10-K 1 a2074481z10-k.htm 10-K
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

for the transition period from to

Commission File Number 0-22922

AMERICAN COUNTRY HOLDINGS INC.
(Exact Name of Registrant as specified in its charter)

Delaware		06-0995978
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
222 North LaSalle Street Chicago, Illinois		60601-1105
(Address of principal executive offices)		(Zip Code)

(312) 456-2000
(Registrant's telephone number including area code)

Securities registered pursuant to Section 12(g) of the Act:

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $.01 par value		NASDAQ (Small Cap Market)
Common Stock Purchase Warrants		NASDAQ (Small Cap Market)

Securities registered pursuant to Section 12(b) of the Act: None

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý No o

The aggregate number of shares of the Registrant's Common Stock, $.01 par value, outstanding March 7, 2002 was 9,624,795.

The aggregate market value of the voting stock (Common Stock, $.01 par value) held by non-affiliates of the Registrant was $5,968,472 on March 7, 2002, based on the closing sales price of the Common Stock on such date.

Documents incorporated by reference: None

This Report contains a total of 68 pages, excluding exhibits. The Exhibit Index appears on page 68.

AMERICAN COUNTRY HOLDINGS INC.

INDEX TO ANNUAL REPORT ON FORM 10-K

FISCAL YEAR ENDED DECEMBER 31, 2001

PART I		2
	ITEM 1. BUSINESS	2
	ITEM 2. PROPERTIES	17
	ITEM 3. LEGAL PROCEEDINGS	17
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	17
PART II		18
	ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS	18
	ITEM 6. SELECTED FINANCIAL DATA	20
	ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	21
	ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	30
	ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	30
PART III		31
	ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT	31
	ITEM 11. EXECUTIVE COMPENSATION	33
	ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT	34
	ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	36
PART IV		36
	ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K	36
	ITEM 14(a)(1) AND (2), (c), AND (d)
	LIST OF FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	F-1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS		F-18
SIGNATURES		37
EXHIBIT INDEX		38

PART I

ITEM 1. BUSINESS.

General

American Country Holdings Inc. ("ACHI" or "the Company") is an insurance holding company which has as its direct subsidiaries American Country Insurance Company ("American Country"), American Country Financial Services Corp. ("Financial Services"), American Country Professional Services Corp. ("Professional Services") and American Country Underwriting Agency Inc. Through its subsidiaries, the Company conducts business as a specialty property and casualty insurer and provides premium financing and collateralized loans for certain of American Country's customers. Through its subsidiaries, the Company will provide underwriting management and third party claims administration to other insurance companies in the future.

American Country is an Illinois domestic insurance company that specializes in the underwriting and marketing of commercial property and casualty insurance for the transportation and hospitality industry. Prior to April 1, 2001, American Country also wrote commercial lines insurance for contractors. This business is currently being run-off. American Country's specialty public livery coverages (taxicab and limousine) are primarily written on risks in the City of Chicago and its surrounding suburbs, Connecticut, Indiana, Michigan, Minnesota, New York, Pennsylvania and Wisconsin. American Country has extended its geographic coverage as part of its expansion program for the transportation lines. American Country is licensed in the states of Connecticut, Illinois, Indiana, Iowa, Kentucky, Massachusetts, Michigan, Minnesota, New York, Ohio, Oklahoma, Pennsylvania, Wisconsin, and in the District of Columbia, and is currently pursuing a license in Nevada. American Country also is admitted as an excess and surplus lines carrier in 19 states. American Country currently maintains an A.M. Best Company ("A.M. Best") rating of "C++" (Marginal).

American Country writes transportation and hospitality insurance. Transportation lines, which include automobile liability and physical damage coverages for taxicabs and limousines, and workers compensation for taxicab drivers in Chicago, accounted for 77.1% of total gross premiums written in 2001. Hospitality lines, which include coverage for restaurants, taverns and banquet halls, accounted for 13.7% of total gross premiums written in 2001. Commercial lines, which include multi-peril risks and workers' compensation, primarily for contractors, accounted for 9.2% of total gross premiums written in 2001. American Country's business is written by salaried employees and through approximately 25 independent insurance producers located in the states in which American Country is licensed.

Financial Services operates principally as a premium finance company.

Professional Services provides collateralized loans to certain of American Country's larger customers, and is licensed as a third party claims administrator.

American Country Underwriting Agency was created in December 2000 to operate as a managing general underwriter.

A discussion of operating segments is contained in Note 14 of the financial statements that are included in Item 14 of this Report on Form 10-K.

Insurance Lines

American Country currently writes business in two areas of insurance: transportation and hospitality. American Country's major insurance niche markets include liability and physical damage for taxicabs and limousines, workers' compensation, multi-peril, automobile and umbrella coverages for specific risks, primarily restaurants. Due to underwriting losses in its contractor commercial lines insurance, American Country decided to exit the contractor market and focus its resources on its other specialty niches and expand them geographically. The non-Illinois hospitality book was also reviewed by management during

2000. This book was re-underwritten throughout 2000 and early 2001. Due to unsatisfactory loss ratios, this book was non-renewed in June 2001.

The following table sets forth the gross and net premiums for the principal lines of insurance written by American Country and the related percentages of the total gross and net premiums written for the year ended December 31, 2001:

	Gross Premiums Written				Net Premiums Written
	Dollars		Percentage		Dollars		Percentage
	(in thousand)				(in thousand)
Transportation	$	64,274	77.1	%	$	57,949	85.7	%
Hospitality		11,384	13.7	%		5,993	8.9	%
Other Commercial		7,708	9.2	%		3,638	5.4	%

Total	$	83,366	100.0	%	$	67,580	100.0	%

Transportation

American Country's transportation business is comprised of liability and physical damage insurance for taxis, limousines, ground shuttle, other commercial vehicles and para-transit fleets used to transport individuals to health care providers. It also includes workers' compensation for taxicab drivers in Chicago. American Country's largest taxi customers in Illinois are written on a direct basis by salaried employees of American Country. The remainder of American Country's transportation business is written by independent insurance producers who specialize in this type of business in their geographic regions.

