buyer, not the seller, must request that the transaction be on a bill-and-hold basis. The buyer must have a substantial business purpose for ordering the goods on a bill-and-hold basis;

4. There must be a fixed schedule for delivery of the goods. The date for delivery must be reasonable and must be consistent with the buyer's business (e.g., storage periods are customary in the industry);

5. The seller must not have retained any specific performance obligations such that the earning process is not complete;

6. The ordered goods must have been segregated from the seller's inventory and not be subject to being used to fill other orders; and

7. The product must be complete and ready for shipment.

100. Furthermore, the following factors must be considered when a bill-and-hold transaction occurs:

1. The date by which the seller accepts payment, and whether the seller has modified its normal billing and credit terms for this buyer;

2. The seller's past experiences with and pattern of bill and hold transactions;

3. Whether the buyer has the expected risk of loss in the event of a decline in the market value of goods;

4. Whether the seller's custodial risks are insurable and insured;

5. Whether extended procedures are necessary in order to assure that there are no exceptions to the buyer's commitment to accept and pay for the goods sold (i.e., that the business reasons for the bill and hold have not introduced a contingency to the buyer's commitment).

101. The SEC is clear that delivery generally is not considered to have occurred unless the product has been delivered to the customer's place of business or another site specified by the customer. If the customer specifies an intermediate site but a substantial portion of the sales price is not payable until delivery is made to a final site, then revenue should not be recognized until final delivery of a product or performance of a service. If uncertainty exists about customer acceptance, revenue should not be recognized until acceptance occurs.

102. Revlon entered into "bill-and-hold" transactions not at the customer's request, but solely at Revlon's request in order to accelerate revenue on transactions to meet earnings estimates during the Class Period. Revlon did not comply with the above criteria, in that risk of loss for the merchandise had not passed to the customer; Revlon, not the customer, requested the bill-and-hold transaction; the customer had not made a fixed commitment to purchase the product; and the product in certain instances was never shipped to the customer.

103. GAAP, as set forth in ARB No. 43, Chapter 4, Inventory Pricing, requires that inventories be recorded at the lower of cost or market. ARB No. 43, Chapter 4, Statement 5 states:

A departure from cost basis of pricing the inventory is required when the utility of goods is no longer as great as its cost. Where there is evidence that the utility of goods, in their disposal in the ordinary course of business, will be less than cost, whether due to physical deterioration, obsolescence, changes in price levels or other causes, the difference should be recognized as a loss in the current period. This is generally accomplished by stating such goods at a lower level commonly designated as market.

104. During the Class Period, Revlon experienced diminishing demand for its products; slow-moving and obsolete inventory quantities especially with respect to its 85% owned CCI subsidiary where it dumped such products, as well as excess product included in its distribution channels. Pursuant to GAAP, Revlon was required to evaluate its (and CCI's) inventory at each quarter-end and record provisions to adjust its inventories to the lower of cost or market for slow-moving, excessive, irregular or obsolete inventory quantities that it held. However, in order to meet their own aggressive earnings forecasts, the Individual Defendants caused the Company to not record material amounts of timely and adequate reserves for excess, slow-moving, irregular and obsolete and overhauled inventory of its products. Had Revlon reported its inventory in accordance with GAAP, its gross margins and reported earnings during the Class Period would have been materially lower.

105. GAAP, as set forth in SFAS No. 5, Accounting For Contingencies, requires that a loss be recognized for certain loss contingencies when it is probable the loss has been incurred and the amount can be reasonably estimated. SFAS No. 5, ¶8 states:

An estimated loss from a loss contingency (as defined in paragraph 1) shall be accrued by a charge to income if both of the following conditions are met:

a. Information available prior to the issuance of the financial statements indicates that it is probable that an asset has been impaired or liability has been incurred at the date of the financial statements. It is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss.

b. The amount of loss can be reasonably estimated.

