(KRT) - Hugh Hefner had changed out of his customary silk pajamas into a sleek Armani suit, a signal to associates that something special was afoot at the Playboy Mansion. His three young girlfriends gathered around him, aiming their uncommonly white smiles toward a camera set up in his living room.

Hefner has a reputation for impatience at moments like these. He gets photographed nearly every day, but he's usually willing to pose for only a few minutes at a time. And he almost never wears regular pants.

On this occasion last summer, he persevered, his grin unwavering as the photo crew snapped shot after shot for the cover of a men's fashion magazine.

At age 79, "Hef" is in the spotlight again, and he loves it. He's making TV appearances, his girlfriends have a television reality show on E!, and a Playboy-themed casino opens in Las Vegas early next year.

Not long ago, Playboy looked like it might fade away. The guru of self-indulgent bachelorhood himself had remarried and settled down to raise his two little boys. Losses were mounting at Playboy Enterprises, the public company run by Christie Hefner, the daughter from his first marriage. Television, the Internet and practically every other popular medium had become saturated with sex, so who needed Playboy?

But lately the company has been staging an unlikely financial comeback. With little fanfare, the iconic tastemaker whose magazine always drew the line well short of explicit sex has become the leading purveyor of hard-core programming on cable and satellite television. And by embracing its inner pornographer, Playboy has moved solidly into the black.

There is still "soft-core" fare on the Playboy Channel, though "soft core" can be pretty graphic these days: Cameras zoom in for close-ups of female genitalia and couples entwining in the nude. But on its Spice movie channels, Playboy turns up the heat, showing porn performers copulating in gynecologist-meets-urologist detail. The company used to outsource this sort of programming, but recently started producing its own in high definition at its state-of-the-art studio in Los Angeles. Its Web sites, once big money losers, now make a profit in part by peddling harder stuff.

Hugh Hefner says he encouraged his daughter to offer hard-core porn-what she refers to as her company's "less-edited services." X-rated content already was a dirty little secret at premier media companies, such as Comcast and DirecTV, which distribute it to their customers at a huge markup. Now that Playboy has joined the parade, its founder couldn't be more thrilled.

"This on many levels is the best time for the company," he says in an interview at the mansion. "To have Playboy hot again with a whole new generation is unbelievable."

Hef intends to keep the empire going as a family concern far into the future, a plan likely to dismay some investors who are betting on the sale of Playboy to a sharper operator after his demise. His commanding 70 percent stake in Playboy's voting stock will go to his teenage sons through a trust arrangement. His two adult children - Christie and a son unconnected to the business - won't get those shares, he says, because that would jeopardize his plan for "continuity."

Dressed in her usual buttoned-down business attire and speaking in a confident voice, Christie Hefner is explaining that if you want to make a difference in a needy spot like Rwanda, you have to use your money wisely.

The 52-year-old Hefner has assembled a group of corporate donors in her Chicago headquarters to hear physician Mardge Cohen plead for help fighting AIDS in the African nation torn by genocide.

Through its foundation, Playboy gives away $600,000 a year, mostly to support free speech, civil liberties and sexual health care. Hefner is urging her fellow donors to lend the Rwandans a hand. "We really do live on the same small planet," she says earnestly.

Hefner does a lot of public speaking, and she's good at it - articulate, poised, fast on her feet. She turns down many more invitations than she accepts, saying she doesn't want fame and celebrity like her dad. But like him, she's a sought-after personality, though for a different reason: She's a rare woman among the overwhelmingly male, turnover-prone ranks of public-company CEOs. She has held the top post at Playboy since 1988, and Forbes recently named her one of the world's 100 most powerful women, putting her at No. 90 - one notch below Chicagoan Penny Pritzker, another child of fortune who belongs to all the right civic groups.

Like her father, Christie Hefner says she is more interested in making a difference in the world than making money. But unlike her father, who focuses on the content of the magazine - stories, cartoons and centerfolds - Christie is all business. She goes on important sales calls. She deals with investment bankers and Wall Street analysts. She hires and fires the company's hands-on managers.