American Country was originally organized primarily to provide insurance for the cab industry in Chicago. Transportation lines continue to be a major part of American Country's business, accounting for over $64.2 million or 77.1% of American Country's total gross premiums written in 2001. In 2001, 2000 and 1999, the Yellow Cab Company accounted for 9%, 10%, and 14%, respectively, and Checker Taxi Association in Chicago accounted for 7%, 7% and 8%, respectively, of American Country's total gross premiums written. The loss of this business could have a material adverse impact on American Country. American Country anticipates that the percentage of its business from Yellow Cab Company and Checker Taxi Association will become less significant as American Country expands its transportation business into additional geographic areas.

Transportation business in the Chicago metropolitan area ranged from 41-51% of American Country's net premiums written in the last three fiscal years. Although American Country believes that insuring taxicabs and limousines in the Chicago metropolitan area provides diversity in exposure and spread of risk between urban and suburban environments, having a large portion of the transportation business centered in one geographic area exposes American Country to certain risks, including rate competition from other insurers in the same metropolitan area and the impact of state and local regulation and judicial decisions affecting that area.

American Country also provides auto liability, physical damage and workers compensation coverage to taxicab associations (other than Yellow and Checker) and individual taxicab owners and operators in Chicago. American Country also provides auto liability coverage to taxi fleets, limousine fleets, ground fleets, para-transit fleets and individual taxi and limousine owners and operators in, Chicago's surrounding communities, downstate Illinois, Connecticut, Indiana, Michigan, Minnesota, Pennsylvania, New York and Wisconsin. It is seeking to expand its transportation business in these areas to proportionally decrease its reliance on the Chicago metropolitan market.

Hospitality

Hospitality lines, which consist of coverages for restaurants, taverns and banquet halls, accounted for $11.4 million or 13.7% of the total gross premiums written by American Country in 2001. American Country's restaurant program is primarily designed for "white tablecloth" establishments, but does accommodate other types of restaurants, including fast food outlets. In addition to offering commercial property damage, workers compensation, umbrella and commercial auto coverages, American Country also offers specialized coverages for its hospitality customers, which include liquor liability, food spoilage, boiler and machinery and employment practices liability. American Country also offers a separate tavern policy, which is tailored to neighborhood establishments rather than nightclubs.

Management reviewed the non-Illinois hospitality book during 2000. This book was re-underwritten throughout 2000 and early 2001. Due to unsatisfactory loss ratios, this book was non-renewed in June 2001. American Country continues to write hospitality lines in the state of Illinois, and mono-line liquor liability in the state of Minnesota.

Other Commercial

Other commercial lines accounted for 9.2% or $7.7 million of 2001 total gross premiums written. American Country wrote general liability, workers' compensation, multi-peril, and umbrella excess for contractors and other commercial businesses, primarily in Illinois and Wisconsin. The commercial business is written by independent agents specializing in these targeted classes.

American Country's artisan contractors program offered coverages for plumbing, electrical, painting, masonry and carpentry contractors. The artisan contractor program targeted operations of at least 10 employees and up to $5 million in payroll.

The contractor book was re-underwritten and re-priced beginning in 1999 and through the first quarter of 2001. Although substantial rate increases occurred as a result of the re-underwriting program, this book could not be written at acceptable margins, and effective April 1, 2001, this book was non-renewed.

Reinsurance

American Country reinsures a portion of its exposure by ceding to reinsurers a portion of the premiums received on the policies that are reinsured. Insurance is ceded primarily to reduce the net liability on individual risks and to protect against catastrophic losses. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of coverage, it does make the assuming reinsurer liable to the insurer to the extent of the losses reinsured. American Country seeks to maintain its risk exposure at appropriate levels by setting maximum coverage limits by class and type of business. American Country's current reinsurance program is divided into two main sections: (1) Transportation Business and (2) Hospitality and Commercial Lines. A detailed chart of American Country's reinsurance program is set forth below.

American Country's current business is predominantly reinsured by General Reinsurance Corporation (rated "A++" by A.M. Best). The decision to place the reinsurance with General Reinsurance Corporation was based on General Reinsurance Corporation's A.M. Best rating, competitive pricing for the reinsurance and the administrative advantages of transacting with a single reinsurer on the bulk of our claims.

Transportation Reinsurance

of the reinsurance agreement is either paid by the company or by other reinsurance agreements. Under its excess of loss program for its transportation business, American Country has a retention of $350,000 and reinsurance coverage of up to $4 million per occurrence. Effective October 1, 2000, American Country entered into a quota share reinsurance agreement with General Reinsurance Corporation, whereby American Country ceded 50% of the in-force, new and renewal business for the Illinois transportation program. On January 1, 2001, the reinsurance agreement was amended to reduce the amount ceded to 10% of the earned new and renewal premium for policies written on or after January 1, 2001. This agreement expired on September 30, 2001.

Commercial and Hospitality Lines Reinsurance

American Country's commercial and hospitality business is reinsured on a multi-line, multi-layer excess of loss basis. Reinsurance coverage under the current treaty is as follows:

All Property Business		The reinsurer pays up to $1,650,000 in excess of American Country's retention of $350,000 per risk.
All Casualty Business (excluding workers' compensation)		The reinsurer pays up to $3,650,000 in excess of American Country's retention of $350,000 per occurrence.
Workers Compensation		The reinsurer pays up to statutory limits in excess of American Country's retention of $350,000 per occurrence.

Property catastrophe reinsurance also is in force, which provides American Country with $3,650,000 of protection after a retention of $350,000 per catastrophic loss occurrence in addition to the multi-line coverage.

In addition to the treaty limit of $2,000,000, American Country also has an $8,000,000 excess of $2,000,000 semi-automatic facultative treaty in place for all property business.

Excess (umbrella) liability business is reinsured under a separate reinsurance agreement which provides coverage to American Country of up to $5,000,000 per occurrence in excess of $1,000,000 per occurrence. American Country's retention is 5% ($50,000) of the first $1,000,000 excess layer and 2.5% of the next $4,000,000 layer. There is a separate endorsement to the treaty for a nominal number of policies. This endorsement provides coverage of up to an additional $5,000,000 per occurrence in excess of the $5,000,000 per occurrence covered by the original agreement. American Country's retention is 15% of this $5,000,000 layer.

