SANTA ANA, Calif. -- Sometimes big headaches come in small packages.

That's what a California company called Zap (ZP) has discovered in trying to import the tiny, European-made Smart car.

Only now, after three years of working to get the cars to meet U.S. safety and environmental regulations -- and battling with giant DaimlerChrysler -- is there a respectable batch of cars to dole out to dealers.

More than 100 cars have been shipped to sales lots. The remainder, about 250, fill a yard in an industrial area of this Orange County enclave. Here, the cars await their turn to be outfitted with myriad environmental and safety items -- from stronger bumpers to better interior padding -- to make them legal for sale in the USA.

Tiny as it might be, the National Highway Traffic Safety Administration found that Zap's version of the Smart car is up to snuff. "Just because it's small doesn't mean it can't meet the standard," says agency spokesman Rae Tyson.

While it juggled regulators' demands, Zap has had its own struggles. By last year, it had amassed $2.2 billion in orders for Smart cars that it hadn't won permission to sell. From $5 a share in late 2004, the stock price slid to 50 cents at the start of the year.

"Certainly, it would appear from a public standpoint we overpromised and underdelivered," says Zap CEO Steven Schneider.

Zap's stock was almost delisted. But now that it is delivering cars, the stock has rebounded, closing Tuesday at 67 cents a share.

Besides regulators, Zap has been at odds with DaimlerChrysler, which owns the Smart brand. Zap filed a lawsuit in November alleging that DaimlerChrysler has tried to destroy it and keep it from converting Smart cars for the U.S. market. Smart spokeswoman Bettina Singhartinger said the company, which has no business relationship with Zap, denies the allegation. "We consider the lawsuit to be unfounded," she says.

A really tiny vehicle

All the turmoil surrounds a car so short that Zap boasts it can be parked perpendicular to the curb. At a little more than 8 feet long, it's 4 feet shorter than BMW's Mini Cooper.

It's powered by a three-cylinder, 61-horsepower turbocharged engine capable of a top speed of 85 mph. It comes in three versions, including a convertible.

DaimlerChrysler markets the Smart ForTwo, as the model is called, from Japan to Canada, but not in the USA.

Smart maintains that the car has passed rigorous safety tests, including a head-on crash with a Mercedes E-Class sedan. The Smart car has "got a bit of a shape like an egg. All the energy gets directed" away from passengers, Singhartinger says.

DaimlerChrysler keeps dropping hints that it might bring a Smart vehicle to the USA, but CEO Dieter Zetsche said last September that the best hope might be the 2007 replacement for the ForTwo.

When Schneider realized the potential U.S. market for the two-seater, he joined with an auto importer firm, G&K Automotive Conversion, to obtain the cars and get them certified.

G&K's president, George Gemayel, says if he had known how hard it would be to get Smart approved by the Transportation Department and Environmental Protection Agency, he might have ducked out of the project. "It's been extremely difficult, stressful and costly. It almost put us out of business."

The EPA didn't approve the emissions modifications until late last year, and every subsequent model year will require going through the approval process again.

The cars can't be sold in five states with the toughest emissions standards, including New York and California. Smart has about six California dealers who plan to sell unused 2004 models, which Schneider says are exempt under current state requirements.

Making the myriad safety and emissions modifications takes about 20 hours per car. Each change must be photographed and documented for regulators, resulting in about 40 pages of paperwork per car. Besides adding running lights and other improvements, one of the harder changes has been adding an auxiliary engine computer to hold down emissions.

The cars are bought off sales lots or from brokers in Europe and Asia. Buying them in larger numbers results in some fleet discounts.

Schneider says 140 U.S. dealers ordered cars, but Zap is being choosy: Only 75 will be given the cars. They represent a mix of independent used car lot operators and an increasing proportion of new car dealers.

The company has had to scale back its goals from last year. It is now on track to sell up to 6,000 Smart cars this year. Next year, sales could push 15,000, Schneider says.

Prices start at $24,000, but some dealers say they are fetching as much as $30,000 from first-on-their-block buyers. At those levels, Schneider says, the cars are profitable even though they are bought overseas at close to retail and despite added costs of shipping and modification.

Dealers want more

Two dealers who have received cars so far seem pleased.

In Phoenix, dealer Tim Day blames a rear-end auto accident in front of his 3D Auto Wholesalers dealership earlier this month on gawkers checking out the Smart cars that had arrived. He's gotten nine so far. He says he has deposits for more than 50 cars.

Bob Chauvin, who has two used car lots in Reno, says he sold the four Smart cars he's received and expects new shipments every week. Buyers are as far away as Florida.

"Everybody is crazy about these cars," he says. On a drive to Arizona, "Everybody on the road is waving at you. They think it's a hybrid or something."

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