106. Revlon failed to timely accrue for certain loss contingencies that were a result of the impairment of its investment in CCI upon its sale of CCI in the second quarter of 1998.

107. GAAP, as set forth in FASB Statement of Financial Accounting Standard ("SFAS") No. 121, requires that companies recognize an impairment loss when the carrying value of the asset is in excess of its fair value. SFAS No. 121, ¶4 states:

An entity shall review long-lived assets and certain identifiable intangibles to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

The types of events envisioned by SFAS No., 121 include changes in the manner in which the asset is used or a significant decrease in the market value of an asset, reduction

in the extent a plant is used, and a lack of long-term profitability. SFAS No. 121, ¶¶5, 57. Where such events are evident, SFAS No. 121 requires the following treatment:

If the examples of events or changes in circumstances set forth in paragraph 5 are present or if other events or changes in circumstances indicate that the carrying amount of an asset that an entity expects to hold and use may not be recoverable, the entity shall estimate the future cash flows expected to result from the use of the asset and its eventual disposition. Future cash flows are the future cash inflows expected to be generated by an asset less the future cash outflows expected to be necessary to obtain those inflows. If the sum of the expected future cash flows (Undiscounted and without interest charges) is less than the carrying amount of the asset, the entity shall recognize an impairment loss in accordance with this Statement. Otherwise, an impairment loss shall not be recognized; however, a review of depreciation policies may be appropriate.

An impairment loss recognized in accordance with paragraph 6 shall be measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. The fair value of an asset is the amount at which the asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced liquidation sale. Quoted market prices in active markets are the best evidence of fair value and shall be used as the basis for the measurement, if available. If quoted market prices are not available, the estimate of fair value shall be based on the best information available in the circumstances. The estimate of fair value shall consider prices for similar assets and the results of valuation techniques to the extent available in the circumstances. Examples of valuation techniques include the present value of estimated expected future cash flows using a discount rate commensurate with the risks involved, option-pricing models, matrix pricing, option-adjusted spread models, and fundamental analysis.

108. Clearly, Revlon did not timely adjust for the impairment of its goodwill and other long-lived assets at its CCI subsidiary given the demise of this operation and its ultimate disposal in June 1998.

109. Due to these accounting improprieties, defendants presented Revlon's financial results and statements in a manner that violated GAAP, including the following fundamental accounting principles:

a. The principle that interim financial reporting should be based upon the same accounting principles and practices used to prepare annual financial statements (APB No. 28, ¶10);

b. The principle that financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit and similar decisions (Concepts No. 1, ¶34);

c. The principle that financial reporting should provide information about the economic resources of an enterprise, the claims to those resources, and effects of transactions, events and circumstances that change resources and claims to those resources (Concepts No. 1, ¶40);

d. The principle that financial reporting should provide information about how management of an enterprise has discharged its stewardship responsibility to owners (stockholders) for the use of enterprise resources entrusted to it (to the extent that management offers securities of the enterprise to the public, it voluntarily accepts wider responsibilities for accountability to prospective investors and to the public in general) (Concepts No. 1, ¶50);

e. The principle that financial reporting should be reliable in that it represents what it purports to represent and that information should be reliable as well as relevant, a notion that is central to accounting (Concepts No. 2, ¶¶58-59);

f. The principle of completeness, which means that nothing is left out of the information that may be necessary to insure that it validly represents underlying events and conditions (Concepts No. 2, ¶79); and

g. The principle that conservatism be used as a prudent reaction to uncertainty to try to ensure that uncertainties and risks inherent in business situations are adequately considered (Concepts No. 2, ¶95).

Undisclosed Adverse Information

110. The undisclosed adverse information concealed by defendants during the Class Period is the type of information that, because of SEC regulations, regulations of the NYSE and customary business practice, is expected by investors and securities analysts to be disclosed and is known by corporate officials and their legal and financial advisors to be the type of information that is expected to be and must be disclosed.