New York auto liability business is reinsured under a facultative agreement which provides coverage to American Country of $1,500,000 of clash protection after a retention of $500,000 per occurrence. This coverage became effective on March 1, 2001.

Effective April 1, 2000, American Country entered into a quota share reinsurance agreement. Under the treaty, 30% of the commercial and hospitality net premium for the period of April 1, 2000 through June 30, 2000, and 50% of the commercial and hospitality premium for the period of July 1, 2000 through March 31, 2001, was ceded to General Reinsurance Corporation. This agreement expired on March 31, 2001 and was not renewed because the underlying business was not renewed.

The following table details American Country's current treaty reinsurance program, including the types of reinsurance and amounts reinsured with each named company for each of American Country's lines of insurance.

AMERICAN COUNTRY HOLDINGS INC.
2001 CEDED Reinsurance Program
For the Period 1/1/01 through 12/31/01
($000)*

Contract	Coverage	Company Retention	Reinsurance Limit	Reinsurances Company	%
First Multi-Line	Excess of Loss	$350	$150 excess of $350 retention	General Reinsurance Corporation	100	%
Term: Continuous from 7/1/99
Second Multi-Line	Excess of Loss	N/A	Casualty: $500 excess of $500 covered by First Multi-Line	General Reinsurance Corporation	100	%
Term: Continuous from 7/1/99			Property: $500 excess of $500 covered by First Multi-Line
Third Casualty Excess	Excess of Loss	N/A	$3,000 excess of $1,000 covered by First and Second Multi-Line	General Reinsurance Corporation	100	%
Term: Continuous from 7/1/99			Workers' Comp only: Follow Form
First Per Claimant/Per Occurrence	Workers' Comp Excess	N/A	$8,000 excess of $4,000 covered by First and Second Multi-Line and Third Casualty Excess	General Reinsurance Corporation	100	%
Term: Continuous from 7/1/99			Term limitation: $15,000 Max any one life: $4,000
Third Property Excess	Excess per Risk	N/A	$3,000 excess of $1,000 covered by	General Reinsurance Corporation	100	%
Term: 7/1/99-6/30/01			First and Second Multi-Line
Third Property Excess	Excess per Risk	N/A	$1,000 excess of $1,000 covered by	General Reinsurance Corporation	100	%
Term: Continuous from 7/1/01			First and Second Multi-Line
Umbrella Quota Share	Excess Umbrella Liability	All business: 5% first $1,000	All business: 95% first $1,000	General Reinsurance Corporation	100	%
Term: 7/1/99-6/30/01		N/A next $9,000	100% next $4,000
Umbrella Quota Share	Excess Umbrella Liability	All business: 5% first $1,000 2.5% next $4,000	All business: 95% first $1,000 97.5% next $4,000	General Reinsurance Corporation	100	%

AMERICAN COUNTRY HOLDINGS INC.
2001 CEDED Reinsurance Program
For the Period 1/1/01 through 12/31/01
($000)*

Contract	Coverage	Company Retention	Reinsurance Limit	Reinsurance Company	%
Term: Continuous from 7/1/01
Excess Property Catastrophe		$350/occurrence	$3,650 excess of $350/occurrence	General Reinsurance Corporation	100	%
Term: 7/1/99-6/30/01
Excess Property Catastrophe		$500/occurrence	$2,500 excess of $500/occurrence	General Reinsurance Corporation	100	%
Term: Continuous from 7/1/01
Other Programs:
Yellow Cab Company (Affiliation)
Special Cover (Affiliation)	Taxi Excess	$350	$150 excess of $350 retention	General Reinsurance Corporation	100	%
Contingent Auto Excess	Taxi Excess	N/A	$3,500 excess of $500 covered by Special Cover	General Reinsurance Corporation	100	%
Term: Continuous from 7/1/99 (Yellow Cab Company only)			Reinstatement charge (One only)
Illinois Transportation Quota Share
Term: 10/1/00-9/31/01	Taxi Primary	50% of $350 from 10/1/00 to 12/31/00, 10% of $350 from 1/1/01 to 9/30/01	50% of $350 from 10/1/00 to 12/31/00, 10% of $350 from 1/1/01 to 9/30/01	General Reinsurance Corporation	100	%
Non-Transportation Quota Share
Term: 4/1/00-3/31/01	Commercial and Hospitality Primary	70% of $350 from 4/1/00 to 6/30/00, 50% of $350 from 7/1/00 to 3/31/01	30% of $350 from 4/1/00 to 6/30/00, 50% of $350 from 7/1/00 to 3/31/01	General Reinsurance Corporation	100	%

*: All amounts, except percentages, are in thousands (000).

Assumed Reinsurance

In October 1999, American Country and Fairfield Insurance Company ("Fairfield") entered into a service agreement and a 100% quota share reinsurance agreement. Pursuant to the terms of the reinsurance agreement, American Country, as the reinsurer, assumes 100% of the premiums and losses of each insurance policy that Fairfield cedes to American Country. The types of policies ceded by Fairfield to American Country consist of transportation lines and hospitality lines. These agreements allowed American Country to write business in states where American Country was not currently licensed.

The service agreement permitted American Country to underwrite, issue and service on behalf of Fairfield, certain commercial auto liability policies for taxi and livery and commercial multi-peril policies for restaurants in the states of Maryland, New Jersey and Rhode Island. American Country received premiums of $488,301 in 2001 for the Fairfield policies it reinsured, from which it paid Fairfield a ceding commission of $105,551. American Country reinsures the business it assumes from Fairfield on the same basis as it reinsures the policies it writes directly.

American Country and Mutual Services Casualty Insurance Company ("MSI") have been parties to a service agreement and a 100% quota share reinsurance agreement since April 1998. Pursuant to the terms of the reinsurance agreement between MSI and American Country, American Country, as the reinsurer, assumed 100% of the premiums and losses of each insurance policy that MSI ceded to American Country. The types of policies ceded by MSI to American Country consisted of transportation lines and hospitality lines. These agreements allowed American Country to write business in states where American Country is not currently licensed.