In her long tenure, she has been a faithful corporate steward on behalf of her hedonistic dad, who mostly ignored her for the first two decades of her life after walking out on the family when she was a small child.

In a 1993 profile, "60 Minutes" asked what motivated her to work so hard. "I was trying to be worthy of my father's attention, my father's love," she said. "I wanted to show him, you know, what a good kid I was."

Paternal approval can be hard to come by. For an English major who took over a troubled company's operations at age 29, Christie Hefner's accomplishments are "remarkable," the elder Hefner allows. Asked about her qualities as a manager, he hedges. "I may not be the best judge of that," he says. "She's there, obviously, you know, because of blood."

Hef is frustrated that, after all these years, with one of the world's most recognized brands, Playboy is not a billion-dollar business. In visibility and influence, it's big. But in the world of public media companies, at $330 million in revenues last year, it's a pipsqueak.

Time Warner has 85,000 employees, Playboy 660. Viacom's sales for 2004 were almost 70 times greater. The Walt Disney Corp. earned more in two days than Playboy managed all last year, and that was Playboy's best performance since 1997.

The comparisons might seem absurd, except that Playboy always has pictured itself in the big leagues. In its government filings, the company counts those media giants among its official "peer group" to benchmark its relative performance. When the dot-com boom briefly sent the company's stock soaring, Christie Hefner pledged that Playboy's market value would exceed $1 billion by 2003. At a meeting with employees, she handed out sweatshirts imprinted with the billion-dollar goal. It wasn't out of greed, her father explains. "The numbers are only a symbol for her. They're important because she wants the company to look good, and she wants to look good."

By 2003, though, the company looked bad. Losses on Playboy's Internet operation exceeded $70 million, and it had spent $200 million to buy out an upstart competitor in the adult TV business. Since 1982, when Christie Hefner took over as president and began directing its operations, Playboy posted net losses of $256 million in its 10 bad years, far outweighing the net earnings of $104 million in its 13 good ones.

True, she inherited a mess in the early '80s, and her overall cash flow has been positive even if her bottom line has not. Nonetheless, Playboy lost on average $6.5 million a year between 1982 and 2004, including $7 million a year over the last decade, and a startling $19 million annually in the last five years.

What held the bunny back? Playboy didn't have much capital, and it failed to break out of its soft-core niche. It bore the commercial stigma of adult entertainment without the higher profits of hard-core porn. Repeatedly targeted by government, feminists and the religious right, Playboy responded cautiously to business opportunities. "They've been ultra-conservative," gripes money manager Mark Boyar, a longtime shareholder who wants the company sold. "She's a mediocre manager at best."

Christie Hefner rejects the criticism. "Who else has taken one magazine and created a half-billion-dollar company?" she asks. Her "two big bets," on TV and the Internet, were right on the money, she says. If they weren't, "I wouldn't have this job."

And in case anybody wonders, she feels fine about her dad saying she owes that job to blood ties. She's fine with her dad's teenage sons getting all his shares when he dies. She's fine with being left off the board of the trust that will control those shares. "The trust is there to support me as long as I want to run the company," she says. "That's all that is important to me."

And, as she has said over and over, she's fine about running a company routinely accused of exploiting women. She devotes time and money to women's causes and sees no conflict between her company's product and her feminist convictions. Those who do, she maintains, don't understand that Playboy empowers women, from the centerfold playmates to the executive suite-and, yes, even through its latest foray into hard-core pornography.

Some people think the market is ready for a lot more than Playboy is offering. Seated in his wheelchair at his Beverly Hills office tower, behind an ornate desk piled high with his company's skin books like "Barely Legal" and "Wet Dreams," Larry Flynt says Playboy is still way too tame.

"If you're going to be in this business, you can't be ashamed," says Flynt, who claims his privately held Hustler empire exceeds Playboy's in size and scope. "Guys like sex. They like it raw. For every customer you would lose by becoming more edgy, you would make more on the other side."

