DEF 14A 1 proxystatement.txt PROXY STATEMENT GENERAL OFFICE: 155 East 21st Street/P.O. Box 4667/Jacksonville, Florida 32201/ (904) 355-1781 FLORIDA ROCK INDUSTRIES INC Mining, Ready Mix Concrete, and Construction Products December 27, 2006 Dear Shareholder: I am pleased to invite you to attend our Annual Meeting of Shareholders, which will be held on Wednesday, February 7, 2007, at 9 a.m. at our offices at 155 East 21st Street, Jacksonville, Florida. Details regarding the business to be conducted at the meeting are described in the accompanying Notice of Annual Meeting of Shareholders and Proxy Statement. At the meeting, I will report on the Company's operations and plans. We also will leave time for your questions. We hope that you are able to attend the meeting. Whether or not you plan to attend, it is important that your shares be represented and voted at the meeting. Therefore, I urge you to promptly vote and submit your proxy by signing, dating and returning the enclosed proxy card in the enclosed envelope. Thank you for your ongoing support of Florida Rock Industries, Inc. Sincerely, /s/ John D. Baker II John D. Baker II President and Chief Executive Officer 2007 Annual Meeting of Shareholders Notice of Annual Meeting and Proxy Statement TABLE OF CONTENTS Notice of Annual Meeting of Shareholders ii Proxy Statement 1 Corporate Governance 5 Board Structure and Committee Membership 8 Director Nomination Process 11 Non-Employee Director Compensation 14 Proposal No. 1 - Election of Directors 16 Proposal No. 2 - Ratification of Independent Registered Public Accounting Firm 18 Shareholder Return Performance 20 Compensation Discussion and Analysis 21 Compensation Committee Report 39 Executive Compensation 39 Certain Relationships and Related Party Transactions 44 Common Stock Ownership of Certain Beneficial Owners 46 Common Stock Ownership by Directors and Executive Officers47 Audit Committee Report 48 Additional Information 49 Annex A - Standards of Board Independence 51 FLORIDA ROCK INDUSTRIES, INC. 155 East 21st Street, Jacksonville, Florida 32206 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TIME AND DATE 9:00 a.m. Wednesday, February 7, 2007 PLACE 155 East 21st Street Jacksonville, Florida ITEMS OF BUSINESS * To elect four directors for a 3 year term. * To ratify the Audit Committee's selection of the Independent Registered Public Accounting Firm. ? To address any other business that may properly come before the meeting or any adjournment. RECORD DATE You are entitled to vote if you were a shareholder of record at the close of business on Monday, December 11, 2006. ANNUAL REPORT Our 2006 Annual Report, which is not part of the proxy soliciting materials, is enclosed. PROXY VOTING Please submit a proxy as soon as possible so that your shares can be voted at the meeting in accordance with your instructions. If you are a shareholder of record and you attend the meeting, you may withdraw your proxy and vote in person. BY ORDER OF THE BOARD OF DIRECTORS Barbara C. Johnston Secretary This Proxy Statement and Proxy Card are being distributed on or about December 27, 2006. FLORIDA ROCK INDUSTRIES, INC. 155 E. 21st Street Jacksonville, Florida 32206 PROXY STATEMENT FOR THE 2007 ANNUAL MEETING OF SHAREHOLDERS _________________________________________________________________ The Board of Directors (the "Board") of Florida Rock Industries, Inc. is soliciting proxies for the Annual Meeting of Shareholders. You are receiving a proxy statement because you own shares of Florida Rock common stock that entitle you to vote at the meeting. By use of a proxy, you can vote whether or not you attend the meeting. The proxy statement describes the matters we would like you to vote on and provides information on those matters so you can make an informed decision. This proxy statement includes information relating to the proposals to be voted on at the meeting, the voting process, compensation of our directors and most highly paid officers, and other required information. In this proxy statement, unless otherwise indicated, the words "the Company," "Florida Rock," "we," "our" and "us" refer to Florida Rock Industries, Inc. Purpose of the Annual Meeting The purpose of the Annual Meeting is to elect directors, to ratify the Audit Committee's selection of the independent registered public accounting firm and to transact such other business as may properly come before the Annual Meeting. Annual Meeting Admission You are invited to attend the meeting in person. The meeting will be held at 9:00 a.m. on Wednesday, February 7, 2007 at our offices at 155 East 21st Street, Jacksonville, Florida. No cameras, recording equipment, electronic devices, large bags, briefcases or packages will be permitted in the Annual Meeting. Quorum A majority of the outstanding shares of our common stock must be represented in person or by proxy at the meeting to establish a quorum. Both abstentions and broker non-votes are counted as present for determining the presence of a quorum. Broker non-votes occur when you fail to provide voting instructions for shares you hold in "street name." In that case,your broker may be authorized to vote your shares on routine items but is prohibited from voting your shares on other matters. The "non-votes" on those other matters are known as "broker non-votes." Shareholders Entitled to Vote Each share of our common stock outstanding as of the close of business on December 11, 2006, the record date, is entitled to one vote at the Annual Meeting on each matter properly brought before the meeting. As of that date, there were 65,809,776 shares of common stock issued and outstanding. This number does not include treasury shares, which are not entitled to be voted at the meeting. Most Florida Rock shareholders hold their shares through a stockbroker, bank, trustee, or other nominee rather than directly in their own name. As summarized below, there are some distinctions between shares held of record and those owned beneficially: * SHAREHOLDER OF RECORD - If your shares are registered directly in your name with Florida Rock's Transfer Agent, American Stock Transfer & Trust Company, you are the record shareholder of those shares and these proxy materials are being sent directly to you by Florida Rock. As the shareholder of record, you have the right to grant your voting proxy directly to Florida Rock or to vote in person at the meeting. * BENEFICIAL OWNER - If your shares are held in a stock brokerage account, by a bank, trustee, or other nominee, you are considered the beneficial owner of shares held in street name and these proxy materials are being forwarded to you by your broker, trustee, or nominee who is considered the record shareholder of those shares. As the beneficial owner, you have the right to direct your broker, trustee or nominee on how to vote and are also invited to attend the meeting. However, since you are not the shareholder of record, you may not vote these shares in person at the meeting. Your broker, trustee, or nominee is obligated to provide you with a voting instruction card for you to use. * PROFIT SHARING PLANS - If your shares are held in your account in the Florida Rock Industries, Inc. Profit Sharing and Deferred Earnings Plan or the Arundel Corporation Profit Sharing and Deferred Earnings Plan (collectively, the "Profit Sharing Plan"), you are considered the beneficial owner of those shares and the trustee of the Profit Sharing Plan (or its nominee) is the shareholder of record. Participants in the Profit Sharing Plan may direct the trustee how to vote the shares allocated to their account by following the voting instructions contained on the proxy card. If voting instructions are not received for shares in the Profit Sharing Plan, those shares will be voted in the same proportion as the shares in the Profit Sharing Plan for which voting instructions are received. Proposals You Are Asked to Vote On and the Board's Voting Recommendations The following proposals are scheduled to be voted on at the meeting. Our Board recommends that you vote your shares as indicated below. Proposal: The Board's Voting Recommendation: 1. The Election of Four "FOR" Director Nominees Each nominee to the Board 2. Ratification of Independent "FOR" Registered Public Accounting Firm Ratification of the Independent Registered Public Accounting Firm Other than the proposals described in this proxy statement, the Board is not aware of any other matters to be presented for a vote at the Annual Meeting. If you grant a proxy, any of the persons named as proxy holders will have the discretion to vote your shares on any additional matters properly presented for a vote at the meeting. If any of our nominees is unavailable as a candidate for director, the proxy holders will vote your proxy for another candidate or candidates as may be nominated by the Board. Required Vote The nominees for election as directors at the Annual Meeting will be elected by a plurality of the votes cast at the meeting. This means that the director nominee with the most votes for a particular slot is elected for that slot. Votes withheld from one or more director nominees will have no effect on the election of any director from whom votes are withheld. The approval of each other proposal requires the affirmative "FOR" vote of a majority of those shares present in person or represented by proxy at the meeting and entitled to vote on the matter. If you are a beneficial owner and do not provide the shareholder of record with voting instructions, your shares may constitute broker non-votes, as described in the section above entitled Quorum. In tabulating the voting result for any particular proposal, shares that constitute broker non-votes will not be included in vote totals and will have no effect on the outcome of any vote. Voting Methods If you hold shares directly as the shareholder of record, you may vote by granting a proxy or, if you hold shares beneficially in street name, by submitting voting instructions to your broker or nominee. If you own shares beneficially as a participant in the Profit Sharing Plan, you may vote by submitting voting instructions to the trustee. Please refer to the summary instructions included on your proxy card or, for shares held in street name, the voting instructions card provided by your broker or nominee. Changing Your Vote You may change your proxy instructions at any time prior to the vote at the Annual Meeting. For shares held directly in your name, you may accomplish this by granting a new proxy or by voting in person at the Annual Meeting. For shares held beneficially by you, you may change your vote by submitting new voting instructions to your broker or nominee. Counting the Vote In the election of directors, you may vote "FOR" all of the nominees or your vote may be "WITHHELD" from one or more of the nominees. With respect to each other proposal, you may vote "FOR," "AGAINST," or "ABSTAIN." If you sign your proxy card or broker voting instruction card with no further instructions, your shares will be voted in accordance with the recommendations of the Board. Shares held in your account in the Profit Sharing Plan will be voted by the trustee as described in Shareholders Entitled to Vote on page 2. Results of the Vote We will announce preliminary voting results at the meeting and publish final results in our Quarterly Report on Form 10-Q for the quarter ending March 31, 2007. Delivery of Proxy Materials Securities and Exchange Commission rules now allow us to deliver a single copy of an annual report and proxy statement to any household at which two or more shareholders reside, if we believe the shareholders are members of the same family. This rule benefits both you and the Company. We believe it eliminates irritating duplicate mailings that shareholders living at the same address receive and it reduces our printing and mailing costs. This rule applies to any annual reports, proxy statements, proxy statements combined with a prospectus, or information statements. Each shareholder will continue to receive a separate proxy card or voting instruction card. Your household may have received a single set of proxy materials this year. If you prefer to receive your own copy now or in future years, please request a duplicate set by contacting John D. Milton, Jr. at (904) 355-1781 or by mail at 155 East 21st Street, Jacksonville, Florida 32206-2104. If a broker or other nominee holds your shares, you may continue to receive some duplicate mailings. Certain brokers will eliminate duplicate account mailings by allowing shareholders to consent to such elimination, or through implied consent if a shareholder does not request continuation of duplicate mailings. Since not all brokers and nominees may offer shareholders the opportunity this year to eliminate duplicate mailings, you may need to contact your broker or nominee directly to discontinue duplicate mailings from your broker to your household. List of Shareholders The names of shareholders of record entitled to vote at the Annual Meeting will be available at the Annual Meeting for any purpose germane to the meeting. The list also will be available between the hours of 9:00 a.m. and 4:30 p.m., at our principal executive offices at 155 East 21st Street, Jacksonville, Florida, by contacting Barbara C. Johnston, our Corporate Secretary. Cost of Proxy Solicitation Florida Rock will pay for the cost of preparing, assembling, printing, mailing, and distributing these proxy materials. In addition to mailing these proxy materials, the solicitation of proxies or votes may be made in person, by telephone, or by electronic communication by our directors, officers, and employees, who do not receive any additional compensation for these solicitation activities. We will also reimburse brokerage houses and other custodians, nominees and fiduciaries for their reasonable out-of-pocket expenses for forwarding proxy and solicitation materials to beneficial owners of stock. Transfer Agent Our Transfer Agent is American Stock Transfer & Trust Company. All communications concerning record shareholder accounts, including address changes, name changes, common stock transfer requirements, and similar issues can be handled by contacting our Transfer Agent at 1-800-937-5449, or in writing at 59 Maiden Lane, Plaza Level, New York, NY 10038. CORPORATE GOVERNANCE Our business, property and affairs are managed under the direction of our Board of Directors. Members of our Board are kept informed of our business through discussions with our Chairman and Chief Executive Officer and other officers, by reviewing materials provided to them, by visiting our offices and plants and by participating in meetings of the Board and its Committees. The Board of Directors is committed to good business practices, transparency in financial reporting and the highest level of corporate governance. Corporate Governance Guidelines The Board has adopted Corporate Governance Guidelines that, along with the charters of the Board committees, provide the framework for the governance of the Company. The Board's