The service agreement permitted American Country to underwrite, issue and service on behalf of MSI, certain commercial auto liability policies for taxi and livery and commercial multi-peril policies for restaurants in the states of Connecticut, Minnesota, Michigan and New Jersey. American Country received premiums of $37,462 in 2001 for the MSI policies it reinsured. American Country reinsures the business it assumes from MSI on the same basis as it reinsures the policies it writes directly. The quota-share reinsurance and service agreements between American Country and MSI were cancelled in October 1999.

Marketing

American Country is licensed in Connecticut, Illinois, Indiana, Iowa, Kentucky, Massachusetts, Michigan, Minnesota, New York, Ohio, Oklahoma, Pennsylvania, Wisconsin and the District of Columbia. American Country also is authorized to act as an excess and surplus lines insurer in 19 states. American Country markets its insurance products through multiple distribution sources consisting of independent insurance producers, managing general underwriters and directly through salaried employees of American Country. American Country relies on both salaried employees and independent insurance producers to produce its Yellow Cab, Checker Taxi and other Chicago taxicab associations' liability insurance, and on approximately 25 producers and two managing general underwriters to market its other insurance products. American Country selects agents based on their comprehensive knowledge of the industries to which American Country provides coverages and the geographic market in which the agent operates.

American Country's current marketing plan is to expand its transportation segment by writing additional business in its current markets. American Country began writing taxicab business in Michigan and Wisconsin in 1997. In 1998, American Country wrote a substantial share (25%) of the insurance coverage for independent taxicab operators in Philadelphia and taxi fleets throughout the state of Pennsylvania. American Country also continued its geographic expansion in the states of Indiana, Michigan, Minnesota and Wisconsin by providing insurance for taxicabs and limousines.

In 1998 American Country was licensed to write business in the state of New York and began providing coverage for New York City Yellow Medallion taxi cabs in February of 1999. In 1999, American Country also began providing transportation coverage in Connecticut.

American Country also expanded its insurance programs for restaurants into the states of Michigan, Minnesota, New Jersey and Pennsylvania during 1998. American Country's restaurant program in these states was written through an agreement with MSI through October 1999, and subsequently through Fairfield, which both produced the business consistent with American Country's underwriting and rating guidelines and filed rates.

In 2000, American Country continued the geographic expansion of both its transportation and restaurant programs. The transportation program achieved growth in the states of Connecticut, Indiana, Michigan, Minnesota and New York. The restaurant program continued to expand in the states of Massachusetts, Michigan, Minnesota, New Jersey and Pennsylvania.

The following tables set forth for the three years ended December 31, 2001, the gross and net premiums written, whether produced directly by American Country employees or by independent agents:

			Year Ended December 31,
			2001				2000					1999
			Premiums Written		Percent of Total		Premiums Written			Percent of Total		Premiums Written		Percent of Total
			(dollar amounts in thousands)
GROSS PREMIUMS
	Transportation		$	64,274	77.1	%	$	57,378		67.1	%	$	50,908	65.4	%
	Hospitality			11,384	13.7			12,629		14.8			9,116	11.6
	Other Commercial			7,708	9.2			15,490		18.1			17,853	22.9
	Personal			0	0			(5	)	(0.0	)		78	0.1

		Total	$	83,366	100.0	%	$	85,492		100.0	%	$	77,955	100.0	%

NET PREMIUMS
	Transportation		$	57,949	85.7	%	$	49,301		73.6	%	$	48,590	65.7	%
	Hospitality			5,993	8.9			7,131		10.7			7,930	10.7
	Other Commercial			3,638	5.4			10,520		15.7			17,388	23.5
	Personal			0	0			1		0.0			75	0.1

		Total	$	67,580	100.0	%	$	66,953		100.0	%	$	73,983	100.0	%

Operating Ratios

Statutory Combined Ratio

American Country's statutory combined ratio expresses losses as a percentage of premium revenues, and is the traditional measure of underwriting experience. Losses and loss adjustment expenses incurred are expressed as a percentage of net premiums earned. Acquisition and underwriting expenses are expressed as a percentage of net premiums written, with the aggregate sum of those percentages equaling the combined ratio. The GAAP ratio expresses all percentages as a percentage of net premiums earned. If the statutory combined ratio is below 100%, an insurance company has an underwriting profit, and if it is above 100%, the insurer has an underwriting loss.

The following table reflects the loss ratios, expense ratios and combined ratios of American Country, determined in accordance with statutory accounting practices, for the years indicated:

		Year Ended December 31,
		2001		2000		1999		1998		1997
Statutory Combined Ratio
Loss and loss expense ratio		112.6	%	94.5	%	91.3	%	79.6	%	88.8	%
Expense ratio		23.6	%	22.6	%	19.4	%	21.3	%	20.8	%

	Combined ratio	136.2	%	117.1	%	110.7	%	100.9	%	109.6	%

During 1999, American Country posted an additional $3.5 million in Workers' Compensation loss reserves in excess of management's original estimate due to continuing adverse development in prior years. The main reasons for the adverse development were rising medical costs and increased length of disabilities covered under these policies.

In 2000, due to the continuing adverse development in prior years, management took a more conservative approach to estimating the total loss reserves. The increase in the 2000 loss ratio is the result of increased incurred but not reported ("IBNR") reserves in prior years.

In 2001, actuarial studies revealed that the losses in several lines of business are developing at a much higher rate than originally projected. The bulk of the development is in the 1999 and 2000 accident years, and is concentrated in the contractor book, the non-Illinois hospitality book, and to a lesser extent, certain areas of the non-Illinois transportation book. In order to bring American Country's loss reserves to the actuarial best point estimate, prior year net reserves were increased by $23.0 million.