Nonsense, Hefner says. "If you get too far out in front of the market, you're going to have problems. Playboy never saw its mission as pushing the envelope."

Pushing a lifestyle was more her father's ambition. In 1953, he started a party that has never really ended, connecting with the daring hipster in every young American man. The first 51,000 copies of Playboy magazine essentially sold out, and Hef went on to become the living embodiment of America's sexual revolution. "He thought everybody was interested in everything that interested him," says James R. Petersen, a longtime Playboy magazine editor. "It was a throw of the dice. He was right."

Being a cool cat with a circular bed, a fab mansion and beautiful women all around turned out to be lucrative too. He took the company public in 1971, making himself one of America's wealthiest media moguls. By its 25th anniversary at the end of 1978, Playboy had "bunny" clubs with nearly a million "keyholders" and a magazine that sold 5.5 million copies every month. It ran a book publisher, a limo service and a four-star resort in Lake Geneva, Wis.

Even so, it would have lost a ton of money were it not for the casinos and betting parlors in the United Kingdom, which accounted for three-fourths of operating profits. Then, abruptly, the Brits kicked Playboy out. The company supposedly had extended illegal loans to high rollers, but a measure of economic self-interest played a role too: Playboy was unwelcome competition for British casinos. To top it off, gambling regulators in New Jersey, eager to flex their muscles, refused to license a Playboy casino under construction in Atlantic City. In 1981, Playboy earned $14 million on sales of $389 million. A year later, sans gambling, it lost $52 million on just $210 million in revenues.

In Playboy's annual report that year, the lead photo showed a shaggy-haired Hefner dressed in lounge-lizard duds, shirt collar spread open like a pair of wings. Beside him stood Playboy's new president, a young woman in a prim, tan suit with a cream-colored blouse buttoned up to her neck.

In the coming years, she would convince her father to dump the books, limos and resort hotels. She would sell land he had picked up in Los Angeles, Spain and Jamaica, and auction off his Jackson Pollock and Willem de Kooning paintings to raise cash.

Yet even when Hef was sidelined with a stroke in 1985, the company hesitated to close his beloved but money-losing clubs. Playboy partnered with Chicago restaurateur Rich Melman to find a winning formula, and Playboy's Empire Club opened in Manhattan at the end of 1985. It shut down within a year, and the clubs passed into history.

In 1987, Playboy's revenues bottomed out at a paltry $160 million, but because of its austerity measures, it was making a profit. It had more than $30 million in cash and virtually no debt. Hef says he appreciates Christie's work during those painful years: "She was there for me," he says. Instead of merely cleaning up his mess, however, she seized on what she considered Playboy's next big opportunity: pay TV.

At first, Playboy magazine translated into boredom on the tube. TV executives came and went, experimenting with knockoffs of "Candid Camera" and the evening news. They trotted out tired comedians. And Playboy TV advertised its "choice" not to program X-rated content.

Choice was not really the word for it. In 1983, an Ohio prosecutor brought criminal obscenity charges against a cable operator who carried Playboy. It didn't matter that the charges were dropped. The fears aroused among cable operators would haunt Playboy for more than a decade. Then the market abruptly turned, and porn went from pay-TV pariah to profit mainstay.

Wearing topsiders without socks, casual slacks and an open collar, Bill Asher looks every inch the Ivy League preppy with an MBA. He's a pornographer, too, and a good one.

He and his partners have built Vivid Entertainment into a leading provider of video sex. He has his standards: No barnyard animals. No violence. No drug use. No adults pretending to be minors. As hard-core porn goes, Vivid's movies are "mainstream," Asher explains. "Pretty people having hot sex." Demand for his product is growing "double-digit," he says, and Playboy, his former employer, is among his best customers.