Corporate Governance and Nominating Committee is responsible for overseeing and reviewing the Guidelines at least annually, and recommending any proposed changes to the Board for approval. The Corporate Governance Guidelines are available on our Web site at www.flarock.com under Investor Relations - Corporate Governance Documents. Executive Sessions of Independent Directors Independent directors regularly meet in executive sessions without management and may select a director to facilitate the meeting. During the 2006 fiscal year, Mr. Carpenter presided at executive sessions of the independent directors. Communication with Directors Shareholders may communicate with the Independent Directors or Chairs of our Audit, Compensation and Corporate Governance and Nominating Committees on board-related issues by writing to the Committee Chairs or to the outside directors as a group c/o Barbara C. Johnston, Corporate Secretary at Florida Rock Industries, Inc., 155 E. 21st Street, Jacksonville, Florida 32206. The envelope should clearly indicate the person or persons to whom the Corporate Secretary should forward the communication. Communications will be distributed to the Board, or to any individual director or directors as appropriate, depending on the facts and circumstances outlined in the communications. The Board of Directors has directed that certain items that are unrelated to the duties and responsibilities of the Board should be excluded, such as: * spam * junk mail and mass mailings * product inquiries and suggestions * resumes and other forms of job inquiries * surveys * business solicitations or advertisements. In addition, material that is unduly hostile, threatening, illegal or similarly unsuitable will be excluded, with the provision that any communication that is filtered out must be made available to any outside director upon request. Standards of Board Independence Pursuant to New York Stock Exchange listing standards, our Board of Directors has adopted a formal set of categorical Standards of Board Independence. In accordance with these Standards, a Director must be determined to have no material relationship with the Company other than as a Director. The Standards specify the criteria by which the independence of our Directors will be determined, including strict guidelines for Directors and their immediate families with respect to past employment or affiliation with Florida Rock or its independent registered public accounting firm. The Standards also prohibit Audit Committee members from having any direct or indirect financial relationship with Florida Rock, and restrict both commercial and not-for-profit relationships of all Directors with Florida Rock. Directors may not be given personal loans or extensions of credit by Florida Rock, and all Directors are required to deal at arm's length with Florida Rock and its subsidiaries and to disclose any circumstance that might be perceived as a conflict of interest. The Standards of Board Independence meet and in some areas exceed the listing standards of the New York Stock Exchange. The Board's Standards of Board Independence are attached to this proxy statement as Annex A. In accordance with these Standards, the Board undertook its annual review of the independence of its Directors. During this review, the Board considered transactions and relationships between each Director or any member of his or her immediate family and Florida Rock (and its subsidiaries and affiliates). The Board also considered whether there were any transactions or relationships between Directors or any member of their immediate family (or any entity of which a Director or an immediate family member is an executive officer, general partner or significant equity holder). As provided in the Standards of Board Independence, the purpose of this review was to determine whether any such relationships or transactions existed that were inconsistent with a determination that the Director is independent. As a result of this review, the Board affirmatively determined that the following Directors are independent of the Company and its management under the standards set forth in the Standards of Board Independence: A. R. Carpenter William P. Foley II Robert P. Crozer Francis X. Knott John A. Delaney William H. Walton III J. Dix Druce, Jr. In making these determinations, the Board considered that in the ordinary course of business, transactions may occur between Florida Rock and other companies at which some of our Directors are or have been officers. In each case, the amount of transactions from these companies in each of the last three years did not approach the thresholds set forth in the Standards of Board Independence. The Board also considered charitable contributions to not-for-profit organizations of which our Directors or immediate family members are executive officers, none of which approached the levels set forth in our Standards of Board Independence. Director Attendance at Annual Meeting of Shareholders The Company's policy is that our Directors are expected to attend the Annual Meeting of Shareholders unless extenuating circumstances prevent them from attending. All of our then serving Directors attended last year's Annual Meeting of Shareholders. Business Conduct Policies We believe that operating with honesty and integrity has earned us trust from our customers, credibility within our communities, and dedication from our employees. Our senior executive and financial officers are bound by our Financial Code of Ethical Conduct. In addition, our directors, officers and employees are required to abide by our Code of Business Conduct and Ethics to ensure that our business is conducted in a consistently legal and ethical manner. Our Code of Business Conduct and Ethics covers many topics, including conflicts of interest, confidentiality, fair dealing, protection and proper use of the Company's assets and compliance with laws, rules and regulations. Employees are required to report any conduct that they believe in good faith to be an actual or apparent violation of these policies. The Audit Committee has adopted procedures to receive, retain, and treat complaints received regarding accounting, internal accounting controls or auditing matters, and to allow for the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters. The Financial Code of Ethical Conduct and the Code of Business Conduct and Ethics are available on our Web site at www.flarock.com under Investor Relations - Corporate Governance Documents. BOARD STRUCTURE AND COMMITTEE MEMBERSHIP The Board is divided into three classes serving staggered three-year terms. The Board has twelve Directors and the following four committees: the Audit Committee, the Compensation Committee, the Corporate Governance and Nominating Committee, and the Executive Committee. The membership during fiscal 2006 and the function of each Committee are described below. During fiscal 2006, the Board of Directors held five meetings. The Audit Committee held nine meetings during fiscal 2006; the Compensation Committee held four meetings during fiscal 2006; and the Corporate Governance and Nominating Committee held one meeting during fiscal 2006. The Executive Committee held no formal meetings during fiscal 2006 but acted on various resolutions by unanimous written consents. All of our directors attended at least 75% of the meetings of the Board and all committees on which the Director served. The following chart shows the composition of the committees of the Board of Directors and the number of meetings held by each committee during fiscal year 2006. Except for the Executive Committee, each of the committees of the Board is composed exclusively of independent directors. Corporate Governance and Director Audit Compensation Nominating Executive ------- ----- ------------ ---------- --------- Edward L. Baker X* John D. Baker II X A.R. Carpenter X X* Robert P. Crozer X John A. Delaney X J. Dix Druce Jr. X* X Luke E. Fichthorn III William P. Foley II X Francis X. Knott X* John D. Milton Jr. X William H. Walton III X Fiscal 2006 Meetings 9 4 1 0 X - Committee Member * -- Committee Chair Audit Committee The Audit Committee assists the Board in its oversight of the integrity of the Company's financial statements, compliance with legal and regulatory requirements, the qualifications, independence, and performance of the Company's independent auditor, and the performance of the Company's internal auditing department. In addition, the Audit Committee: * Reviews the annual audited and quarterly consolidated financial statements; * Reviews the Company's financial reporting process and disclosure and internal controls and procedures, including major issues regarding accounting principles and financial statement presentation, and critical accounting policies to be used in the consolidated financial statements; * Reviews earnings press releases prior to issuance; * Appoints, oversees, and approves compensation of the independent auditor; * Reviews with the independent auditor the scope of the annual audit, including fees and staffing, and approves all audit and permitted non-audit services provided by the independent auditor; * Reviews findings and recommendations of the independent auditor and management's response to the recommendations of the independent auditor; and * Discusses policies with respect to risk assessment and risk management, the Company's major risk exposures, and the steps management has taken to monitor and mitigate such exposures. The Board of Directors has determined that all Audit Committee members are independent and financially literate and that the Chair of the Committee, J. Dix Druce, Jr., has financial management expertise under the New York Stock Exchange listing standards and qualifies as an "audit committee financial expert" within the meaning of the rules of the Securities and Exchange Commission. The charter of the Audit Committee is available at www.flarock.com under Investor Relations - Corporate Governance Documents. Compensation Committee The primary functions of the Compensation Committee are to review and refine our executive compensation philosophy and guiding principles to reflect Florida Rock's mission, values and long-term strategic objectives and to adopt and administer executive compensation programs in a manner that furthers the interests of our shareholders. The role of the Compensation Committee is described in greater detail under the section entitled "Compensation Discussion and Analysis." The charter of the Compensation Committee is available at www.flarock.com under Investor Relations - Corporate Governance Documents. William P. Foley, II, Francis X. Knott and William H. Walton III served as members of the Compensation Committee during the 2006 fiscal year. Mr. Knott, the Chairman of the Compensation Committee, served as a Vice President of Florida Rock from 1988 to 1991. Subject to that exception, none of the members of the Compensation Committee (i) was an officer or employee of the Company or any of its subsidiaries during the fiscal year, or (ii) had any relationship requiring disclosure by the Company under the rules of the Securities and Exchange Commission requiring disclosure of certain relationships and related party transactions. None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our Board of Directors or Compensation Committee. Corporate Governance and Nominating Committee Under its Charter, the principal functions of the Corporate Governance and Nominating Committee are to (1) identify individuals who are qualified to serve on the Company's Board of Directors, (2) recommend for selection by the Board of Directors the director nominees for the next annual meeting of the shareholders or at any such time that there is a vacancy on the Board of Directors, (3) develop and recommend to the Board of Directors corporate governance guidelines with respect to the Company, and (4) oversee the evaluation of the Board and management of the Company. In addition, the Corporate Governance and Nominating Committee: * Establishes criteria for Board membership; * Recommends to the Board directors to serve on other Board committees, monitors the functions of such committees and makes recommendations to the Board regarding the functions of such other committees; * Reviews and recommends changes to the Company's Corporate Governance Guidelines, Financial Code of Ethical Conduct and Code of Business Conduct and Ethics; * Reviews and approves all transactions between the Company and any related person that are required to be disclosed under the rules of the Securities and Exchange Commission; and * Considers all requests by any Director or executive officer for waivers of the Company's Financial Code of Ethical Conduct or Code of Business Conduct and Ethics. The charter of the Corporate Governance and Nominating Committee is available at www.flarock.com under Investor Relations - Corporate Governance Documents. Executive Committee Edward L. Baker, John D. Baker II and John D. Milton, Jr. comprise the Executive Committee. To the extent permitted by law, the Executive Committee exercises the powers of the Board between meetings of the Board of Directors. DIRECTOR NOMINATION PROCESS Role of the Corporate Governance and Nominating Committee The Corporate Governance and Nominating Committee ("Committee") identifies individuals whom the Committee believes are qualified to become Board members in accordance with the Director Qualification Standards set forth below, and recommends selected individuals to the Board for nomination to stand for election at the next meeting of shareholders of the Company at which directors will be elected. In the event there is a vacancy on the Board between meetings of shareholders, the Committee identifies individuals whom the Committee believes are qualified to become Board members in accordance with the Director Qualification Standards, and recommends one or more of such individuals for appointment to the Board. Nominees Proposed by Shareholders for Consideration by the Committee The Committee will consider properly submitted shareholder nominees for candidates for membership on the Board of Directors. Shareholders proposing individuals for consideration by the Committee must include at least the following information about the proposed nominee: the proposed nominee's name, age, business or residence address, principal occupation or employment, and whether such person has given written consent to being named in the proxy statement as a nominee and to serving as a director if elected. Shareholders should send the required information about the nominee to: Corporate Secretary Florida Rock Industries, Inc. 155 East 21st Street Jacksonville, Florida 32206 In order for an individual proposed by a shareholder to be considered by the Committee for recommendation as a Board nominee for the Annual Meeting of Shareholders to be held in early 2008, the Corporate Secretary must receive the proposal no later than 5 p.m. Eastern Time on September 30, 2007. Such proposals must be sent via