111. During the Class Period, defendants materially misled the investing public, thereby inflating the price of Revlon's common stock, by publicly issuing false and misleading statements and omitting to disclose material facts necessary to make defendants' statements not false and misleading. Said statements and omissions were materially false and misleading in that they failed to disclose material adverse information and misrepresented the truth about the Company, its business and operations, including, among others:

a. that the Company was aggressively shipping its customers products in order to artificially boost sales in excess of actual demand causing its channel inventory to

increase substantially, thereby severely restricting the Company's ability to continue to stuff the channels;

b. it was not true that Revlon's "U.S. operation continued its strong growth based upon our existing products and introduction of successful new product offerings" as any purported growth was the result of defendants' marketing incentives and improper revenue recognition and not increasing demand for the Company's products;

c. it was not true that Revlon's international sales were increasing as a result of "increased distribution internationally into the expanding self-select distribution channel" as any purported growth was the result of defendants' marketing incentives and improper revenue recognition and not increasing demand for the Company's products;

d. that as much as $20 million of the Company's reported inventory was considered excess inventory or outdated products that was substantially impaired and unsalable and would have to be written off in the future;

e. that Revlon's continuing investment in its 85% owned subsidiary CCI was further impaired by at least $10,000,000 in the second quarter of 1998;

f. the Company's reported financial results were artificially inflated in violation of GAAP and its financial statements were materially false and misleading;

g. it was not true that the Company's financial statements contained "all adjustments necessary for a fair presentation;" and

h. Revlon failed to disclose the existence of known trends, events or uncertainties that it reasonably expected would have a material unfavorable impact on net revenues or income or that were reasonably likely to result in the Company's liquidity decreasing in a material way, in violation of Item 303 of Regulation S-K under the federal securities laws (17 C.F.R. 229.303). These trends included the fact that sales by Revlon to its customers (into the channel) greatly exceeded sell-through (sales by its customers out of the channel) and that sales of its top-of-the-line products to mass merchandisers would damage sales to department stores and sales to outlet stores and the gray market would damage sales to mass merchandisers.

112. At all relevant times, the material misrepresentations and omissions particularized in this Complaint directly or proximately caused or were a substantial contributing cause of the damages sustained by plaintiffs and other members of the Class. As described herein, during the Class Period, defendants made or caused to be made a series of materially false or misleading statements about Revlon's business, prospects and operations. These material misstatements and omissions had the cause and effect of creating in the market an unrealistically positive assessment of Revlon and its business, prospects and operations, thus causing the Company's securities to be overvalued and artificially inflated at all relevant times. Defendants' materially false and misleading statements during the Class Period resulted in plaintiffs and other members of the Class purchasing

the Company's securities at artificially inflated prices, thus causing the damages complained of herein.

113. As a result of these materially false and misleading statements and failures to disclose, Revlon's securities traded at artificially inflated prices during the Class Period. The artificial inflation continued until the time Revlon admitted that as a result of charges, write-offs and slowing product demand, the Company would miss its third quarter 1998 sales estimates by almost $100 million, and that it would miss its consensus EPS estimate by almost 90%, and these admissions were communicated to, and digested by, the securities markets.

The Individual Defendants' Responsibility For The False Statements

114. Each of the Individual Defendants had access to the adverse undisclosed information about Revlon's business, inventories, products, operational trends, financial statements, markets and present and future business prospects through access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors meetings and committees thereof and through reports and other information provided to them in connection therewith.

115. Each of the Individual Defendants was involved in drafting, producing, reviewing or disseminating the false and misleading statements and information alleged herein, were aware, or recklessly disregarded, that the false and misleading statements were being issued regarding the Company and approved or ratified these statements, in violation of the federal securities laws.