Premium-to-Surplus Ratio

While there are no statutory provisions governing premium-to-surplus ratios, regulatory authorities and rating agencies regard this ratio as an important indicator since the lower the ratio, the greater the insurer's ability to withstand abnormal loss experience. The following table sets forth the ratio of net premiums written during the year to statutory-basis capital and surplus at the end of the year for American Country for the years indicated:

	2001		2000		1999		1998		1997
Net premiums written during the year	$	67,580	$	66,953	$	73,983	$	56,861	$	60,078
Statutory-basis capital and surplus at end of year		25,557		40,238		37,173		39,083		34,555
Ratio		2.64 to 1		1.66 to 1		1.99 to 1		1.45 to 1		1.74 to 1

Reserves for Losses and Loss Adjustment Expenses

American Country maintains reserves for the payment of losses and loss adjustment expenses ("LAE") for all lines of business. The determination of reserves for losses and LAE is based on information reported to it regarding claims and the historical loss experience of the business. The vast majority of losses are reported to American Country by its insureds in a timely fashion; however, there is always a certain percentage of IBNR losses at any given time. American Country establishes reserves for IBNR claims and this reserve also includes amounts for the potential adverse development of losses known to American Country (in other words, subsequent developments may occur that require that previously established reserves be increased). Upon receipt of a claim, American Country establishes a reserve, which is an estimate of the amount which will be paid upon conclusion of the claim. The reserves for the known losses, IBNR reserve and the loss adjustment expense reserve, represent the total amount American

Country estimated will be needed to satisfy all losses (known and unknown) which may be paid by American Country. These reserves are reflected as liabilities on American Country's balance sheet.

There can be a significant period of time between the occurrence of an insured loss, the reporting of the loss to American Country, and the payment of such loss. Liability claims have a greater period of time elapsing between the occurrence of a loss and payment than property claims. General liability claims have the longest time lag between the occurrence and final payment of the loss. Many factors are considered when establishing the IBNR reserve for a particular line of business and the lag time between the occurrence and final payment of the loss is an important component.

All claims are investigated, supervised, and adjusted by personnel of American Country. In-house counsel for American Country handle the defense of most cases for insureds located in the Chicago Metropolitan Area. All outside counsel are chosen by American Country, and American Country's staff monitors all cases and grants settlement authority on all files.

Automobile property damage and physical damage reserves are established on a formula case reserve basis. Automobile theft losses and total losses are reserved for the book value of the vehicle as of the time of the loss. All other lines of business are reserved based on an analysis of each individual case. The case based reserve is an estimate of the amount of ultimate payment projected by the personnel of American Country based upon their knowledge of similar cases. All bodily injury claims are reviewed and reserves adjusted thirty days after the file is opened and every six months thereafter for the life of the file. Adjustments are made to reserves at these mandatory intervals or whenever the known exposure changes.

The following table sets forth a reconciliation of the beginning and ending losses and LAE reserve balances, net of reinsurance ceded for the past three years:

		Year Ended December 31,
		2001		2000		1999
		(in thousands)
Net reserves for losses and LAE, beginning of year		$	98,371	$	91,349	$	80,465
Incurred losses and LAE for claims relating to:
	Current year		53,003		65,881		59,227
	Prior years		23,034		2,436		4,389

Total net claims incurred			76,037		68,317		63,616

Losses and LAE payments for claims relating to:
	Current year		14,762		22,159		18,368
	Prior years		46,025		39,136		34,364

Total net claims paid			60,787		61,295		52,732

Net reserves for losses and LAE, end of year			113,621		98,371		91,349
Total reinsurance recoverable on unpaid losses and LAE			20,283		16,323		13,144

Gross reserves for losses and LAE, end of year		$	133,904	$	114,694	$	104,493

The $23,034,000 increase in prior years' reserves during 2001 is attributable to reserves strengthening for prior accident years. This includes additional reserves for Workers' Compensation of $11.8 million for accident years 1997 through 2000, Commercial Multiple Peril of $4.1 million for accident years 1997 through 2000 and Commercial Auto Liability of $6.2 million for accident years 1998 through 2000. The adverse development is the result of the continued deterioration of the contractor lines, including workers compensation, commercial multiple peril and commercial auto liability, as well as deterioration in package and auto lines for the non-Illinois hospitality program. Additionally, certain areas of the non-Illinois transportation book developed at a higher rate than expected.

The $2,436,000 increase in prior years' reserves during 2000 is attributable to reserve strengthening for losses incurred in calendar year 1998, offset by an improvement in the development for calendar years prior to 1998. The adverse development is the result of the continued deterioration of the Workers' Compensation line, and is primarily due to increased medical costs and longer duration disabilities covered under these policies.

The $4,389,000 increase in prior years' reserves during 1999 is attributable to reserve strengthening, including additional reserves for Workers' Compensation of $3,500,000, for losses incurred in calendar years 1998 and prior. This is primarily due to increased medical costs and longer duration disabilities covered under these policies.

The commercial lines insurance industry has suffered from a prolonged soft market. Pricing pressures have resulted in premium revenue that is inadequate to cover the losses incurred. As a result, American Country has recorded losses that are substantially higher than management's original estimate. Consequently, American Country increased its reserves for the contractor book by $16.2 million, $5.1 million, and $5.0 million in 2001, 2000 and 1999, respectively. American Country began non-renewing this contractor business effective April 1, 2001. Capital constraints, competition and adverse loss experience are the primary reasons for management's decision to exit this line.