registered, certified or express mail. The Corporate Secretary will send properly submitted shareholder proposed nominations to the Committee Chair for consideration at a future Committee meeting. Individuals proposed by shareholders in accordance with these procedures will receive the same consideration that individuals identified to the Committee through other means receive. Nominations by Shareholders at the Annual Meeting The Company's Articles of Incorporation provide that only persons who are nominated in accordance with the procedures set forth in the Articles of Incorporation shall be eligible for election as directors by the shareholders. Under the Articles of Incorporation, directors may be nominated, at a meeting of shareholders at which directors are being elected, by (1) the Board of Directors or any committee or person authorized or appointed by the Board of Directors, or (2) by any shareholder who is entitled to vote for the election of directors at the meeting and who complies with certain notice procedures. These notice procedures require that the nominating shareholder make the nomination by timely notice in writing to the Secretary of the Company. To be timely, the notice must be received at the principal executive offices of the Company not less than forty (40) days prior to the meeting except that, if less than fifty (50) days' notice or prior public disclosure of the date of the meeting is given to shareholders, the notice must be received no later than ten (10) days after the notice of the date of the meeting was mailed or such public disclosure was made. The notice must contain certain prescribed information about the proponent and each nominee, including such information about each nominee as would have been required to be included in a proxy statement filed pursuant to the rules of the Securities and Exchange Commission had such nominee been nominated by the Board of Directors. Director Qualification Standards The Corporate Governance and Nominating Committee has established the following standards and qualifications for members of the Board of Directors: * Each Director shall at all times represent the interests of the shareholders of the Company. * Each Director shall at all times exhibit high standards of integrity, commitment and independence of thought and judgment. * Each Director shall dedicate sufficient time, energy and attention to ensure the diligent performance of his or her duties, including by attending shareholder meetings and meetings of the Board and Committees of which he or she is a member, and by reviewing in advance all meeting materials. * The Board shall meet the applicable standards of independence from the Company and its management. * The Board shall encompass a range of talent, skill and expertise sufficient to provide sound and prudent guidance with respect to all of the Company's operations and interests. The Corporate Governance Guidelines establish a retirement policy at age 70 (or the expiration of their term after their 70th birthday) for directors who joined the Board after 1986. Identification, Evaluation and Selection of Nominees The Committee periodically reviews the appropriate size and composition of the Board and anticipates future vacancies and needs of the Board. In the event the Committee recommends an increase in the size of the Board or a vacancy occurs, the Committee considers qualified nominees from several sources, which may include current Board members, a director search firm, and nominees recommended by shareholders and other persons. The Committee may from time to time retain a director search firm to help the Committee identify qualified director nominees for consideration by the Committee. The Committee evaluates qualified director nominees at regular or special Committee meetings against the current Director Qualification Standards described above and reviews qualified director nominees with the Board. The Committee and the Chairman of the Board interview candidates who meet the Director Qualification Standards, and the Committee selects nominees who best suit the Board's current needs and recommends one or more of such individuals for appointment to the Board. NON-EMPLOYEE DIRECTOR COMPENSATION Compensation Arrangements for Fiscal 2006 and 2007 The following table describes the compensation arrangements with our non-employee directors for the 2006 and 2007 fiscal years. 2006 2007 ---- ---- Annual Cash Retainer $15,000 $25,000 Attendance Fee Per Meeting(1) $2,000 $5,000 Committee Stipends: Audit Committee Chair $10,000 $15,000 Other Audit Committee Members $5,000 $5,000 Compensation Committee and $2,000 $5,000 Corporate Governance Committee Chairs Other Members of Compensation and $1,000 $2,000 Corporate Governance Committees Director Stock Purchase Plan 25% match 25% match and payment and payment of broker of broker commissions(2) commissions(2) Stock Options 1,000 Options Options valued per meeting at $50,000(4) attended(3) (1) Non-employee directors receive meeting fees of $5,000 per Board meeting attended. No fees are paid for attendance at committee meetings. We reimburse our directors for travel and lodging expenses that they incur in connection with their attendance of directors' meetings and meetings of shareholders of the Company. From time to time, the Company may transport one or more non-employee directors to and from such meetings in the Company's airplane. (2) Our non-employee directors may elect to participate in the Director Stock Purchase Plan under which non-employee directors may invest all or any portion of their director fees in the Company's common stock, which is purchased in the open market. The Company matches 25% of the designated investment and pays all broker commissions. (3) During the 2006 fiscal year, non-employee directors received an automatic grant of options to purchase 1,000 shares of common stock for each regularly scheduled director meeting attended. These options became exercisable immediately, have an exercise price equal to the closing price of the Company's common stock on the date of the meeting, and expire ten (10) years after the grant date. (4) Under the current compensation arrangement, non-employee directors receive an annual grant of stock options valued at $50,000. The options are granted on the first Wednesday of December and have an exercise price equal to the closing price of the Company's common stock on the grant date. The options become exercisable immediately and have an exercise term of ten (10) years. The number of shares subject to the option is determined using the Black-Scholes valuation methodology. Under this program, on December 6, 2006, each non-employee director received options to acquire 2,828 shares at an exercise price of $43.21 per share. Actual Fiscal 2006 Director Compensation The following table shows the compensation paid to our non- employee directors for the 2006 fiscal year. Director Compensation for Fiscal 2006
NAME FEES STOCK OPTION NON-STOCK CHANGE IN ALL OTHER TOTAL EARNED AWARDS AWARDS INCENTIVE PENSION COMPENSATION ($) OR PAID ($) ($)(2) PLAN VALUE AND ($)(3) IN CASH COMPENSATION NONQUALIFIED ($)(1) ($) DEFFERED COMPENSATION EARNINGS A.R. Carpenter 32,000 -- 119,560 -- -- 8,050 159,610 Robert P. Crozer 26,000 -- 119,500 -- -- -- 145,500 J. Dix Druce, Jr. 35,000 -- 119,560 -- -- 8,800 163,360 John A. Delaney 30,000 -- 119,560 -- -- 7,550 157,110 Luke E. Fichthorn III (4) 25,000 -- 119,560 -- -- -- 144,560 William P. Foley II 24,000 -- 92,630 -- -- 6,050 122,680 Francis X. Knott 25,000 -- 97,000 -- -- 6,300 128,300 William H. Walton III 26,000 -- 119,560 -- -- 6,550 152,100
(1) Includes amounts deferred by the directors under the Director Stock Purchase Plan. (2) This amount is determined using the Black-Scholes model. This model was developed to estimate the fair value of traded options, which have different characteristics than director stock options, and changes to the subjective assumptions used in the model can result in materially different fair value estimates. (3) Represents the 25% matching contributions under the Director Stock Purchase Plan and the estimated allocable share of broker commissions on purchases by the plan for the account of the director. (4) In addition to the amounts shown above, Mr. Fichthorn receives an annual fee of $60,000 for financial consulting services. PROPOSAL NO. 1 ELECTION OF DIRECTORS Our Board of Directors is divided into three classes. One class of directors is elected at each annual meeting of shareholders for a three-year term of office. The directors elected at this meeting will serve until the Annual Meeting of Shareholders held in 2010. Directors not up for election this year will continue in office for the remainder of their terms. The Board of Directors has nominated four directors to serve for a three-year term expiring in 2010. The nominees were evaluated and recommended by the Corporate Governance and Nominating Committee in accordance with the process for nominating directors described above. If a nominee is unavailable for election, proxy holders will vote for another nominee proposed by the Board or, as an alternative, the Board may reduce the number of directors to be elected at the meeting. The Board of Directors unanimously recommends a vote FOR the election of these director nominees. Directors Up for Election in 2007 for Terms Expiring in 2010 Director Director Other Name and Principal Age Class/Terms Since Directorships Occupation ------------------ ---- ----------- ------- ------------- Thompson S. Baker II 48 Class III 1991 Patriot (Exp. 2010) Transportation Vice President of the Holding, Inc. Company John A. Delaney 50 Class III 2005 (Exp. 2010) President, University of North Florida Luke E. Fichthorn III 65 Class III 1972 Bairnco (Exp. 2010) Corporation Partner in Twain Associates (a private Patriot investment banking firm) Transportation Holding, Inc. Chairman of the Board and Chief Executive Officer of Bairnco Corporation (manufacturing) Francis X. Knott 61 Class III 2003 (Exp. 2010) (Also Chairman of Partners from Realty Trust, Inc. (a 1989 to real estate management 2002) enterprise) Directors Continuing in Office Director Director Other Name and Principal Age Class/Terms Since Directorships Occupation ------------------ ---- ----------- -------- ------------- Edward L. Baker 71 Class II 1970 Patriot (Exp. 2009) Transportation Chairman of the Board of Holding, Inc. the Company John D. Baker II 58 Class I 1979 Patriot (Exp. 2008) Transportation President and Chief Holding, Inc. Executive Officer of the Company Wachovia Corp A. R. Carpenter 64 Class I 1993 Regency Centers (Exp. 2008) Corporation Retired Vice Chairman of CSX Corporation Stein Mart, Inc. PSS World Medical, Inc. Robert P. Crozer 59 Class I 2005 (Exp. 2008) Senior Advisor, Greenhill & Co., Inc. (Investment banking firm) J. Dix Druce Jr. 59 Class II 2001 Regency Centers (Exp. 2009) Corporation Chairman of National P.E.T. Scan LLC William P. Foley II 62 Class I 2005 Fidelity (Exp. 2008) National Chairman and CEO, Fidelity Financial, Inc. National Financial, Inc. CKE Restaurants, Inc. John D. Milton Jr. 61 Class II 2002 (Exp. 2009) Executive Vice President, Treasurer and Chief Financial Officer William H. Walton III 54 Class II 2003 St. Joe Co. (Exp. 2009) Managing Member, Rockpoint Group, LLC (a real estate investment firm) All of the nominees and directors have been employed in their respective positions for the past five years, except Messrs. Crozer and Delaney. Mr. Crozer, age 59, has served as Senior Advisor to Greenhill & Co., Inc., an investment banking firm, since September 2004. From March 2001 to September 2004, Mr. Crozer served as Chairman of Wahyam Capital, LLC, a private investment firm. From 1989 to March 2001, Mr. Crozer served as Vice Chairman of Flowers Foods, Inc., and its predecessor, Flowers Industries, Inc. Mr. Crozer also served as a director of Keebler Foods Company from 1996 to March 2001 and as Chairman of the Board of Directors of Keebler from 1998 until March 2001. Mr. Delaney has served as President of the University of North Florida since July 2003. From 1995 to 2003, Mr. Delaney served as Mayor of the City of Jacksonville. Mr. Delaney is an attorney who also formerly served as General Counsel of the City of Jacksonville. Edward L. Baker and John D. Baker II are brothers. Thompson S. Baker II is the son of Edward L. Baker. See Certain Relationships and Related Party Transactions for a discussion of the relationships between the Company and Patriot Transportation Holding, Inc. PROPOSAL NO. 2 RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Audit Committee has selected KPMG LLP as the Company's independent registered public accounting firm to examine the consolidated financial statements of the Company for fiscal year 2007. The Board of Directors seeks an indication from shareholders of their approval or disapproval of the Audit Committee's appointment of KPMG LLP (KPMG) as independent registered public accounting firm (auditors) for fiscal year 2007. KPMG has been our independent auditor since 2005, and no relationship exists other than the usual relationship between auditor and client. Representatives of KPMG will be available to respond to questions at the annual meeting of shareholders. Audit and Non-Audit Fees The following table presents fees for professional audit services rendered by KPMG for the audit of the Company's financial statements for the fiscal years ended September 30, 2006 and September 30, 2005, and fees billed by KPMG for other services during those periods. Service Provided Fiscal 2006 Fiscal 2005 Audit fees(1) Annual Audit $ 245,000 $ 325,000 Internal control over 1,064,850 1,433,107 financial reporting Accounting consultation 31,600 25,470 --------- ---------- Total Audit Fees 1,341,450 1,783,577 --------- ---------- Audit related fees(2) Employee benefit plans 52,000 55,000 Procedures regarding sale 10,000 -- of interest in joint venture --------- ---------- Total audit related fees 62,000 55,000 Tax Fees(3) Compliance (federal and state returns) and research 129,500 39,525 --------- --------- Total tax fees 129,500 39,525 --------- --------- All Other Fees Accounting Research Online annual subscription 1,500 2,400 --------- --------- Total Fees $1,534,450 $ 1,880,502 ---------- ------------ (1) Audit fees consisted of audit work performed in the preparation of the financial statements and in the assessment of internal controls over financial reporting, as well as work that generally only the independent auditor can reasonably be expected to provide, such as statutory audits. (2) Audit related fees consisted principally of audits of employee benefit plans. (3) Tax fees consisted principally of assistance related to tax compliance and reporting. Pre-Approval of Audit and Non-Audit Services Under the Audit Committee Charter, the Audit Committee is required to pre-approve all auditing services and permissible non- audit services, including related fees and terms, to be performed for the Company by its independent auditor, subject to the de minimus exceptions for non-audit services described under the Securities Exchange Act of 1934, as amended, which are approved by the Audit Committee prior to the completion of the audit. The Audit Committee pre-approved all audit services, audit-related services and tax review, compliance and planning services performed for the Company by KPMG with respect to fiscal year 2006. SHAREHOLDER RETURN PERFORMANCE The following graph and table compare the performance of our common stock to the S&P 500 Index, the Dow Jones U.S. Building Materials and Fixtures Index and a peer group of companies in our industry for the five-year period commencing September 30, 2001 and ending on September 30, 2006. The peer group consists of Martin Marietta Materials, Inc., Texas Industries, Inc., and Vulcan Materials Company. The table and graph assume that $100 was invested on September 30, 2001 in the Company's common stock and in each of the indices and assumes the reinvestment of dividends. 