UPDATE 3-KB Toys files for bankruptcy, to close all stores

(Recasts first paragraph; adds details on earlier bankruptcy, background, additional byline)

By Emily Chasan and Aarthi Sivaraman

NEW YORK, Dec 11 (Reuters) - KB Toys Inc, one of the largest U.S. toy retailers, filed for Chapter 11 bankruptcy protection on Thursday, with a plan to close all its stores and begin liquidation sales in the middle of the holiday season.

KB Toys is the latest retailer to succumb to the sharp decline in consumer spending this year. Others like apparel retailer Steve & Barry's to jeweler Whitehall Jewelers Holdings (WHJHQ.PK) filed for bankruptcy protection earlier this year and started selling their merchandise at deep discounts.

"The liquidity crisis is directly attributable to a sudden and sharp decline in consumer sales due to macro-economic forces," KB Toys said in court papers.

The company, which runs about 460 stores, said it will try to find a buyer for its wholesale distribution unit as it conducts going-out-of-business sales.

KB Toys filed a petition in U.S. Bankruptcy Court in Delaware, along with eight affiliates, listing assets of $100 million to $500 million, and liabilities in the same range.

The company, which started in 1922 as a family-owned business, previously filed for bankruptcy protection in 2004 and emerged from bankruptcy in 2005 after selling itself to Prentice Capital Management Inc.

At that time, KB Toys got $20 million in funding from an affiliate of Prentice. In exchange for the funding and a seasonal overadvance credit facility of up to $25 million, the Prentice affiliate got 90 percent of the common stock, while the remaining was to be held by a trust for the benefit of unsecured creditors of KB Toys entities being reorganized.

KB Toys' liquidation sales will start about half way into the holiday shopping season, which traditionally kicks off on the day after the Thanksgiving holiday.

But worries are mounting about this year's holiday sales, which could be the worst since the early 1990s, as consumers facing higher costs, a credit crunch and mounting job losses cut back on spending.

KB Toys suffered a "sudden and sharp decline in consumer sales due to macro-economic forces" during its most critical selling season, Raymond Borst, the company's controller, said in a court affidavit.

For the period from Oct. 5 through Dec. 8, same-store sales dropped almost 20 percent from the year-earlier period.

KB Toys said it has 10,850 employees, about 6,515 of whom are seasonal. About 277 stores are located in malls and 30 operate seasonally and were set to close in January.

The company did not obtain traditional debtor-in-possession financing and instead is seeking court approval to use cash collateral to pay operating expenses, including payroll.

KB Toys listed Hong-Kong based consumer goods exporter Li & Fung Ltd (0494.HK) as its largest creditor, with a claim of about $27.2 million. U.S. toymaker Mattel Inc MAT.N was the next largest creditor, with a $1.3 million claim.

The company's first bankruptcy court hearing is set for Friday. (Reporting by Emily Chasan and Aarthi Sivaraman; Editing by Jeffrey Benkoe, Andre Grenon, Richard Chang)