116. As executives, directors and controlling persons of a publicly-held company whose securities was, and is, registered with the SEC pursuant to the Exchange Act, traded on the NYSE, and governed by the provisions of the federal securities laws, the Individual Defendants each had a duty to disseminate promptly accurate and truthful information with respect to the Company's financial condition and performance, growth, operations, financial statements, business, products, markets, management, earnings and present and future business prospects, and to correct any previously-issued statements that had become materially misleading or untrue, so that the market price of the Company's publicly-traded securities would be based upon truthful and accurate information. The Individual Defendants' misrepresentations and omissions during the Class Period violated these specific requirements and obligations.

117. Each of the defendants is liable as a participant in a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Revlon securities, by disseminating materially false and misleading statements or concealing material adverse facts. The scheme (i) deceived the investing public regarding Revlon's business, inventory, product demand, growth, operations and the intrinsic value of Revlon

securities; and (ii) caused plaintiffs and other members of the Class to purchase Revlon securities at artificially inflated prices.

No Safe Harbor

118. The statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to any of the allegedly false statements pleaded in this complaint. Many of the specific statements pleaded herein were not identified as "forward-looking statements" when made. To the extent there were any forward-looking statements, there were no meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the purportedly forward-looking statements. Alternatively, to the extent that the statutory safe harbor does apply to any forward-looking statements pleaded herein, defendants are liable for those false forward-looking statements because at the time each of those forward-looking statements was made, the particular speaker knew that the particular forward-looking statement was false, and/or the forward-looking statement was authorized and/or approved by an executive officer of Revlon who knew that those statements were false when made.

Applicability Of Presumption Of Reliance

119. The market for Revlon's securities was open, well-developed and efficient at all relevant times. Plaintiffs and other members of the Class purchased or otherwise acquired Revlon securities relying upon the integrity of the market price of Revlon's securities and market information relating to Revlon, and have been damaged thereby.

120. At all relevant times, the market for Revlon's securities was an efficient market for the following reasons, among others:

a. Revlon's common stock met the requirements for listing, and was listed and actively traded on the NYSE, a highly efficient and automated market;

b. As a regulated issuer, Revlon filed periodic public reports with the SEC and the NYSE;

c. Revlon regularly communicated with public investors via established market communication mechanisms, including through regular disseminations of press releases on the national circuits of major newswire services and through other wide-ranging public disclosures, such as communications with the financial press and other similar reporting services; and

d. Revlon was followed by several securities analysts employed by major brokerage firms who wrote reports which were distributed to the sales force and certain customers of their respective brokerage firms and were publicly available and entered the public marketplace.

121. As a result of the foregoing, the market for Revlon's securities promptly digested current information regarding Revlon from all publicly available sources and reflected such information in the price of Revlon's securities. Under these circumstances, all purchasers of Revlon's securities during the Class Period suffered similar injury through their purchase of Revlon's securities at artificially inflated prices and a presumption of reliance applies.

PLAINTIFF'S CLASS ACTION ALLEGATIONS

122. Plaintiffs bring this action on their own behalf and as a class action pursuant to Federal Rules of Civil Procedure 23(a) and 23(b)(3) on behalf of a class (the "Class") consisting of all persons or entities who purchased Revlon securities from October 29, 1997 through October 1, 1998, inclusive (the "Class Period"), and who were damaged thereby. Excluded from the Class are defendants, the officers and directors of the Company at all relevant times, members of their immediate families, parents, subsidiaries, officers, directors and affiliates of the corporate defendant, any entity in which any defendant has a controlling interest, directly or indirectly, and their legal representatives, heirs, successors or assigns.

123. The members of the Class are so numerous that joinder of all members is impracticable. Throughout the Class Period, Revlon's securities was actively traded on the New York Stock Exchange. While the exact number of Class members can only be ascertained through appropriate discovery, plaintiffs believe that Class members number in the thousands. As of February 18, 1999, there were 8,736,771 shares of Revlon Class A common stock owned by the public.

124. Plaintiffs' claims are typical of the claims of the members of the Class. Plaintiffs and all members of the Class sustained damages as a result of defendants' wrongful conduct complained of herein.