2001 2002 2003 2004 2005 2006 Florida Rock 100 98 161 248 492 301 Peer Group 100 85 95 130 200 214 S&P 500 Index 100 80 99 113 126 140 Bldg Materials 100 96 123 175 216 205 COMPENSATION DISCUSSION AND ANALYSIS Our Compensation Discussion and Analysis addresses the following topics: * the members and role of our Compensation Committee; * our compensation-setting process; * our compensation philosophy and policies regarding executive compensation; * the components of our executive compensation program; and * our compensation decisions for fiscal year 2006 and for the first quarter of fiscal year 2007. In this "Compensation Discussion and Analysis" section, the terms, "we," "our," "us," and the "Committee" refer to the Compensation Committee of Florida Rock's Board of Directors. The Compensation Committee -------------------------- Committee Members and Independence Francis X. Knott, William P. Foley II and William H. Walton III are the members of the Compensation Committee. Mr. Knott, who has served on the Board of Directors for approximately 16 years, is the Committee Chairman. Mr. Knott served as a Vice President of Florida Rock from 1988 to 1991. Each member of the Compensation Committee qualifies as an independent director under New York Stock Exchange listing standards and Florida Rock's Standards of Board Independence. Role of Committee We operate under a written charter adopted by the Board. A copy of the charter is available at www.flarock.com under Investor Relations - Corporate Governance Documents. The fundamental responsibilities of our Committee are: * to adopt, review and refine an executive compensation philosophy and guiding principles that reflect Florida Rock's mission, values and long-term strategic objectives; * to administer Florida Rock's executive compensation programs in a manner that furthers Florida Rock's strategic goals and serves the interests of our shareholders; * to establish compensation-related performance objectives under the MIC plan for executive officers that support our strategic plan; * to evaluate the job performance of the Chief Executive Officer in light of those goals and objectives; * to determine the total compensation levels of the senior executive officers and to allocate total compensation among the various components of executive pay; * to administer Florida Rock's equity compensation and incentive compensation plans; * to make recommendations to the Board of Directors regarding incentive and equity-based compensation plans; * to make recommendations regarding succession plans for senior executive officers; and * to recommend to the Board the compensation arrangements with non-employee directors. Committee Meetings Our Compensation Committee meets as often as necessary to perform its duties and responsibilities. We held four meetings during fiscal 2006 and have held two meetings so far during fiscal 2007. Mr. Knott works with the Chief Executive Officer to establish the meeting agenda. We typically meet with the Chief Executive Officer and, where appropriate, with the General Counsel and with outside advisors. We also regularly meet in executive session without management. We receive and review materials in advance of each meeting. These materials include information that management believes will be helpful to the Committee as well as materials that we have specifically requested. Depending on the agenda for the particular meeting, these materials may include: * financial reports on year-to-date performance versus budget and compared to prior year performance; * calculations and reports on levels of achievement of individual and corporate performance objectives; * reports on Florida Rock's strategic objectives and budget for future periods; * reports on Florida Rock's five-year performance and current year performance versus a peer group of companies; * information on the executive officers' stock ownership and option holdings; * information regarding equity compensation plan dilution; * estimated grant-date values of stock options (using the Black-Scholes valuation methodology); * tally sheets setting forth the total compensation of the named executive officers, including base salary, cash incentives, equity awards, perquisites and other compensation and any amounts payable to the executives upon voluntary or involuntary termination, early or normal retirement or following a change-in- control of Florida Rock; and * information regarding compensation programs and compensation levels at study groups of companies identified by our compensation consultant. The Compensation Committee Process ---------------------------------- A Continuing Process Although many compensation decisions are made in the first quarter of the fiscal year, our compensation planning process neither begins nor ends with any particular Committee meeting. Compensation decisions are designed to promote our fundamental business objectives and strategy. Business and succession planning, evaluation of management performance and consideration of the business environment are year-round processes. Management's Role in the Compensation-Setting Process Management plays a significant role in the compensation- setting process. The most significant aspects of management's role are: * evaluating employee performance; * establishing business performance targets and objectives; and * recommending salary levels and option awards. The Chief Executive Officer works with the Compensation Committee Chair in establishing the agenda for Committee meetings. Management also prepares meeting information for each Compensation Committee meeting. The Chief Executive Officer also participates in Committee meetings at the Committee's request to provide: * background information regarding Florida Rock's strategic objectives; * his evaluation of the performance of the senior executive officers; and * compensation recommendations as to senior executive officers (other than himself and the Chairman). Committee Advisors The Compensation Committee Charter grants us the sole and direct authority to hire and fire our advisors and compensation consultants and approve their compensation of Florida Rock to is obligated to pay our advisors and consultants. These advisors report directly to the Compensation Committee. In the first quarter of fiscal 2007, we decided to engage a compensation consultant to identify specific study groups of companies and to provide research regarding compensation programs and compensation levels among the companies in the study groups. We initially identified possible consultants and asked Michael P. Oates, Florida Rock's Vice-President of Human Resources, to solicit these candidates, and any others he thought appropriate, to provide proposals to provide these services. Mr. Oates forwarded these proposals to us for review, and we authorized Mr. Knott to interview and hire Strategic Apex Group. Based on the interview and the written proposals, Mr. Knott engaged Strategic Apex Group ("SAG") to serve as our consultant for fiscal 2007. We determined that Strategic Apex Group was independent because it has never done any work for Florida Rock and has no prior relationship with management. We instructed SAG to report directly to the Committee but authorized SAG to communicate with Mr. Oates to obtain information. Strategic Apex Group will not do any work for Florida Rock except as authorized by the Compensation Committee. We directed the consultant to design three comparison groups of companies and to provide a research report regarding compensation levels and compensation programs at those companies. Annual Evaluation We meet in executive session each year to evaluate the performance of the named executive officers, to determine their Annual MIC Program bonuses for the prior fiscal year, to establish their Annual MIC Program performance objectives for the current fiscal year, to set their base salaries for the next calendar year, and to consider and approve any grants to them of equity incentive compensation. Performance Objectives Our process begins with establishing individual and corporate performance objectives for senior executive officers in the first quarter of each fiscal year. We engage in an active dialogue with the Chief Executive Officer concerning strategic objectives and performance targets. We review the appropriateness of the financial measures used in incentive plans and the degree of difficulty in achieving specific performance targets. Corporate performance objectives typically are established on the basis of a targeted return on capital employed for Florida Rock or a particular business unit. Benchmarking We do not believe that it is appropriate to establish compensation levels primarily based on benchmarking. We believe that information regarding pay practices at other companies is useful in two respects, however. First, we recognize that our compensation practices must be competitive in the marketplace. Second, this marketplace information is one of the many factors that we consider in assessing the reasonableness of compensation. Accordingly, we review compensation levels for our named executive officers against compensation levels at the companies in the study groups identified by our compensation consultant. Our compensation consultant provided us with information regarding compensation programs and compensation levels at the 50th and 75th percentiles among companies in three study groups. The study groups are described below: Study Group Study Group Study Group Florida 1: Related 2: 3: Rock industry 17 high Companies companies growth in the companies geographic area No. of 7 17 15 N/A Companies in Study Group No. of 1 10 11 N/A Industries Median $1,100 $1,600 $2,000 $1,200 Revenues ($ million) Median $1,700 $2,000 $1,800 $2,900 Market Cap ($ million) Median 1- 18% 35% 20% 22% Year Sales Growth Median 3- 31% 120% 42% 60% Year Sales Growth The companies in Study Group 1 were Ameron International Corp; Eagle Materials, Inc;, Granite Construction, Inc.; Headwaters, Inc.; Martin Marietta Materials, Inc..; Texas Industries, Inc.; and Vulcan Materials. The consultant decided not to include four other industry companies that were significantly larger than Florida Rock and are foreign-based. The companies in Study Group 2 were Albemarle Corp; Aleris International Inc.; Armor Holdings, Inc.; Brady Corp; Curtis- Wright Corp; DRS Technologies, Inc.; Gardner Denver Inc.; JLG Industries Inc.; Joy Global Inc,; Kansas City Southern; Lincoln Electric Holdings Inc.; Manitowoc Company Inc.; MSC Industrial Direct Co. Inc.; Quanex Corp.; Roper Industries Inc.; Rush Industries Inc.; and Teledyne Technologies Inc. The companies in Study Group 3 were Acuity Brands, Inc.; Albemarle Corp; Armor Holdings, Inc.; Georgia Gulf Corp; Graphic Packaging Corp; Jacuzzi Brands, Inc.; Landstar System, Inc.; Massey Energy Co; NewMarket Corp; Republic Services, Inc.; Rock- Tenn Co.; Roper Industries, Inc. Superior Essex, Inc.; Walter Industries, Inc.; and Watsco Inc. To remain consistent from year to year, we currently intend to use these three study groups (same industry, high growth and geographic) as part of the annual marketplace study. The specific companies included in each group may change based on their size, relevance or other pertinent factors. Targeted Compensation Levels Together with the performance objectives, we establish targeted total compensation levels (i.e., maximum achievable compensation) for each of the senior executive officers. In making this determination, we are guided by the compensation philosophy described below. We also consider historical compensation levels, competitive pay practices at the companies in the study groups, and the relative compensation levels among the Company's senior executive officers. We may also consider industry conditions, corporate performance versus a peer group of companies and the overall effectiveness of our compensation program in achieving desired performance levels. Performance Pay As targeted total compensation levels are determined, we also determine the portion of total compensation that will be contingent, performance-based pay. Performance-based pay generally includes cash bonuses under our MIC Program for achievement of specified performance objectives and stock-based compensation whose value is dependent upon long-term appreciation in stock price. Committee Effectiveness We review, on an annual basis, the performance of our Committee and the effectiveness of our compensation program in obtaining desired results. Compensation Philosophy Our executive compensation program is designed with one fundamental objective: to support Florida Rock's core values and strategic objectives. Our compensation philosophy is intended to align the interests of management with those of our shareholders. The following principles influence and guide our compensation decisions: We Focus on Results and Strategic Objectives Our compensation analysis begins with an examination of Florida Rock's business plan and strategic objectives. We intend that our compensation decisions will attract and retain leaders and reward them for achieving Florida Rock's strategic initiatives and objective measures of success. We Believe in a Pay for Performance Culture At the core of our compensation philosophy is our guiding belief that pay should be directly linked to performance. This philosophy has guided many compensation related decisions: * A substantial portion of executive officer compensation is contingent on, and variable with, achievement of objective corporate and/or individual performance objectives. * Our stock option plan prohibits discounted stock options, reload stock options and re-pricing of stock options. * We do not have any employment, severance or change-in- control agreements with any of our executive officers. * We have capped the benefit levels under the Management Security Plan and closed the plan to new participants. Compensation and Performance Pay Should Reflect Position and Responsibility Total compensation and accountability should generally increase with position and responsibility. Consistent