The following table reflects American Country's losses and LAE reserve development, net of estimated salvage and subrogation recoveries, through December 31, 2000, for each of the preceding ten years:

	Cumulative Redundancy (Deficiency)
	(000's only)
	Year Ended December 31,
	1991			1992			1993			1994			1995			1996			1997			1998			1999			2000			2001
Reserve for loss and loss expenses net of reinsurance recoverables	$	57,846		$	62,234		$	64,274		$	66,494		$	74,582		$	79,460		$	83,973		$	80,465		$	91,349		$	98,371		$	113,621
Reserve re-estimate as of:
One year later		56,684			63,751			65,868			66,665			75,577			78,988			84,407			84,854			93,785			121,405
Two years later		60,869			66,607			63,759			67,693			78,628			82,604			91,015			89,672			110,204
Three years later		62,717			63,744			65,559			69,172			79,634			86,277			89,127			96,007
Four years later		60,875			64,040			66,524			68,541			79,624			84,311			92,258
Five years later		61,207			64,770			65,670			68,186			78,236			84,722
Six years later		61,554			64,553			65,497			67,142			79,225
Seven years later		61,484			64,658			65,094			67,613
Eight years later		61,633			64,497			65,364
Nine years later		61,638			64,567
Ten years later		61,891
Cumulative redundancy (deficiency)		(4,045	)		(2,333	)		(1,090	)		(1,119	)		(4,643	)		(5,272	)		(8,285	)		(15,542	)		(18,855	)		(23,034	)
Percentage		-7.0	%		-3.7	%		-1.7	%		-1.7	%		-6.2	%		-6.6	%		-9.9	%		-19.3	%		-20.6	%		-19.3	%
Reserve for claims and expenses, gross		*			75,780			73,922			73,209			81,633			90,965			99,087			92,417			104,493			114,694			133,904
Reinsurance recoverables		*			13,546			9,648			6,715			7,051			11,505			15,114			11,952			13,144			16,323			20,283

Reserve for claims and expenses, net		57,846			62,234			64,274			66,494			74,582			79,460			83,973			80,465			91,349			98,371			113,621

*: Information not available

	Paid Losses
	(000's only)
	Year Ended December 31,
	1991		1992		1993		1994		1995		1996		1997		1998		1999		2000	2001
Cumulative amount of losses paid, net of Reinsurance recoverables through:
One year later	$	17,141	$	21,331	$	23,271	$	22,495	$	25,938	$	29,002	$	32,949	$	34,364	$	39,136	46,025
Two years later		31,753		37,778		37,843		38,161		43,579		50,707		54,663		56,755		67,405
Three years later		44,070		48,653		48,178		48,658		59,041		64,768		68,580		74,480
Four years later		51,495		56,212		54,636		57,939		68,066		73,692		80,199
Five years later		57,099		58,792		60,174		62,953		72,740		78,845
Six years later		58,481		61,695		63,016		64,629		75,750
Seven years later		59,652		63,056		63,538		65,771
Eight years later		60,702		63,370		64,293
Nine years later		60,995		63,860
Ten years later		61,364

Investments

Funds, including reserve funds, are invested until required for American Country's operations, subject to restrictions on permissible investments established by applicable state insurance codes. American Country's investment policy is to maximize after-tax income while generally limiting investments to investment grade securities with high liquidity. In 2001, American Country began investing in convertible

preferred stock and convertible bonds. American Country's fixed income investment portfolio was managed by Conning Asset Management Company in 2001. American Country's convertible investment portfolio was managed by Asset Allocation & Management Company in 2001.

The following table contains information concerning American Country's investment portfolio at December 31, 2001:

		Amortized Cost		Fair Value		Amount Reflected on Balance Sheet		Percent of Total
		(in thousands)
Available-for-sale securities
	Fixed maturity securities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies		$	5,336	$	5,618	$	5,618	4.4	%
Obligations of states and political subdivisions			1,726		1,822		1,822	1.4	%
Foreign governments			1,011		1,029		1,029	0.8	%
Corporate securities			63,011		65,387		65,387	50.7	%
Mortgage-backed securities			52,123		53,005		53,005	41.4	%

Total fixed maturity securities			123,207		126,861		126,861	98.4	%
Equity securities			2,072		2,078		2,078	1.6	%

Total available-for-sale securities		$	125,279	$	128,939	$	128,939	100.0	%

The following table sets forth a profile of American Country's fixed maturity investment portfolio by rating at December 31, 2001:

S&P/Moody's Rating(1)	Fair Value		Percent of Total
	(in thousands)
AAA/Aaa (including U.S. Treasuries of $3,945)	$	60,397	47.6	%
AA/Aa		15,256	12.0	%
A/A		32,939	26.0	%
BBB/Ba		13,838	10.9	%
All other (non-investment grade)		4,431	3.5	%

Total	$	126,861	100.0	%

(1): Ratings are as assigned primarily by Standard & Poor's Corporation, with remaining ratings as assigned by Moody's Investors Service Inc.

The following table sets forth a profile of American Country's fixed maturity investment portfolio by maturity at December 31, 2001:

Maturity	Fair Value		Percent of Total
	(in thousands)
Due in one year or less	$	1,851	1.5	%
Due after one year through five years		35,554	28.0	%
Due after five years through ten years		25,589	20.2	%
Due after ten years		10,862	8.6	%
Mortgage-backed securities		53,005	41.8	%

Total fixed maturity securities	$	126,861	100.0	%

The following table summarizes the Company's investment results for the five years ended December 31, 2001:

	Year Ended December 31,
	2001		2000		1999		1998		1997
	(in thousands)
Total net investment income	$	8,481	$	8,522	$	7,618	$	7,134	$	7,025
Average annual pre-tax yield		6.9%		7.4%		6.1%		6.0%		6.4%
Average annual after-tax yield		5.9%		5.0%		4.7%		4.4%		4.6%
Effective federal income tax on investment income		30.8%		28.1%		25.0%		25.0%		31.1%

Regulation

American Country is subject to varying degrees of regulation and supervision in the jurisdictions in which it transacts business under statutes which delegate regulatory, supervisory and administrative powers to state insurance commissioners. Such regulation is designed to protect policyholders rather than investors and relates to such matters as standards of solvency, which must be met and maintained; the licensing of insurers and their agents and producers; the nature of and examination of the affairs of insurance companies, which includes periodic financial and market conduct examinations by the regulatory authorities; annual and other reports, prepared on a statutory accounting practices basis, required to be filed on the financial condition of insurers or for other purposes. In general, American Country must file all rates and forms for insurance directly underwritten with the insurance department of each state in which it operates on an admitted basis; reinsurance generally is not subject to state regulation. Further, state insurance statutes typically place limitations on the amount of dividends or other distributions payable by insurance companies in order to protect their solvency. Illinois, the domicile state of American Country, requires that dividends be paid only out of earned surplus, and limits the annual amount payable without prior approval of the Department to the greater of 10% of policyholders' surplus or the amount of the prior year's statutory net income.