125. Plaintiffs will fairly and adequately protect the interests of the members of the Class and have retained counsel competent and experienced in class and securities litigation. Plaintiffs have no interest that is in conflict with those of the Class.

126. Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting individual members of the Class. Among the questions of law and fact common to the Class are:

a. whether the federal securities laws were violated by defendants' acts as alleged herein;

b. whether statements made by defendants to the investing public during the Class Period misrepresented material facts about the business, operations and finances of Revlon;

c. whether defendants pursued the fraudulent scheme and course of business alleged herein;

d. whether defendants acted knowingly or recklessly;

e. whether the market price of Revlon securities during the Class Period was manipulated or artificially inflated due to the activities complained of herein; and

f. whether the members of the Class have sustained damages and, if so, the proper measure of damages.

127. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy since joinder of all members is impracticable. Because the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation makes it virtually impossible for them to individually seek redress for the wrongful conduct alleged.

128. Plaintiffs know of no difficulty that will be encountered in the management of this litigation that would preclude its maintenance as a class action.

129. The names and addresses of the record owners of Revlon securities purchased during the Class Period are available from the Company or its transfer agent or agents. Notice can be provided to such record owners via first class mail using techniques and a form of notice similar to those customarily used in class actions.

COUNT IViolation Of Section 10(b) Of

The Exchange Act Against And Rule 10b-5 Promulgated Thereunder Against All Defendants

130. Plaintiffs repeat and reallege each and every allegation contained above as if fully set forth herein.

131. During the Class Period, Revlon and the Individual Defendants, and each of them, carried out a plan, scheme and course of conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing public, including plaintiffs and other Class members, as alleged herein; (ii) artificially inflate and maintain the market price of Revlon's securities; and (iii) cause plaintiffs and other members of the Class to purchase Revlon's securities at artificially inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, each of the defendants took the actions set forth herein.

132. Throughout the Class Period, defendants, directly and indirectly, by the use and means of instrumentalities of interstate commerce or of the mails, engaged and participated in a continuous course of conduct to misrepresent facts and to conceal adverse material information about Revlon, including its true financial results as specified herein. Defendants employed devices, schemes, and artifices to defraud while in possession of material, adverse non-public information and engaged in acts, practices, and a course of conduct which included the making of, or participation in the making of,

untrue or misleading statements of material fact and omitting to state material facts necessary in order to make the statements made about Revlon not misleading.

133. Each of the defendants (a) knew or had access to the material, adverse non-public information about Revlon's financial results, which information was not disclosed; and (b) participated in drafting, reviewing, approving and promulgating the misleading statements, releases, reports and other public representations of and about Revlon.

134. During the Class Period, with knowledge of or reckless disregard for the truth, defendants disseminated or approved the false statements specified above, which were misleading in that they contained misrepresentations and failed to disclose material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.

135. Specifically, defendants knew, or recklessly disregarded, among other things, that during the Class Period, Revlon's revenues and earnings were materially overstated in violation of GAAP as a result of deliberately shipping excessive amounts of Revlon products and offering promotions, special deals, rebates and marketing incentives, such as rights of return, especially at the end of quarters, and improperly recognizing revenues on such shipments without booking sufficient reserves and failing to write-down CCI's inventory and make any disclosure that the value of that inventory was impaired in any fashion and the failure to adequately record impairments in its recorded investment in CCI.

136. Defendants acted with scienter throughout the Class Period in that they either had actual knowledge of the misrepresentations and omissions of material fact set forth herein or acted with reckless disregard for the truth in failing to ascertain and to disclose the true facts, even though such facts were available to them. The Individual Defendants were the most senior officers and largest shareholder of Revlon and they had inside knowledge, or recklessly disregarded, the improper revenue recognition in violation of GAAP, promotions, special deals, rebates and marketing incentives, such as rights of return and the failures to write-down CCI's inventory or make any disclosure that the value of that inventory was impaired in any fashion that occurred during the Class Period, and they had the means and ability to falsify Revlon's financial results which thereby inflated the price of Revlon's securities. The Individual Defendants also controlled Revlon's press releases, corporate reports, SEC filings and communications with securities analysts. By defendants' overstating Revlon's financial results to show ever increasing revenues and profits, Perelman and Revlon were able to refinance at a lower interest rate and with an extended maturity $815 million in junk bonds through private placements.