with this philosophy: * Total compensation is higher for individuals with greater responsibility and greater ability to influence the Company's achievement of targeted results and strategic initiatives. * As position and responsibility increases, a greater portion of the executive officer's total compensation is performance- based pay contingent on the achievement of performance objectives. * Equity-based compensation is higher for persons with higher levels of responsibility, making a significant portion of their total compensation dependent on long-term stock appreciation. Compensation Decisions Should Promote the Interests of Shareholders Compensation should focus management on achieving strong short-term (annual) performance in a manner that supports and ensures the Company's long-term success and profitability. The Annual MIC program creates incentive for meeting annual performance targets while the G2G Program encourages the achievement of objectives on a three year performance cycle. We believe that stock options create long-term incentives that align the interest of management with the long-term shareholders. Compensation Should be Reasonable and Responsible It is essential that Florida Rock's overall compensation levels be sufficiently competitive to attract talented leaders and motivate those leaders to achieve superior results. At the same time, we believe that compensation should be set at responsible levels. Our executive compensation programs are intended to be consistent with Florida Rock's constant focus on controlling costs. Compensation Disclosures Should be Clear and Complete We believe that all aspects of executive compensation should be clearly, comprehensibly and promptly disclosed in plain English. We believe that compensation disclosures should provide all of the information necessary to permit shareholders to understand our compensation philosophy, our compensation-setting process and how and how much our executives are paid. Elements of Executive Compensation ---------------------------------- Base Salary Base pay is a critical element of executive compensation because it provides executives with a base level of monthly income. In determining base salaries, we consider the executive's qualifications and experience, scope of responsibilities and future potential, the goals and objectives established for the executive, the executive's past performance, competitive salary practices at companies in the study groups, internal pay equity and the tax deductibility of base salary. Finally, for our most senior executives (our Chairman, Chief Executive Officer, and Chief Financial Officer), we establish base salaries at a level so that a significant portion (generally 50% or more) of the total compensation that such executives can earn is performance-based pay. Annual Management Incentive Compensation Program The Amended Management Incentive Compensation Plan (the "MIC Plan") contains two separate programs - the Annual MIC Program (formerly known as the MIC Plan) and the G2G Incentive Bonus Program. The Annual MIC Program provides officers and key employees an opportunity to earn an annual cash bonus for achieving specified, performance-based goals established for the fiscal year. Performance goals under the Annual MIC Program are tied to measures of operating performance rather than appreciation in stock price. In recent years (including fiscal 2006 and fiscal 2007) the Compensation Committee has established performance objectives for the executive officers based on targeted levels of return on average capital employed. We believe that return-on-capital employed is a superior measure of performance in an asset- intensive business. If specified minimum threshold levels are achieved, the executive officers can earn cash bonuses up to the following amounts:
Bonus at Bonus at Threshold Target Bonus at Performance Performance Stretch Performance Executive Officer Level Level Level ----------------- ----------- ----------- ------------------- Chief Executive Officer No Bonus 75% of Base Salary 150% of Base Salary Chairman No Bonus 50% of Base Salary 100% of Base Salary Chief Financial Officer No Bonus 50% of Base Salary 100% of Base Salary Other Executive Officers No Bonus 25% of Base Salary 85% of Base Salary
G2G Incentive Bonus Program In 2005, Florida Rock adopted a three year business process improvement program called the "Good to Great" or "G2G Program." The program focuses on three principal objectives: Quality Growth, Quality People and Quality Operations. The central theme for this initiative is the communication of these initiatives to each Florida Rock employee at every level of operation. The G2G Incentive Bonus Program is intended to incentivize the achievement of the initiatives in the G2G Program. The G2G Incentive Bonus Program for fiscal years 2005 to 2007 offers participants, including the senior executive officers, the opportunity to earn a cash bonus for the Company's achievement of a targeted level of cumulative net earnings for fiscal years 2005 to 2007. If a specified minimum level of net earnings is achieved for this period, the participants will earn cash bonuses up to 100% of their base salary for fiscal 2007. Equity Based Compensation We believe that equity compensation is the most effective means of creating a long-term link between the compensation provided to officers and other key management personnel with gains realized by the shareholders. We have elected to use stock options as the equity compensation vehicle. All stock options incorporate the following features: * the term of the grant does not exceed 10 years; * the grant price is not less than the market price on the date of grant; * grants do not include "reload" provisions; * repricing of options is prohibited, unless approved by the shareholders; and * options vest 20% per year over five years beginning with the first anniversary of the date of grant. We continue to use stock options as a long-term incentive vehicle because: * Stock options align the interests of executives with those of the shareholders, support a pay-for-performance culture, foster employee stock ownership, and focus the management team on increasing value for the shareholders. * Stock options are performance based. All the value received by the recipient from a stock option is based on the growth of the stock price above the option price. * Stock options help to provide a balance to the overall compensation program: the Annual MIC Program and G2G Incentive Bonus Program focus on the achievement of annual and three year performance targets; the five year vesting for stock options creates incentive for increases in shareholder value over a longer term. * The vesting period encourages executive retention and the preservation of shareholder value. In determining the number of options to be granted to senior executive officers, we take into account the individual's position, scope of responsibility, ability to affect profits and shareholder value and the individual's historic and recent performance and the value of stock options in relation to other elements of total compensation. Management Security Plan The Management Security Plan was adopted many years ago as a retention tool to provide retirement benefits (based on annual base salaries) to certain senior executives. The Management Security Plan provides for annual payments to participants (or their beneficiaries) until the later of (i) their date of death or (ii) 15 years after their retirement or death. The annual payments are set at two times the benefit level during the first year and at the annual benefit level in subsequent years. The benefit levels originally increased with base salaries but the Company has capped the benefit levels at 50% of base salaries as of December 31, 2002. The plan has been closed to newly hired executives for several years. Additional Benefits Executive officers participate in other employee benefit plans generally available to all employees on the same terms as similarly situated employees. In addition, certain executive officers participate in a Medical Reimbursement Plan and a Tax Services Reimbursement Plan and receive certain other additional perquisites that are described in this Proxy Statement under the heading Executive Compensation. Our Committee requested that Florida Rock disclose all perquisites provided to the executives shown in the Summary Compensation Table even if the perquisites fall below the disclosure thresholds under SEC rules. Our Compensation Decisions -------------------------- This section describes the compensation decisions that we made with respect to the named executive officers for fiscal 2006 and during the first quarter of fiscal 2007. Executive Summary In fiscal 2006, we continued to apply the compensation principles described above in determining the compensation of our named executive officers. These compensation decisions were made in the context of Florida Rock's "Good to Great" initiatives. These initiatives are exemplified by the simple mantra: "We can do better." Our decisions were made in the context of remarkable improvements in operating results, including record levels of revenues, gross profit and net earnings for three consecutive years. In summary, the compensation decisions made in fiscal 2006 and the first quarter of fiscal 2007 for the named executive officers were as follows: * We increased base salaries for the named executive officers, on average, by only 3.7% for 2006. * Beginning in 2007, we eliminated certain perquisites previously provided to our named executive officers. * For 2007, we increased base compensation (salary and perquisites) for the named executive officers by approximately 5.0%. * In 2006, we raised our targets for the achievement of annual bonus levels. As a result, the named executive officers received lower bonuses for fiscal 2006 than for fiscal 2005 despite a 34% increase in net earnings over fiscal 2005 and a 13.6% increase in return on capital employed. * In 2007, we reduced option grants for the named executive officers by 20% from fiscal 2006. * Performance-based pay represented 52% of the total compensation actually paid to the named executive officers for fiscal 2006. We believe that these decisions are consistent with our core compensation principles: * We believe in a pay for performance culture; * Compensation decisions should promote the interests of long- term shareholders; and * Compensation should be reasonable and responsible. Base Salary and Perquisites Decisions We recently decided to eliminate two perquisites for our named executive officers: company automobiles and payment of country club dues. Historically, Florida Rock has provided company cars to its executive officers because they generally travel extensively for business. Florida Rock also paid country club dues because, in most cases, the club memberships are used primarily for business entertainment. We are eliminating these perquisites for the named executive officers, effective January 1, 2007. We adjust base salaries on a calendar year basis. The following table reflects the adjustments made to the base salaries of the named executive officers for calendar year 2007. Name Title 2007 Base Salary ---- ----- ---------------- John D Baker II President and CEO $670,877 Edward L Baker Chairman $557,655 John D Milton Jr. Executive Vice President $477,540 and CFO Thompson S Baker II President, Aggregates Group $383,962 George J. Hossenlopp President, Southern $308,604 Concrete Group In setting these base salaries, we considered: * the compensation philosophy and guiding principles described above; * the experience and industry knowledge of the named executive officers and the quality and effectiveness of their leadership at the Company; * all of the components of executive compensation, including base salary, incentive compensation under the MIC Plan, stock options, retirement and death benefits under the MSP Plan, and benefits and perquisites; * the mix of performance pay to total compensation; * the elimination of the perquisites described above; * internal pay equity among Florida Rock senior executives; and * the base salary paid to the officers in comparable positions at companies in the three study groups, using the 50th percentile as our point of reference. No specific weighting was applied to these factors. The total increase in base salaries for the named executive officers for calendar year 2007 ($196,757), after deducting the value of the discontinued perquisites ($86,143, based on the amounts reported for 2006), represents an overall compensation increase of 5.0% over 2006. Annual MIC Program Bonus The Annual MIC Program provides officers and key employees an opportunity to earn an annual cash bonus for achieving specified, performance-based goals established for the fiscal year. In recent years (including fiscal 2006 and fiscal 2007), the Compensation Committee has established performance objectives for the named executive officers based on targeted levels of return on average capital employed ("ROCE"). These performance objectives allow the named executive officers to earn a cash bonus up to a specified percentage of their base salary if Florida Rock or their particular business unit achieves at least a specified threshold level of ROCE. The targeted levels of ROCE and maximum bonuses as a percentage of salary for 2006 and 2007 for the named executive officers are specified below. Annual MIC Program Name Title Bonus as % Percentage of Salary (1) Threshold Target Stretch John D. Baker II President and 0% 75% 150% CEO Edward L. Baker Chairman 0% 50% 100% John D. Milton, Executive 0% 50% 100% Jr. Vice President and CFO Thompson S. Baker President, 0% 25% 85% II (2) Aggregates Group George J. President, 0% 25% 85% Hossenlopp (2) Southern Concrete Group 2006 ROCE Levels 16.85% 21.06% 25.27% 2007 ROCE Levels 14.64% 18.30% 21.96% (1) The named executive officers are eligible to receive a bonus equal to up to the specified percentage of their base salary if Florida Rock or their business unit, as applicable, achieves the specified level of ROCE. If ROCE exceeds the threshold level but is less than the stretch level, the bonus is prorated. (2) The bonuses for these individuals is determined partly by reference to the ROCE achieved by Florida Rock and partly by the ROCE achieved by the divisions that they lead. The targets for their individual divisions are set at different levels. For purposes of this bonus calculation, return on average capital employed is defined as Florida Rock's net income excluding the after-tax cost of financing, divided by total average capital employed. In the case of business segments, ROCE is annual business segment earnings divided by average business segment capital employed (average of beginning and end-of-year amounts). These segment earnings include Florida Rock's share of segment earnings of joint venture companies, consistent with our capital employed definition, and exclude the cost of financing. We believe that return-on-capital employed is