Yet Vivid and Playboy have the same business dilemma. Pornography in America is a multibillion-dollar industry, but most of the profits flow to middlemen who distribute the stuff. Asher, Hefner and Flynt take in a fraction compared to media barons such as Rupert Murdoch of News Corp. or Brian Roberts of Comcast, who control the cables and satellites. Lower-profile middlemen-execs at pay-TV providers-have made their bonuses in lean years by pushing porn on a receptive public. Even nice hotels have come to rely on the profits from adult movies in their rooms.

As the market for adult TV turned more intense in the 1990s, Playboy lagged behind. An aggressive competitor known as Spice provided the racier stuff, nabbing the pay-TV audience Playboy had cultivated for years. "We were allowing ourselves to get beat at our own game," says Asher, a Dartmouth alum who joined Playboy in 1994. "We didn't get aggressive soon enough because that wasn't where Playboy wanted to be."

Even when the company bought out Spice for $127 million in 1999, it took only two channels. The third, known as Spice Hot, had the most graphic sexual content then available, including vaginal and oral penetration shown at a distance. Most cable operators wouldn't touch it, and they advised Christie Hefner to stay away. She tallied the risks and took a pass.

But Asher sensed opportunity. For little more than a promissory note and a cut of future royalties, he and his partners at Vivid took Spice Hot off Playboy's hands.

In its annual report, Playboy assured shareholders that the two new channels it did acquire from Spice contained no explicit sex and maintained "the level of taste and quality established by Playboy magazine." Playboy also retained an option to buy back Spice Hot if the market changed.

Did it ever. Within months, Playboy won a Supreme Court victory striking down a 1996 law aimed at limiting the distribution of all adult programming to overnight hours. Even more important, satellite and digital cable delivery came on strong, providing a new level of privacy and security that customers enthusiastically embraced.

Suddenly, lots of operators wanted Spice Hot. MediaOne offered it, then DirecTV did. Vivid launched new "Hot" networks, challenging Playboy with a lower-cost, sexier product, just as the original Spice programs had done.

Playboy exercised its option to buy back Spice Hot in 2001, paying Vivid a stunning $82 million for the expanded programming portfolio, including the explicit channel it had passed up two years earlier. "It was probably the worst business deal ever done," says Kenneth Boenish, president of New Frontier Media Inc., a rival pay-TV pornographer. "And you wonder why they haven't made money."

Playboy executives defend the deal, saying they paid fair market value. The trouble was, Playboy didn't have that kind of money readily at hand. By 2001, the company had developed an acute case of dot-com fever.

Christie Hefner had spotted the Internet early. She launched the company's Web site in 1994, ahead of many competitors. She spoke glowingly about the future of media in an interactive world. She hired a big staff and laid the plans for a blockbuster initial public offering of Playboy.com.

At first, Playboy tried to translate the magazine to the Web, counting on advertising to support its site. But even its mild adult content scared away big-time marketers like automakers and tech companies. Playboy launched online subscription services and e-commerce, too, but as in TV, it was a lot tamer than the competition's.

Even then, porn on the Internet was uninhibited and often free. Apart from dedicated Playboy fans, not enough customers would pay for the mellow fare on Playboy.com, recalled Liz Wald, who served as an Internet consultant to the company. "They definitely didn't want to be hard core, and on the Internet, the-harder-the-better is what makes money."

So the IPO never happened, and Playboy stock collapsed as the dot-com bubble burst. Facing tens of millions in losses, the company slashed jobs by more than 20 percent, from 780 in 1999 to 610 in 2001.

Other ventures had come and gone before without doing serious damage. Beginning in 1993, Christie Hefner repeatedly sent former Illinois state Sen. Billy Marovitz to Greece on a casino deal. She married Marovitz in 1995, but eventually withdrew from the casino. She bought the Sarah Coventry line of costume jewelry, and eventually dumped it. She tried mail-order catalogs, then dropped them too. None of those experiments lost money.