137. Defendants maintained close relationships with Revlon's customers, were kept apprised of Revlon's customers' sell-through of Revlon products, and continuously monitored and assisted in the management of the inventories of Revlon products held by such customers. Accordingly, the defendants acted with scienter because they knew that the promotions, special deals, rebates and marketing incentives caused the inventory held by Revlon's customers to grow materially, that Revlon's sales to its customers greatly

exceed its customers' sales of Revlon products and that there would be a concomitant impairment of sales in future quarters.

138. As a result of the fraudulent scheme, deceptive practices and false and misleading statements and omissions, the market price of Revlon's securities was artificially inflated during the Class Period. In ignorance of the fraudulent scheme, the false and misleading nature of the material representations and omissions described above, and the deceptive and manipulative devices employed by the defendants, plaintiffs and the other members of the Class, in reliance on the integrity of the market or directly on the statements and reports of the defendants, were damaged by purchasing Revlon securities at artificially inflated prices.

139. Had plaintiffs and the other members of the Class known of the true financial condition and business prospects of Revlon, which were not disclosed by defendants, plaintiffs and other members of the Class would not have purchased their Revlon securities, or, if they had purchased such securities during the Class Period, they would not have done so at the artificially inflated prices which they paid.

140. By virtue of the foregoing, defendants have violated Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder.

141. As a direct and proximate result of defendants' wrongful conduct, plaintiffs and the other members of the Class suffered damages in connection with their respective purchases of the Company's securities during the Class Period.

COUNT II

Violation Of Section 20(a) Of

The Exchange Act Against Individual Defendants Only

142. Plaintiffs repeat and reallege each and every allegation contained above as if fully set forth herein.

143. Each of the Individual Defendants acted as a controlling person of Revlon within the meaning of §20(a) of the Exchange Act during the Class Period. By virtue of their high-level positions, and their ownership and contractual rights, participation in or awareness of the Company's operations and intimate knowledge of the Company's revenue generation and inventory problems, the Individual Defendants had the power to direct and cause the direction of the management and policies of Revlon and did direct the management and policies of the Company, including the content and dissemination of the various statements which plaintiffs contend are false and misleading. The Individual Defendants were provided with or had unlimited access to copies of the Company's reports, press releases, public filings and other statements alleged by plaintiffs to be

misleading prior to or shortly after these statements were issued and had the ability to prevent the issuance of the statements or cause the statements to be corrected.

144. In particular, each of these defendants had direct and supervisory involvement in the day-to-day operations of the Company and, therefore, had the power to control or influence the particular transactions giving rise to the securities violations as alleged herein, and exercised the same. Each of the Individual Defendants in some meaningful sense was a culpable participant in the securities violations alleged herein.

145. As set forth above, Revlon and the Individual Defendants each violated §10(b) and Rule 10b-5 by their acts and omissions as alleged in this Complaint. By virtue of their positions as controlling persons, the Individual Defendants are liable pursuant to § 20(a) of the Exchange Act. As a direct and proximate result of defendants' wrongful conduct, plaintiffs and other members of the Class suffered damages in connection with their purchases of the Company's securities during the Class Period.

WHEREFORE, plaintiffs, on their own behalf and on behalf of other members of the Class, pray for judgment:

a. Declaring this action to be a proper class action maintainable under Rule 23 of the Federal Rules of Civil Procedure on behalf of the Class;

b. Awarding plaintiffs and the other members of the Class damages as a result of the wrongs complained of herein, with pre-judgment and post-judgment interest;

c. Awarding plaintiffs and the other members of the Class their costs and expenses in this litigation, including reasonable attorneys' fees and experts' fees and other costs and disbursements;

d. Awarding extraordinary, equitable and/or injunctive relief as permitted by law, equity or the federal statutory provisions sued hereunder, pursuant to Federal Rules of Civil Procedure 64 or 65 or any appropriate state law; and

e. Awarding plaintiffs and the other members of the Class such other and further relief as the Court may deem just and proper.