a superior measure of performance in an asset-intensive business, both to evaluate management's performance and to demonstrate to shareholders that capital has been used wisely over the long term. In addition to meeting the ROCE goals, each of the named executive officers had to achieve certain individual goals to be paid the bonus. These goals are generally subjective goals regarding the achievement of specific goals that improve a business process or further our long-term objectives. G2G Incentive Bonus Program. The G2G Incentive Bonus Program was established during fiscal 2005 as part of our "Good to Great" program. The bonus program is intended to encourage the achievement of specific initiatives over a three year performance cycle. Under the G2G Incentive Bonus Program, the named executive officers can earn a cash bonus of 1% of their 2007 base salary for every $1 million by which total net earnings for 2005 to 2007 exceeds $486 million up to a maximum of 100% of their fiscal 2007 base salary. For purposes of calculating this bonus, total net earnings for 2005 to 2007 means Florida Rock's aggregate net earnings for the three fiscal years ended September 30, 2005, 2006 and 2007, excluding gains from sales of real estate. For the first two years of this period (fiscal 2005 and 2006) aggregate net earnings, excluding real estate gains, were $357.7 million. Stock Option Grants In December 2006 and December 2007, we granted the following stock options to the named executive officers: Fiscal Fiscal 2006 2007 Options Black- Options Name Granted Scholes Granted Black- (# of Value (# of Scholes underlying underlying Value(1) shares) shares) John D. Baker 15,000 310,870 12,000 $203,880 II Edward L. 15,000 310,870 12,000 $203,880 Baker John D. 12,500 259,058 10,000 $169,900 Milton, Jr. Thompson S. 12,500 259,058 10,000 $169,900 Baker II George J. 10,000 207,247 8,000 $135,920 Hossenlopp (1) This amount is determined using the Black-Scholes model. This model was developed to estimate the fair value of traded options, which have different characteristics than employee stock options, and changes to the subjective assumptions used in the model can result in materially different fair value estimates. This hypothetical value is based on the following assumptions: an exercise price equal to the market value on day of grant; estimated dividend yield of 1.39%; expected volatility of 35.96%; risk-free interest rate of 4.4%; and expected lives of 7 years. The options vest ratably over a five year period and expire ten years from the date of grant. In approving these option grants, we considered our compensation philosophy, the position and level of responsibility of each officer, our belief that stock options should be a significant part of the total mix of executive compensation, the number of options currently held by each officer and the level of options granted to them in prior years. Variable Performance-Based Pay as a Percentage of Potential Compensation We place great emphasis on variable performance-based compensation through the Annual MIC Program, the G2G Program and stock options. The chart below shows the breakdown between fixed pay and variable performance-based pay for fiscal 2006: % of Total Compensation Actual Name Title Stock MIC Bonus Performance Options Pay ---- ----- ------- --------- ----------- John D. Baker President 16% 36% 52% II and CEO Edward L. Chairman 22% 27% 49% Baker John D. Executive 23% 30% 53% Milton, Jr. Vice President and CFO Thompson S. President, 30% 22% 52% Baker II Aggregates Group George J. President, 26% 25% 51% Hossenlopp Southern Concrete Group Severance Arrangements None of our named executive officers have any arrangements that provide for payment of severance payments. Change-in-Control Arrangements None of our named executive officers are entitled to payment of any benefits upon a change-in-control of Florida Rock, except that our 2000 Stock Plan provides that upon a change in control all unvested stock options shall immediately become vested (unless the Compensation Committee determines otherwise). At present, the named executive officers hold the following unvested stock options that would become vested upon a change in control. No. of Shares Unrealized Value of Name Underlying Unvested Unvested Options Options (#) ($) John D. Baker II 45,750 544,388 Edward L. Baker 45,750 544,388 John D. Milton, Jr. 38,125 453,657 Thompson S. Baker II 37,000 422,686 George J. Hossenlopp 30,500 362,925 Note: The unrealized value of unvested options was calculated by multiplying the number of shares underlying unvested options by the closing price of the stock as of November 30, 2006 and then deducting the aggregate exercise price for these options. Reasonableness of Compensation After considering all components of the compensation paid to the named executive officers, the Compensation Committee has determined that the compensation is reasonable and not excessive. In making this determination, we considered many factors, including the following: * Management has consistently led Florida Rock to record levels of performance in recent years. * The shareholder return performance of Florida Rock over the past five years has significantly outpaced the performance of companies in Florida Rock's peer group. * Variable, performance based pay represents, on average, 65% of the total compensation that the named executive officers could earn for fiscal 2006. * The executive officers have no severance or change-in- control agreements with Florida Rock. * The total compensation levels for the named executive officers are comparable with the 50th percentile of compensation levels at the companies in the study groups. Compensation Policies --------------------- Internal Pay Equity We believe that internal equity is an important factor to be considered in establishing compensation for the officers. We have not established a policy regarding the ratio of total compensation of the Chief Executive Officer to that of the other officers, but we do review compensation levels to ensure that appropriate equity exists. We intend to continue to review internal compensation equity and may adopt a formal policy in the future if we deem such a policy to be appropriate. The Tax Deductibility of Compensation Should be Maximized Where Appropriate The Company generally seeks to maximize the deductibility for tax purposes of all elements of compensation. For example, the Company always has issued nonqualified stock options that result in a tax deduction to Florida Rock upon exercise. Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public corporations for non-qualifying compensation in excess of $1.0 million paid to any such persons in any fiscal year. We review compensation plans in light of applicable tax provisions, including Section 162(m), and may revise compensation plans from time to time to maximize deductibility. However, we may approve compensation that does not qualify for deductibility when we deem it to be in the best interests of Florida Rock. Financial Restatement It is the Board of Directors' Policy that the Compensation Committee will, to the extent permitted by governing law, have the sole and absolute authority to make retroactive adjustments to any cash or equity based incentive compensation paid to executive officers and certain other officers where the payment was predicated upon the achievement of certain financial results that were subsequently the subject of a restatement. Where applicable, the Company will seek to recover any amount determined to have been inappropriately received by the individual executive. Stock Ownership Guidelines We have adopted stock ownership guidelines for our Chairman and for our President and Chief Executive Officer. These stock ownership guidelines require that these officers must continue to own shares of our common stock having a market value equal to at least five times their base salary. Both of these officers currently meet these guidelines. Timing of Stock Option Grants Florida Rock has adopted a policy on stock option grants that includes the following provisions relating to the timing of option grants: * Except for inducement grants for new executives, we determine all awards of stock options at a Compensation Committee meeting held during the last week of November or the first week of December of each year. * The grant date for all awards is made after Florida Rock has released earnings for the fiscal year. * Florida Rock executives do not have any role in selecting the grant date. * The grant date of the stock options is always the date of approval of the grants (or a specified later date if for any reason the grant is approved during a time when Florida Rock is in possession of material, non-public information). * The exercise price is the closing price of the underlying common stock on the grant date. * Stock option awards are promptly announced on a Form 8-K. COMPENSATION COMMITTEE REPORT We have reviewed and discussed the foregoing Compensation Discussion and Analysis with management. Based on our review and discussion with management, we have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement and in Florida Rock's Annual Report on Form 10-K for the year ended September 30, 2006. Submitted by: Francis X. Knott, Chairman William P. Foley II William H. Walton III Members of the Compensation Committee Notwithstanding anything to the contrary set forth in any of the Company's previous filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that incorporate future filings, including this Proxy Statement, in whole or in part, the foregoing Compensation Committee Report and the foregoing Shareholder Return Performance Graph shall not be incorporated by reference into any such filings. EXECUTIVE COMPENSATION Summary Compensation Table -------------------------- The following table sets forth information concerning the compensation of our Chief Executive Officer and our other four most highly compensated executive officers who served in such capacities during the fiscal year ended September 30, 2006 (the "Named Executive Officers"):
Change in pension Non- value and Stock non- Incentive qualified All Other Stock Option Plan deferred Compensation Name and Salary Bonus Awards Awards Compens- compens- ($) Total Principal Year ($) ($) ($) ($) ation ation ($) Position ($)(1) earnings John D. Baker II 2006 626,033 4,200 -- 310,870 708,596 163,330 131,410 1,944,428 President and Chief Executive Officer (PEO) John D. Milton 2006 449,750 4,200 -- 259,058 336,353 55,846 10,349 1,115,556 Jr. Exec. Vice- President and CFO (PFO) Edward L. Baker 2006 510,884 4,200 -- 310,870 385,514 58,804 136,714 1,406,986 Chairman of the Board Thompson S. 2006 321,250 4,200 259,058 188,988 41,456 48,740 863,692 Baker II Vice President George Hossenlopp 2006 276,250 -- 207,247 193,648 92,990 18,722 788,857 Vice President
(1) Bonuses under the MIC Plan are accrued in the fiscal year earned and paid in the following fiscal year. (2) This amount is determined using the Black-Scholes model. This model was developed to estimate the fair value of traded options, which have different characteristics than employee stock options, and changes to the subjective assumptions used in the model can result in materially different fair value estimates. This hypothetical value is based on the following assumptions: an exercise price equal to the market value on day of grant; estimated dividend yield of 1.39%; expected volatility of 35.96%; risk-free interest rate of 4.4%; and expected lives of 7 years. Other Annual Compensation from Summary Compensation Table --------------------------------------------------------- The following table contains a breakdown of the compensation and benefits included under All Other Compensation in the Summary Compensation table above. PersonaL Medical Use of Use of and Tax Life Company Year Company Services Insurance Aircraft Miscellaneous Car Reimburse- (2) (3) (4)(5) ment(1) ---- ----- --------- --------- -------- ------------- John D. 2006 4,778 37,546 14,253 62,638 12,195 Baker II John D. 2006 7,794 2,555 -- -- -- Milton, Jr. Edward L. 2006 3,246 1,829 -- 98,311 33,328 Baker Thompson 2006 1,101 5,782 -- 5,279 36,578 S. Baker II George 2006 4,699 6,600 -- -- 7,423 Hossenlopp (1) The amounts shown represent benefits paid under our Medical Reimbursement Plan, under which we reimburse certain officers for personal medical expenses not covered by insurance, and the Tax Services Reimbursement Plan, under which we reimburse certain officers up to $12,000 per year for personal tax planning and tax return preparation services. (2) The amount shown reflects a bonus paid John D. Baker II for the premium costs on a life insurance policy. (3) We have operations throughout most of the Southeastern and Mid-Atlantic States as well as an operation in Canada. Our senior executive officers are required to travel extensively to these operations and to other locations as part of their responsibilities. To facilitate this travel, we own a company airplane. We encourage Edward L. Baker and John D. Baker II to use our airplane for non- business as well as business travel for safety and security reasons and to make the best use of their time. They reimburse us for non-business use at a specified hourly rate. The amount shown represents the difference between the incremental cost to us (based on the average weighted cost of fuel, a pro rata share of repairs and maintenance, and other miscellaneous variable costs) of use of our airplane for non-business use and the amount reimbursed by the Named Executive Officer. (4) The amounts shown under the Miscellaneous column represent payment of country club and social club dues and purchase of tickets to sporting events on behalf of the Named Executive Officers and other miscellaneous reimbursed expenses. These club memberships and tickets generally are maintained for business entertainment but may be used for personal use. The entire amount has been included, although we believe that only a portion of this cost represents a perquisite. (5) We own a hunting lodge that is used primarily for business entertainment or other business use. Edward L. Baker supervises the operation of the hunting lodge as part of his employment responsibilities. The amounts shown in the Miscellaneous column also include an estimate of our incremental cost for the personal use of Florida Rock's hunting lodge. Grants of Plan-Based Awards --------------------------- The following table sets forth information concerning option grants to the Named Executive Officers during the fiscal year ended September 30, 2006 as well as estimated future payouts under cash incentive plans: Name Grant Estimated Future Payouts All Exercise Date Under Non-Equity Other or Base Incentive Plan Awards Option Price of Awards: Option Numberof Awards Securities ($/Share) Underlying Options (#) Threshold Target Maximum ($)(1) ($)(1) ($)(1) John D. Baker II 12/7 0 503,158 1,006,316 15,000 $51.67 /05 0 670,877 670,877 John D. Milton, 12/7 0 238,770 477,540 12,500 $51.67 Jr. /05 0 477,540 