American Country is also subject to statutes governing insurance holding company systems in various jurisdictions. Such statutes require American Country to file an annual Holding Company System Registration statement with the state insurance regulatory authorities, which includes information concerning its capital structure, ownership, financial condition and general business operation. Under the terms of applicable state statutes, any person or entity desiring to purchase more than a specified percentage (commonly 10%) of American Country's outstanding voting securities is required to obtain regulatory approval for the purchase of such voting securities. Section 131.2 of the Illinois Insurance Code relating to holding companies, to which American Country is subject, requires disclosure of transactions between American Country and its subsidiaries and affiliates. Such transactions must satisfy certain standards, including that they be fair, equitable and reasonable and that certain material transactions be specifically non-disapproved by the Director of Insurance. Further, prior approval by the Director is required of affiliated sales, purchases, exchanges, loans or extensions of credit, or investments, any of which involve the lesser of 3% of American Country's admitted assets or 25% of American Country's policyholder surplus as of the preceding December 31st.

The National Association of Insurance Commissioners ("NAIC") facilitates the regulation of multi-state companies through uniform reporting requirements, standardized procedures for financial examinations, and uniform regulatory procedures embodied in model acts and regulations. Current developments address the reporting and regulation of the adequacy of capital and surplus. The NAIC has a risk-based capital model act for property/casualty companies, which calculates a minimum required statutory policyholders' surplus based on the underwriting, investment, credit loss reserve and other business risks applicable to the insurance company's operations. At December 31, 2001, American Country's required risk-based capital was $9.1 million; and its reported statutory capital and surplus was $25.6 million, so that at December 31, 2001, American Country substantially exceeded the risk-based capital requirements. See

"Management's Discussion and Analysis of Financial Condition and Results of Operations—Regulation" for additional information.

Competition

The property and casualty insurance business is highly competitive on the basis of both price and service. In recent years, the property and casualty insurance industry has been characterized by relatively high levels of competition, aggressive pricing and marketing.

American Country faces its most active competition in public transportation lines from managing general agency insurance programs, and national and regional insurance carriers. Managing general agency insurance programs are put together by agents and reinsurers using an insurance company that writes the insurance business as a fronting carrier and then reinsures substantially all of the business with the reinsurer. Many of these programs are short-lived, but they generally are priced aggressively. Besides creating instability, they generally do not provide continuity of claims practices and settlements, which often adversely affects future pricing for property and casualty insurance. However, American Country's long-term agreements with the taxi companies tends to mitigate this circumstance.

In Illinois, the competition for coverage of contractors is primarily from national carriers, regional carriers and mono-line workers' compensation carriers. The competition for restaurants is mainly from regional carriers. Due to this competition, American Country believes that the commercial lines products are currently under-priced, even with the current hardening of the market, and therefore American Country decided to non-renew its contractor commercial lines business effective April 1, 2001, and its non-Illinois hospitality business effective June 1, 2001 and refocus its underwriting efforts in the public livery lines.

American Country benefits in all classes of its business by maintaining long term agency relationships. In addition, American Country's agents have specialized in these classes of business for many years. American Country believes it has been able to compete successfully by underwriting specialty coverages for niche areas in which American Country has expertise.

Environmental Issues

American Country believes that it has limited risk of claims arising from environmental exposures. The underwriting philosophy of American Country excludes writing insurance for business which presents possible environmental exposures. Its liability policies contain a pollution coverage exclusion and a lead paint exclusion. The industry, however, has seen a dramatic increase in the number of environmental claims being presented to insurers for defense and indemnification, and recent court cases have diminished the protection granted by the pollution exclusion.

Financing Operations

Financial Services operates principally as a premium finance company under the regulations of the Illinois Department of Insurance. Professional Services operates principally as a finance company providing collateralized loans to members of certain taxi associations. All loans are secured either through unearned premiums on insurance policies or, by taxicab medallions and equipment assets. During 2001, both Financial Services and Professional Services sold substantially all of the collateralized loans to American Country. For the year ended December 31, 2001, Financial Services and Professional Services had combined net income of $21,000, compared to $168,000 in 2000. This decrease is due primarily to an decrease in the premium finance activity of Financial Services as a result of decreased demand for premium financing, and also to the sale of loans by both companies to American Country.

Employees

As of December 31, 2001, American Country employed approximately 163 full time employees, 11 of whom are executive management, and 23 part-time employees. American Country is not a party to any collective bargaining agreement.

ITEM 2. PROPERTIES.

The Company leases office space at 222 N. LaSalle Street, Chicago, Illinois, for its executive offices and insurance operations. The 39,000 square feet facility has a monthly rental of approximately $61,600. The current lease expires in May 2002. On March 1, 2002, the Company entered into a new lease for office space at 500 West Madison Street, Chicago, Illinois, for its executive officers and insurance operations. The new lease expires on December 31, 2012.

The Company leases space at two additional locations in the Chicago area for purposes of storage and claim handling. The aggregate monthly rental is approximately $7,200.

The Company leases office space for its remote claims offices in Minnesota, Connecticut, Pennsylvania and New York. The aggregate monthly rental is approximately $8,000.

The Company believes that it currently has adequate space for expansion at its existing and newly leased facilities.

ITEM 3. LEGAL PROCEEDINGS.

There are no pending material legal proceedings to which the Company or its subsidiaries is a party or of which any of the properties of the Company or its subsidiaries is subject. The Company is subject to claims arising in the ordinary course of business. Most of these lawsuits involve claims under insurance policies issued by American Country. These lawsuits are considered by American Country in estimating the reserves for losses and loss adjustment expenses.

On May 20, 1999, Frontier Insurance Group, Inc. (which owned approximately 23% of the outstanding shares of the Company) filed a purported shareholder derivative action in Delaware Chancery Court against the Company's directors and the Company itself as a nominal defendant.

On November 2, 2001, a Stipulation of Dismissal was entered and accepted by the Delaware Chancery Court.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

There were no matters submitted to a vote of security holders during the fourth quarter of 2001.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS.