JURY TRIAL DEMANDED JURY Plaintiffs hereby demand a trial by jury.

DATED: New York, New York

April 17, 2000

KAPLAN, KILSHEIMER & FOX LLP

By:

Robert N. Kaplan (RK-3100)

805 Third Avenue, 22nd Floor

New York, New York 10022

Telephone: (212) 687-1980

Fax: (212) 687-7714

BERNSTEIN LIEBHARD & LIFSHITZ

By:

Sandy A. Liebhard (SL-0835)

10 East 40th Street

New York, NY 10016

Telephone: 212/779-1414

Facsimile: 212/779-3218

FINKELSTEIN & KRINSK

By:

Jeffrey R. Krinsk

501 West Broadway, Suite 1250

San Diego, CA 92101

Telephone: 619/238-1333

Facsimile: 619/238-5425

WOLF HALDENSTEIN ADLER

FREEMAN & HERZ LLP

Fredric Isquith, Esq.

270 Madison Avenue

New York, NY 10017

Telephone: 212-545-4600

Facsimile: 212-545-4653

SPECTOR, ROSEMAN & KUDROFF PC

Robert M. Roseman, Esq.

1818 Market Street, 25th Fl.

Philadelphia, PA 19103

Telephone: 215-496-0300

Facsimile: 215-496-6611

Robert C. Susser

Attorney at Law

6 East 43rd Street

Suite 1900

New York, NY 10017-4609

Telephone: 212-808-0298

Facsimile: 212-949-0966

STULL, STULL & BRODY

Jules Brody, Esq.

6 East 45th Street

New York, NY 10017

Telephone: 212-687-7230

Facsimile: 212-490-2022

WEISS & YOURMAN

Joseph Weiss, Esq.

The French Building

551 Fifth Avenue

Suite 1600

New York, NY 10176

Telephone: 212-682-3025

Facsimile: 212-682-3010

TABLE OF CONTENTS

TABLE OF CONTENTS i

NATURE OF THE ACTION 1

JURISDICTION AND VENUE 13

PARTIES 14

USE OF SECURITIES ANALYSTS AS A CONDUIT TO FEED

FALSE INFORMATION TO THE SECURITIES' MARKETS 17

SUBSTANTIVE ALLEGATIONS 20

Background Facts 20

Revlon Improperly And Artificially Inflated Revenues And Earnings 22

Revlon Delayed The Writedown Of Outdated And

Unsalable Inventory 23

September 1997 Rumors Of Softer Sales 25

Materially False And Misleading Statements Made During The Class Period 25

Third Quarter 1997 Misrepresentations 25

Fourth Quarter And Full Year 1997 Misrepresentations 29

The Note Refinancing 33

Analysts Are Used To Reinforce The Impression That Revlon Is Continuing To Grow 35

First Quarter 1998 Misrepresentations 35

Revlon Announces The Disposition Of CCI 40

Second Quarter 1998 Misrepresentations 41

Revlon's True Financial Condition Is Belatedly Disclosed 45

Undisclosed Adverse Information 59

The Individual Defendants' Responsibility For The False Statements 62

No Safe Harbor 64

Applicability Of Presumption Of Reliance 65

PLAINTIFF'S CLASS ACTION ALLEGATIONS 66

COUNT I

Violation Of Section 10(b) Of The Exchange Act Against And Rule 10b-5 Promulgated Thereunder Against All Defendants 68

COUNT II

Violation Of Section 20(a) Of

The Exchange Act Against Individual Defendants Only 72

JURY TRIAL DEMANDED JURY 74

1. Understatement of loss.