477,540 Edward L. Baker 12/7 0 278,828 557,655 15,000 $51.67 /05 0 557,655 557,655 Thompson S. Baker 12/7 0 95,991 326,368 12,500 $51.67 II /05 0 383,962 383,962 George Hossenlopp 12/7 0 77,151 262,313 10,000 $51.67 /05 0 308,604 308,604 (1) The first row for each named executive officer under the columns captioned "Estimated Future Payments under Non-Equity Incentive Plan Awards" represents the amounts that may be earned with respect to fiscal 2007 under the MIC Annual Bonus Program. The second row represents the amount that may be earned under the G2G Incentive Bonus Program with respect to the three year period ending September 30, 2007. Outstanding Equity Awards at Fiscal Year-End --------------------------------------------- The following table sets forth information concerning stock options held by the Named Executive Officers at September 30, 2006: Option Awards Name Number Number of Equity Option Option of Securities Incentive Exercise Expiration Securities Underlying Plan Price Date Underlying Unexercised Awards: ($) Unexercised Options Number of Options (#) Securities (#) Unexercisable Underlying Exercisable Unexercised Unearnded Options (#) John D. 337,500 -- -- 4.86 5/6/2007 Baker II 29,532 -- -- 10.17 12/5/2010 33,750 -- -- 14.27 12/4/2011 33,750 6,750 -- 17.51 12/3/2012 33,750 13,500 -- 25.69 12/2/2013 22,500 13,500 -- 37.83 11/30/2014 15,000 12,000 -- 51.67 12/6/2015 John D. 168,750 -- -- 10.63 1/1/2011 Milton, Jr. 28,125 -- -- 14.27 12/4/2011 28,125 5,625 -- 17.51 12/3/2012 28,125 11,250 -- 25.69 12/2/2013 18,750 11,250 -- 37.83 11/30/2014 12,500 10,000 -- 51.67 12/6/2015 Edward L. 337,500 -- -- 4.86 5/6/2007 Baker 29,532 -- -- 10.17 12/5/2010 33,750 -- -- 14.27 12/4/2011 33,750 6,750 -- 17.51 12/3/2012 33,750 13,500 -- 25.69 12/2/2013 22,500 13,500 -- 37.83 11/30/2014 15,000 12,000 -- 51.67 12/6/2015 Thompson S. 0 -- -- 4.86 5/6/2007 Baker II 14,175 -- -- 10.17 12/5/2010 22,500 -- -- 14.27 12/4/2011 22,500 4,500 -- 17.51 12/3/2012 28,125 11,250 -- 25.69 12/2/2013 18,750 11,250 -- 37.83 11/30/2014 12,500 10,000 -- 51.67 12/6/2015 George J. 0 -- -- 4.86 5/6/2007 Hossenlopp 10,125 -- -- 10.17 12/5/2010 16,875 -- -- 14.27 12/4/2011 22,500 4,500 -- 17.51 12/3/2012 22,500 9,000 -- 25.69 12/2/2013 15,000 9,000 -- 37.83 11/30/2014 10,000 8,000 -- 51.67 12/6/2015 (1) All information in this table relates to nonqualified stock options. The Company has not granted any incentive stock options or stock appreciation rights ("SARs"). (2) Options become exercisable in five equal installments each year beginning on the first anniversary of the grant date. Option Exercises and Stock Vested --------------------------------- As reflected in the following table, during fiscal 2006 none of the Named Executive Officers exercised any stock options or became vested in any restricted stock: Option Awards Stock Awards Name Number of Value Number of Value Shares Realized Shares Realized Acquired on Acquired on Vesting on Exercise Exercise on Vesting ($) (#) ($) (#) John D. Baker II -- -- -- -- John D. Milton, -- -- -- -- Jr. Edward L. Baker -- -- -- -- Thompson S. -- -- -- -- Baker II George J. -- -- -- -- Hossenlopp Pension Benefits ----------------- The following table describes pension benefits to the Named Executive Officers: Name Plan Name Number of Present Payments Years Value of During Last Credited Accumulated Fiscal Year Service Benefit ($) (#) ($)(1)(2) John D. MSP Plan -- 3,861,435 -- Baker II John D. Individual 3 145,783 -- Milton, Plan Jr.(2) Edward L. MSP Plan -- 2,090,402 -- Baker Thompson S. MSP Plan -- 1,860,510 -- Baker George MSP Plan -- 1,649,886 -- Hossenlopp (1) Our Management Security Plan (the "MSP Plan") provides the following benefits to certain officers and key employees (and their beneficiaries) upon retirement or death: (a) upon normal retirement on or after age 65, two times the Annual Benefit Level during the first year and the Annual Benefit Level in subsequent years until the latter of (i) the participant's death, or (ii) the 15th anniversary of retirement (or the earlier death of the designated beneficiary); and (b) upon death, two times the Annual Benefit Level during the first year and the Annual Benefit Level in subsequent years until the later of (i) the 15th anniversary of the participant's death or (ii) the date the participant would have turned 65 (or, in either case, the earlier death of the designated beneficiary). (2) The annual benefit levels are equal to 50% of the participating executive's base salary as of December 31, 2002. The annual benefit levels for participating named executive officers are: $275,000 for John D. Baker II; $237,500 for Edward L. Baker, $132,500 for Thompson S. Baker II; and $117,500 for George J. Hossenlopp. John D. Milton, Jr., is not eligible to participate in the MSP Plan. Accordingly, the Compensation Committee has approved a lump sum retirement payment to Mr. Milton (or his beneficiary) upon his retirement or his earlier death. The lump sum payment will be equal to $50,000 multiplied by the number of years from January 1, 2004 that Mr. Milton is employed with the Company, plus an interest accrual of 6.5% per year. Nonqualifed Deferred Compensation --------------------------------- As reflected in the following table, none of the Named Executive Officers receives any nonqualified deferred compensation: Name Executive Registrant Aggregate Aggregate Aggregate Contributions Contributions Earnings Withdrawals/ Balance in Last FY in Last FY in Last Distributions at Last ($) ($) FY ($) ($) FYE ($) John D. Baker -- -- -- -- -- II John D. -- -- -- -- -- Milton, Jr. Edward L. -- -- -- -- -- Baker Thompson S. -- -- -- -- -- Baker George -- -- -- -- -- Hossenlopp CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS Relationships ------------- Four of our directors (Edward L. Baker, John D. Baker II, Thompson S. Baker II and Luke E. Fichthorn III) also are directors of Patriot Transportation Holding, Inc. ("Patriot"). The four directors beneficially own approximately 45.9% of the stock of Patriot and 25.6% of our stock. Related Party Transactions -------------------------- Joint Venture On October 4, 2006, we entered into a Joint Venture Agreement with a subsidiary of Patriot ("FRP"). The Joint Venture Agreement establishes a real estate joint venture to develop approximately 4,300 acres of land near Brooksville, Florida. Under the terms of the joint venture, FRP contributed its fee interest in approximately 3,500 acres that we leased from FRP under a long-term mining lease. We will continue to mine the property and pay royalties to FRP for as long as mining does not interfere with the development of the property. We contributed 553 acres that we owned as well as our leasehold interest in the 3,500 acres that we leased from FRP. We also contributed a 288 acre parcel that we recently acquired in contemplation of the development, and FRP reimbursed us for half of the acquisition cost (about $3 million) of that second parcel. We will jointly control the joint venture with FRP, and we will each have a mandatory obligation to fund additional capital contributions of up to $2 million. Distributions will also be made on a 50-50 basis. The property does not yet have the necessary entitlements for real estate development. Approval to develop real property in Florida entails an extensive entitlement process involving multiple and overlapping regulatory jurisdictions and the outcome is inherently uncertain. We expect that the entitlement process may take several years to complete. In connection with the Joint Venture, we also amended and extended certain lease agreements with FRP on our corporate headquarters in Jacksonville, Florida, and the Grandin, Astatula and Marion Sand mining properties, also in Florida. Transportation and Leasing Services Patriot routinely hauls petroleum products, cement, construction aggregates and other products for us. Patriot has numerous hauling competitors at all terminal and plant sites and the rates charged are, accordingly, established by competitive conditions. We paid charges for transportation services to subsidiaries of Patriot totaling $1,976,000 in fiscal 2006. We also lease from FRP certain construction aggregates mining sites and other properties, including our principal offices. We paid rents and royalties to subsidiaries of Patriot totaling $6,345,000 in fiscal 2006. Administrative Services We provide certain administrative and property management services to Patriot. We charged Patriot $191,000 for these services in fiscal 2006. Consulting Arrangement Mr. Fichthorn provides us with financial consulting and other services on an ongoing basis for which he receives $60,000 per year. Policies and Procedures ----------------------- The Corporate Governance and Nominating Committee of the Board of Directors is responsible for reviewing and approving all material transactions with any related party. However, in certain cases, transactions have been approved by a committee consisting of all Independent Directors. Related parties include any of our directors or executive officers, certain of our shareholders and their immediate family members. This obligation is set forth in writing in our Corporate Governance and Nominating Committee Charter. A copy of the Corporate Governance and Nominating Committee Charter is available at www.flarock.com under Investor Relations - Corporate Governance Documents. To identify related party transactions, each year, we submit and require our directors and officers to complete Director and Officer Questionnaires identifying any transactions with us in which the officer or director or their family members have an interest. We review related party transactions due to the potential for a conflict of interest. A conflict of interest occurs when an individual's private interest interferes, or appears to interfere, in any way with our interests. Our Code of Business Conduct and Ethics requires all directors, officers and employees who may have a potential or apparent conflict of interest to immediately notify our General Counsel. We expect our directors, officers and employees to act and make decisions that are in our best interests and encourage them to avoid situations which present a conflict between our interests and their own personal interests. Our directors, officers and employees are prohibited from taking any action that may make it difficult for them to perform their duties, responsibilities and services to Florida Rock in an objective and fair manner. In addition, we are strictly prohibited from extending personal loans to, or guaranteeing the personal obligations of, any director or officer. Exceptions are only permitted in the reasonable discretion of the Board of Directors or the Corporate Governance and Nominating Committee. A copy of our Code of Business Conduct and Ethics is available at www.flarock.com under Investor Relations - Corporate Governance Documents. COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following table and notes set forth the beneficial ownership of our common stock by each person known by us to own beneficially more than 5% of the common stock of the Company. NAME AND ADDRESS OF AMOUNT AND NATURE BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP PERCENT OF CLASS Baker Holdings, LP 11,050,080(1) 16.8% Edward L. Baker 1,420,180 (1) 2.1% John D. Baker II 3,884,378 (1) 5.9% Cynthia L. Baker Trust 375,000 (1) 0.6% P.O. Box 4667 Jacksonville, FL 32201 16,729,638 (1) 25.1% * Less than 1% (1) Edward L. Baker and John D. Baker II are the sole shareholders of the general partner of Baker Holdings, LP and as such have shared voting and dispositive power over the shares owned by the partnership. Edward L. Baker and John D. Baker II each have a pecuniary interest in 4,284,192 shares. See Common Stock Ownership By Directors and Executive Officers and the accompanying notes for additional information on shares beneficially owned by Edward L. Baker and John D. Baker II. COMMON STOCK OWNERSHIP BY DIRECTORS AND OFFICERS The following table and notes set forth the beneficial ownership of our common stock by each director and each non- director named in the Summary Compensation Table and by all officers and directors of the Company as a group as of October 31, 2006. NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) CLASS Edward L. Baker 8,373,568(2)(3)(4)(5)(6) 12.6% John D. Baker II 8,356,070(2)(3)(5)(6)(7) Thompson S. Baker II 212,591(8) * A. R. Carpenter 51,699 * Robert P. Crozer 6,500 * John A. Delaney 8,580 * J. Dix Druce Jr. 16,051 * Luke E. Fichthorn III 146,957 * William P. Foley II 6,346 * Francis X. Knott 13,387 * George J. Hossenlopp 77,152 * John D. Milton Jr. 255,628 * Clarron E. Render 136,767 * William H. Walton III 11,257 * All Directors and Officers as a group 18,098,137 26.8% (21 people) *Less than 1% (1) Except for shares noted in the footnotes below, the listed person has sole voting and investment power of shares listed by their name. The figures shown above include options to purchase the following number of shares that are exercisable within 60 days of October 31, 2006: Edward L. Baker - 460,032 shares, John D. Baker II - 460,032 shares; Thompson S. Baker II - 81,550 shares; A.R. Carpenter - 9,000 shares; Robert P. Crozer - 6,500 shares; John A. Delaney - 7,500 shares; J. Dix Druce, Jr. - 9,000 shares; Luke E. Fichthorn III - 9,000 shares; William P. Foley II - 5,500 shares; Francis X. Knott -- 8,000 shares; George Hossenlopp - 66,500 shares; John D. Milton, Jr. - 246,250 shares; Clarron E. Render - 76,175 shares; and William H. Walton III - 9,000 shares. (2) Edward L. Baker and John D. Baker II are the sole shareholders (with shared voting power) of the general partner of Baker Holdings, LP, which owns 11,050,080 shares of our common stock. Each of them holds a pecuniary interest in 4,284,192 shares owned by Baker Holdings, LP, and each of them disclaims beneficial ownership of the shares owned by Baker Holdings, LP except to the extent of their pecuniary interest. In the table above, 4,284,192 of the shares owned by Baker Holdings, LP are included in the reported beneficial ownership of John D. Baker II, and the remaining 6,765,888 shares are included in the reported beneficial ownership of Edward L. Baker. (3) Edward L. Baker and John D. Baker II are trustees (with shared voting power) and income beneficiaries of the Cynthia L. Baker Trust, which owns 375,000 shares of our common stock. In the table above, one-half of the shares (187,500 shares) owned by the Cynthia L. Baker Trust are included in the reported beneficial ownership of each of Edward L. Baker and John D. Baker II, who disclaim beneficial ownership except to the extent of their pecuniary interest. (4) Includes 394,941 shares held in trust for the benefit of children of John D. Baker II as to which Edward L. Baker has sole voting power and sole investment power but as to which he disclaims beneficial ownership; 162,071 shares in the Profit Sharing and Deferred Earnings Plan of the Company; and 13,603 shares held by the wife of Edward L. Baker as to which