The Internet bust and TV acquisitions left Playboy under financial pressure. Bankers were leery of lending to it and private investors were demanding big equity stakes for tiny cash infusions. Hugh Hefner made a $27.2 million personal loan to keep Playboy.com afloat. In March 2003, with no better alternatives, the company issued $115 million in junk bonds at a punishing 11 percent interest rate. Before it paid off the last of the bonds two years later, Playboy would hand over $22 million in interest and $25 million in prepayment penalties and fees.

On the plus side, the Spice channels gave Playboy an overwhelming share of the adult pay-TV market. Costly as it was, the deal to buy back Spice Hot from Asher contributed to earnings from the start. Once they were scaled down, the Internet operations limped toward profitability. And the corporation's growing reliance on porn didn't affect the Playboy brand's marketability. The company still commanded the attention of big-time investors. Wall Street beckoned.

So, Christie Hefner set out last year in search of investor money to shore up her balance sheet. She took along Linda Havard, her chief financial officer, whom she had hired away from oil giant ARCO in 1997, and investor relations veteran Martha Lindeman.

It was a grueling "road show." The Playboy team made the same sales pitch over and over to the investment world's mostly male audiences for seven days, seven or eight times a day. In Boston on day four, cars whisked them from Fidelity to BlackRock to Putnam. Then it was on to Minneapolis and Kansas City on day five. Against the odds, the sales blitz worked. In April 2004, Playboy sold 4.4 million additional shares, raising $52 million, helping it get out from under its most onerous debt. Hefner, Havard and Lindeman had put Playboy's finances back on track.

On an oversized purple bed in Playboy's high-tech California studios, Ann Marie is egging on a fan during her Spice Clips TV program. It's a live call-in show, shot in high definition, and the hostess, clad only in a sheer black halter top, is spreading her private parts while asking Jake from Missouri if he likes what he sees. "Oh, yeah," Jake replies, but when he fails to utter enough "oohs" and "aahs," she ditches him for a more vocal caller, Jason from Ohio.

So it goes in the hard-core heart of Playboy's California-based entertainment division. It faces competition from New Frontier and others, but at the moment it dominates the market, offering those so inclined what division chief Jim Griffiths describes as "a robust adult experience." The TV and Internet businesses under Griffiths provide the bulk of the company's operating profits.

In recent years, Playboy's three divisions have moved in very different directions. Its TV and Internet arm has dialed up the heat, targeting an audience in their 20s who have grown blase about less-provocative entertainment. The magazine flirted with a youth movement but still aims for a slightly older yuppie male. The licensing business, once known for automobile air fresheners, now targets upscale European and Asian women with high-end apparel.

Does that hodgepodge reflect a lack of coordinated vision? Does it suggest that Playboy's latest comeback lacks staying power, like its previous ones? No one at Playboy expresses any such concerns. From Christie Hefner on down, they profess to be going their own way in perfect harmony. As Hefner puts it: "Each manifestation of the brand has to find the sweet spot."

In Playboy's Manhattan offices on Fifth Avenue this summer, racks of clothes filled the hallways around the office of Aaron Duncan, creative director for Playboy's licensing arm. He parted the hangers and picked out a red top with the word "Foxy" written in gold, a rabbit-head logo in the lower corner. It's a chic, fitted number, made of microfiber in Italy by one of Playboy's contract manufacturers. European women in their 20s and 30s will love it, Duncan says. "That goes for $120 or $130."

Duncan's boss, Alex Vaickus, came to Playboy in 1998 with an unlikely idea: Reposition the classic men's brand for wealthy young women overseas. "A lot of people laughed at us," Duncan recalls. Not anymore: Playboy merchandise alone rings up almost $600 million a year. The company typically puts in no money, and it collected licensing fees of $20 million last year, virtually risk-free.

The racks of upscale apparel in Manhattan seem far, far away from the round purple bed in the L.A. studio where Ann Marie performs. Vaickus recoils at the idea of Playboy's licensing arm approving lowbrow products such as the "signature glass sex toy" that Ann Marie wields with abandon. "It doesn't fit with what we want the brand to represent," he explains.

