Firm Accuses 2 Ex-Officers of Theft : Embezzlement: With Design in Mind alleges an elaborate scheme in the loss of $2.1 million. The toy company says it will file a lawsuit.

After a two-month internal investigation, a struggling Chatsworth company that makes novelty gift items and toys on Monday accused its two top former officers of embezzling $2.1 million.

With Design in Mind International Inc. alleged that Steve Zuloff, its former chairman and chief executive officer, and Barry Benjamin, previously president and chief financial officer, collaborated in an elaborate scheme that included improperly paying sales commissions to a company owned by their children.

Sheldon F. Morick, the company’s new chief executive officer, said in an interview that the company believes the two men had been misusing company funds for at least two years.

Until about three months ago, “no one had any idea that this was happening,” Morick said. “But it was discovered through the efforts of employees.”

Zuloff, a company co-founder and its chief executive since 1988, and Benjamin, a company director since 1988, were both ousted in late June after allegations of misconduct surfaced. Telephone messages left at their homes Monday were not returned, and their attorney in Washington, D.C., could not be reached.

With Design’s board said it has tried to get Zuloff and Benjamin to pay the company $2.1 million, plus $150,000 the company said it incurred for the investigation. “But they refused to make restitution,” Morick said.

Morick said With Design would file a lawsuit this week. He added that the company had notified the Securities and Exchange Commission, and that the federal regulatory agency had requested information on the allegations.

With Design, which was incorporated in 1986 and whose investors included Los Angeles Dodger pitcher Orel Hershiser, has been struggling in the last couple of years, partly because of the recession. The company lost $2.76 million during the nine months ended June 30 on sales of $2.9 million, compared with a loss of $683,181 on revenue of $3.59 million in the same period a year ago. With Design’s stock, which traded above $8 a share one year ago, closed Monday at $1.375 on the NASDAQ market.

In the interview, Morick said With Design thought Zuloff and Benjamin misused company funds in four ways: allegedly diverting for personal use money that should have gone to a supplier, taking money received from a distributor, paying sales commission to a company owned by several of their children and using company funds for airline trips and other “unjustified” expenses.

“It was wide-ranging . . . and they appeared to have done it together,” Morick said.

Morick, a former executive at toy makers Mattel Inc. and Revell Inc., said that despite the management shake-up, “the company is in very good shape financially and will continue to develop.” The company, he said, has cash and cash equivalents of about $4.3 million.

Morick said With Design plans to steer the company away from its novelty gift and toy products to its video-based technology called Micro Theatre, which creates three-dimensional images for video arcade games and are used as display systems for companies wanting to demonstrate their products.