he disclaims any beneficial interest. (5) Includes for John D. Baker II 135,000 shares held in a trust administered by an independent trustee for the benefit of his spouse and children. The beneficial ownership total shown for John D. Baker II does not include an aggregate of 394,941 shares held by certain trusts that are administered by Edward L. Baker, as trustee, for the benefit of Mr. Baker's children. Both Edward L. Baker and John D. Baker II disclaim beneficial ownership of these shares. (6) The Thompson S. Baker Living Trust owns 5,832 shares, as to which Edward L. Baker and John D. Baker II have shared voting and dispositive powers. The table attributes to Edward Baker 1,944 shares as to which he has a pecuniary interest and an additional 1,944 shares in which another person has a pecuniary interest. The remaining 1,944 shares in which John D. Baker II has a pecuniary interest are included in the shares shown for John D. Baker II. (7) Includes 517,657 shares owned by his wife's living trust as to which John D. Baker II disclaims any beneficial interest. (8) Includes 27,648 shares owned by the wife and three minor children of Thompson S. Baker II, as to which Thompson S. Baker II disclaims any beneficial interest. AUDIT COMMITTEE REPORT The Audit Committee reviews the Company's financial reporting process on behalf of the Board of Directors. Management has the primary responsibility for the financial statements and the reporting process, including the system of internal controls. In this context, the Committee has met and held discussions with management and the independent registered public accounting firm regarding the fair and complete presentation of the Company's results and the assessment of the Company's internal control over financial reporting. The Audit Committee has discussed significant accounting policies applied by the Company in its financial statements, as well as alternative treatments. Management represented to the Audit Committee that the Company's consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, and the Audit Committee has reviewed and discussed the consolidated financial statements with management and the independent registered public accounting firm. The Audit Committee discussed with the independent registered public accounting firm matters required to be discussed by Statement on Auditing Standards No. 61 (Communications With Audit Committees). In addition, the Audit Committee has discussed with the independent registered public accounting firm the auditor's independence from the Company and its management, including the matters in the written disclosures required by the Independence Standards Board Standard No. 1 (Independence Discussions With Audit Committees). The Audit Committee also has considered whether the independent registered public accounting firm's provision of non-audit services to the Company is compatible with the auditor's independence. The Audit Committee has concluded that the independent registered public accounting firm is independent from the Company and its management. The Audit Committee reviewed and discussed Company policies with respect to risk assessment and risk management. The Audit Committee discussed with the Company's internal auditor and independent registered public accounting firm the overall scope and plans for their respective audits. The Audit Committee met with the internal auditor and the independent registered public accounting firm, with and without management present, to discuss the results of their examinations, the evaluations of the Company's internal controls, and the overall quality of the Company's financial reporting. In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors, and the Board has approved, that the audited financial statements be included in the Company's Annual Report on Form 10-K for the year ended September 30, 2006, for filing with the Securities and Exchange Commission. The Committee has selected KPMG LLP as the Company's independent registered public accounting firm for fiscal 2007. Submitted by: J. Dix Druce, Jr., Chairman A.R. Carpenter John A. Delaney Members of the Audit Committee The Audit Committee Report does not constitute soliciting material, and shall not be deemed to be filed or incorporated by reference into any other Company filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates the Audit Committee Report by reference therein. ADDITIONAL INFORMATION Shareholder Proposals for the 2008 Annual Meeting If you would like to submit a proposal for inclusion in the company's 2008 Proxy Statement, please note that our Corporate Secretary must receive it on or before August 29, 2007. Proposals not received by that date will not be eligible for inclusion in the Proxy Statement. The inclusion of any proposal will be subject to the applicable rules of the Securities and Exchange Commission. The Company may solicit proxies in connection with next year's annual meeting which confer discretionary authority to vote on any shareholder proposals of which the Company does not receive notice by November 12, 2007. Matters Raised at the Meeting not Included in this Statement We do not know of any matters to be acted upon at the meeting other than those discussed in this statement. If any other matter is presented, proxy holders will vote on the matter in their discretion. Solicitation Florida Rock is soliciting this proxy on behalf of its Board of Directors. This solicitation is being made by mail, but also may be made by telephone or in person. Shareholder List A shareholder list will be available for your examination during normal business hours at 155 E. 21st Street, Jacksonville, Florida 32206, at least ten days prior to the annual meeting and will also be available for examination at the annual meeting. Revocability of Proxy You may revoke the enclosed proxy by filing a written notice of revocation with Florida Rock or by submitting another executed proxy that is dated later. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors, as well as beneficial owners of 10% or more of our outstanding common stock, to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission, The New York Stock Exchange and the Company. Based on a review of our records, we believe that all of such reports were filed on a timely basis. Additional Company Documents Our website, www.flarock.com, includes copies of (i) our Annual Report on Form 10-K, including the Financial Statements and Financial Schedules, (ii) our Corporate Governance Guidelines, (iii) the Charters of the Audit Committee, the Compensation Committee and the Corporate Governance and Nominating Committee, and (iv) our Code of Business Conduct and Ethics. Shareholders may receive copies of these documents without charge by writing to the Treasurer at Post Office Box 4667, Jacksonville, Florida 32201. BY ORDER OF THE BOARD OF DIRECTORS December 27, 2006 Barbara C. Johnston Secretary PLEASE RETURN THE ENCLOSED FORM OF PROXY, DATED AND SIGNED, IN THE ENCLOSED ADDRESSED ENVELOPE, WHICH REQUIRES NO POSTAGE. ANNEX A FLORIDA ROCK INDUSTRIES, INC. STANDARDS OF BOARD INDEPENDENCE ------------------------------- As used in these Standards of Board Independence, the term the "Company" includes Florida Rock Industries, Inc. and any of its subsidiaries. The term "immediate family member" includes the director's spouse, parents, children, siblings, mothers-in- law, fathers-in-law, sons-in-law, daughters-in-law, brothers-in- law, sisters-in-law and any other person (other than domestic employees) who shares the director's home. The following standards will apply in determining whether a director is an independent director for all purposes other than service on the Company's Audit Committee: 1. Disqualification. A director will not be considered an independent director under any circumstances if: A. The director is or was employed by, or any immediate family member of the director is or was an executive officer of, the Company at any time during the previous 3-year period; B. The director or any of his or her immediate family members receives or has received at any time during the previous 3-year period more than $100,000 in direct compensation from the Company, other than fees for service on the Board of Directors or any committee of the Board of Directors and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service); C. The director is or has been at any time during the previous 3-year period affiliated with or employed by, or has an immediate family member who is or has been at any time during the previous 3-year period affiliated with or employed in a professional capacity by, a present or former internal or external auditor of the Company; D. The director or any of his or her immediate family members is or has been, at any time during the previous 3-year period, a part of an interlocking directorate in which an executive officer of the Company serves or served on the compensation committee of another company that employs the director or his or her immediate family member, as applicable; or E. The director is or has been at any time during the previous 3-year period an executive officer or employee, or has an immediate family member who is or has been at any time during the previous 3-year period an executive officer, of a company that either makes payments to, or receives payments from, the Company for property or services in an amount which, in any single fiscal year, exceeds the greater of (A) $1,000,000 or (B) 2% of such other company's consolidated gross revenues. 2. Board Determination. A director will not be considered an independent director unless the Board of Directors makes an affirmative determination that the director, either directly or as a partner, shareholder or officer of any organization that has a relationship with the Company, has no "material relationship" with the Company. A. For purposes of determining whether a director has a "material relationship" with the Company, the Board of Directors will consider all relevant facts and circumstances. "Material relationships" can include commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships (among others). B. For purposes of determining whether a director has a "material relationship" with the Company, a director will not be considered to have a "material relationship" with the Company solely by virtue of the fact that: (i) the director, or any of his or her immediate family members, receives consulting fees or other compensation from the Company not in excess of $100,000 per year; or (ii) the director, or any of his or her immediate family members, formerly served in public office, and in connection with such public service, received campaign contributions from the Company or any of its affiliates within the limits prescribed by all applicable laws; or (iii) the director, or any of his or her immediate family members, serves on the Board of Directors of any company on which another director of the Company serves as a director, employee or contractor; or (iv) the director, or any of his or her immediate family members, serves on the Board of Directors of Patriot Transportation Holding, Inc. Notwithstanding the foregoing, in the event that any director, or any of his or her immediate family members, has relationships that fall within two (2) or more of the foregoing categorical standards, the Board shall consider the materiality of all such relationships, in the aggregate, to determine whether such director is independent. C. The Company will disclose the categorical standards set forth herein for the Board's determination of the independence of any director in the Company's annual proxy statement. If the Board makes a determination that any director who does not meet these categorical standards is "independent," the Company will disclose the basis of the Board's determination in the Company's annual proxy statement. FLORIDA ROCK INDUSTRIES, INC. PROXY SOLICITED BY BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF SHAREHOLDERS CALLED FOR FEBRUARY 7, 2007 The undersigned hereby appoints Edward L. Baker and John D. Baker II, or either of them, the attorneys, agents and proxies of the undersigned with full power of substitution to vote all the shares of common stock of Florida Rock Industries, Inc. which the undersigned is entitled to vote at the Annual Meeting of Shareholders of the Company to be held at the offices of the Company, 155 East 21st Street, Jacksonville, Florida on February 7, 2007 at 9 o'clock in the morning, and all adjournments thereof, with all the powers the undersigned would possess if then and there personally present. Without limiting the general authorization and power hereby given, the above proxies are directed to vote as instructed on the matters below: 1. The election of the following director nominees: Thompson S. Baker II, John A. Delaney, Luke E. Fichthorn III and Francis X. Knott to serve for a three-year term. / / FOR the nominees listed / / WITHHOLD AUTHORITY above (except as marked to vote for all nominees to the contrary below) listed above To withhold authority to vote for any individual nominee, write that nominee's name in the space provided. _________________________________________________________________ 2. The ratification of the Audit Committee's selection of KPMG LLP as the Company's independent registered public accounting firm (auditors) for fiscal 2007. / / FOR approval / / AGAINST approval / / ABSTAIN 3. To transact such other business as may properly come before the meeting or any adjournments thereof. (Continued and to be signed on other side) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Shares represented by properly executed and returned proxies will be voted at the meeting in accordance with the directions of the undersigned shareholder, or, if no directions are indicated, will be voted in favor of the election of the nominees proposed in this proxy statement and for ratification of KPMG LLP as the Company's independent registered public accounting firm (auditors) for 2007 and, if any other matters properly come before the meeting, in accordance with the best judgment of the persons designated as proxies. The undersigned hereby revokes any proxy heretofore given with respect to said stock, acknowledges receipt of the Notice and the Proxy Statement for the meeting accompanying this proxy, each dated _____________, 2006, and authorizes and confirms all that the said proxies or their substitutes, or any of them, may do by virtue hereof. Dated:______________________________________________ Signature: ______________________________________________ Signature if Held Jointly: ______________________________ IMPORTANT: Please date this proxy and sign exactly as your name or names appear(s) hereon. If the stock is held jointly, signatures should include both names. Personal representatives, trustees, guardians and others signing in a representative capacity should give full title. If you attend the meeting you may, if you wish, withdraw your proxy and vote in person. PLEASE RETURN PROMPTLY IN THE ACCOMPANYING ENVELOPE