At the magazine's New York editorial office, down the hall from Duncan's clothing racks, the sensibilities likewise lean to the cool rather than the hot. The magazine's centerfolds are no more revealing than they were years ago, and nudity still represents just 12 percent of the content, notes Playboy publisher Diane Silberstein, a savvy media veteran who arrived in 2003. "You'll never see a woman photographed in here looking like a slut, a vixen or a vamp," she says.

Playboy's target reader expects no less, according to Chris Napolitano, a long-serving staffer who rose to editorial director last year. From the magazine's standpoint, the Playboy man is a sophisticated, urban college graduate around 30, who cares about politics and big ideas.

When a new generation of men's magazines known as "Laddie" books hit it big in 1999 and 2000, Playboy worried about getting stale. Maxim, in particular, looked like a PG-13 version of Playboy. Longtime editorial director Arthur Kretchmer retired, and his replacement came straight from Maxim in late 2002. Clashes followed.

Playboy's veteran journalists viewed seemingly small steps, such as introducing shorter stories, as threats to quality. The bigger step of moving editorial operations from Chicago to New York inspired dark speculation about lowering the average age of staff and readers alike to sell more ads.

Napolitano and Silberstein dismiss such talk. "Not the directive I received," Napolitano says. "We wanted to invigorate the magazine." In any case, Maxim import James Kaminsky lasted less than two years as editorial director. His short tenure reinforced impressions that Hugh Hefner runs the book, and the book is safe-even though it loses money and circulation has leveled off at barely half its 1970s peak of 6 million.

As it has for a couple of decades now, a profit-hungry Wall Street wants Playboy to get cracking: Get into video on demand. Get deeper into international markets. Get into the booming business of adult entertainment delivered over the ubiquitous cell phone.

At Jefferies & Co., analyst Robert Routh advises splitting off the fast-growing entertainment division from the publishing and licensing arms. He also wants Playboy to partner with the hard-core Private Media, run by a second-generation Swedish pornographer, to boost an already substantial overseas presence. The company declines to comment on those suggestions.

As for Hef passing his stock to his teenage sons instead of Christie, Routh doubts the arrangement will stand for long after the founder's death. "It's absolutely ridiculous. You have somebody running the company who isn't going to control it, and you have two kids who are too young to make decisions," he said. "It will be a perpetual overhang on the stock until that is lifted in some way."

Hef concedes he "can never be sure" his intentions will be followed, but he's confident. He has put in place controls that will prevent a "divisive splintering" of his majority stake and ensure "continuity of concept and philosophy," he says.

Boyar, the investor critical of Christie Hefner's leadership, is certain the company will be sold anyway, at a rich premium befitting the brand's global recognition. He's hoping the mansion goes with it.

Valued at about $45 million, the 29-room pad on 5 lush acres in the hills of Los Angeles has become a sore point for shareholders who consider it costly overhead. It accounts for more than 10 percent of Playboy's full-time employees, and Hef pays the company an "obviously below-market" annual rent of $1.3 million to live there, Boyar asserts.

He thinks it should be sold and re-established in Las Vegas as a tourist attraction with a casino attached. "If the company was in somebody else's hands with a more aggressive bent," Boyar says, "it's a home run."

Seated on a comfortable couch in his library, fiddling with the pieces from a backgammon board before him and looking much younger than his age, Hef serenely shakes his head.

The mansion will carry on after his death for promotional and philanthropic purposes, he says. He envisions limited public tours, and special events that attract swarms of beautiful people. The famous grotto will be alive with frolicking swimmers. The flamingos and monkeys that reside on the grounds will be cared for in style as the party goes on around them for a long, long time to come.

1980: Playboy earns three-fourths of operating profits from gambling, with seven casinos in England, one in Nassau and 79 betting parlors and bingo shops.

1982: Playboy is forced to sell its casinos in London and Atlantic City. Hefner's daughter, Christie, becomes president of the company. Playboy Channel launched.

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