The Company's Common Stock is traded on the NASDAQ (Small Cap Market) under symbol ("ACHI") and the Company's Warrants are traded on the NASDAQ (Small Cap Market) under the symbol ("ACHIW"). The following table sets forth the high and low bid prices as reported on NASDAQ for the Company's Common Stock during the quarters indicated. The prices reported reflect inter-dealer quotations and may not represent actual transactions and do not include retail mark-ups, markdowns or commissions.

COMMON STOCK

Quarter Ended	High		Low
December 31, 2001	$	1.87	$	1.10
September 30, 2001		2.06		1.70
June 30, 2001		2.60		1.80
March 31, 2001		2.50		1.88
December 31, 2000		2.13		1.88
September 30, 2000		3.69		3.31
June 30, 2000		2.50		2.50
March 31, 2000		4.50		3.75

On May 8, 2000, the Company effected a one-for-four reverse stock split. No fractional shares were issued as a result of the reverse stock split. Issued and outstanding shares after the reverse stock split represented approximately 13.37% of the total authorized number of shares. The number of common shares issued and outstanding has been restated for all periods presented. Historical market prices have also been restated to reflect the reverse stock split.

At March 21, 2002, there were approximately 160 holders of record of the Company's Common Stock. This number does not include an indeterminate number of stockholders whose shares are held by brokers in "street name." The Company has not paid any cash dividends on the Common Stock since it became publicly traded. (See "Business Regulation" for restrictions on the payment of dividends by the Company's insurance subsidiary.)

Warrants

The following table sets forth the high and low bid prices as reported on NASDAQ for the Company's Common Warrants during the quarters indicated. The prices reported reflect inter-dealer quotations and may not represent actual transactions and do not include retail markups, markdowns or commissions.

COMMON WARRANTS

Quarter Ended	High		Low
December 31, 2001	$	0.23	$	0.07
September 30, 2001		0.13		0.06
June 30, 2001		0.20		0.05
March 31, 2001		0.09		0.09
December 31, 2000		0.06		0.06
September 30, 2000		0.31		0.31
June 30, 2000		0.19		0.13
March 31, 2000		0.38		0.38

At March 21, 2002, the Company had 2,054,129 common warrants outstanding. The warrants give the warrant holder the right to purchase .728 shares of the Company's Common Stock for a price of $5.50 through August 31, 2002.

On December 27, 2000, the Company sold 814,286 Units and 405,000 shares of Series A convertible preferred stock in a private placement exempt from registration under Regulation D of the Securities Act. Janney Montgomery Scott LLC, an investment banking firm, acted as placement agent. The proceeds of the private placement were $5,475,000 with the Company receiving $5,251,000 and Janney Montgomery Scott receiving $193,500 for their services as placement agent. The Company applied the proceeds toward working capital and general corporate purposes. At March 21, 2002, the Company had 305,000 shares of Series A convertible preferred stock outstanding.

The Units consisted of one share of the Company's common stock and one five-year Class A warrant. Each Class A warrant entitles the holder to purchase one share of the Company's common stock at $1.925 per share, subject to certain anti-dilution adjustments, through December 27, 2005. The common stock and the Class A warrants that comprised the Units were separately transferable immediately upon issuance. The holders of the Class A warrants have no right to vote on matters submitted to shareholders, have no right to receive dividends and are not deemed to be holders of common stock. There is no established trading market for the Class A warrants. The Company applied to list the Class A warrants on the Nasdaq SmallCap Market, and the application was approved. However, the warrants are not currently traded on any public exchange, and no assurance can be given that a trading market will develop. At March 21, 2002, the Company had 814,286 Class A warrants outstanding.

The Series A convertible preferred stock has an initial stated value of $10 and an initial conversion price of $1.75, subject to anti-dilution adjustments. The preferred stock ranks senior to the Company's common stock. The preferred stock accrues cumulative dividends on a quarterly basis at an annual rate of six percent (6%). The holders of the preferred stock are entitled to vote on all matters submitted to a vote of stockholders, and if the Company fails to pay any dividend for four or more dividend periods, then the holders of the preferred stock are entitled to elect two directors to the board of directors. The Company may redeem in whole or in part, at any time after December 29, 2002, the preferred stock in an amount equal to the stated value and all accrued and unpaid dividends. On July 11, 2001, 100,000 shares of preferred stock were converted into common stock by the holders. In 2001, the Company declared and paid $213,000 in preferred dividends.

In January 2001, the Company filed a registration statement to register 814,286 shares of common stock, 814,286 Class A warrants, 814,286 shares of common stock issuable upon the exercise of the Class A warrants and 2,314,283 shares of common stock issuable upon conversion of the Series A preferred stock. The Securities and Exchange Commission declared the registration statement effective in May 2001.

ITEM 6. SELECTED FINANCIAL DATA.

The following selected financial data are derived from the Company's consolidated financial statements. The data should be read in conjunction with the consolidated financial statements, related notes and other financial information included elsewhere in this report.

American Country Holdings Inc.
Selected Financial Data

			Year Ended December 31,
			2001			2000			1999			1998		1997
Income Statement Data:
Revenues:
	Gross premiums written		$	83,366		$	85,492		$	77,955		$	68,070	$	68,416

	Net premiums written		$	67,580		$	66,953		$	73,983		$	56,861	$	60,078

	Net premiums earned		$	67,496		$	72,262		$	69,677		$	56,135	$	59,814
	Net investment income			8,481			8,522			7,618			7,134		7,025
	Realized capital gains (losses)			311			(194	)		(342	)		1,479		1,613
	Other income			108			217			215			315		331

		Total revenues		76,396			80,807			77,168			65,063		68,783
Expenses:
	Losses and loss adjustment expenses			76,037			68,317			63,617			44,679		53,149
	Amortization of policy acquisition costs, underwriting, and other expenses			16,528			15,987			14,009			12,932		12,911

	Interest expense			538			823			584			491		161

		Total expenses		93,103			85,127			78,210			58,102		66,221

Income (loss) before income taxes				(16,707	)		(4,320	)		(1,042	)		6,961		2,562
Income tax expense (benefit)				(5,382	)		(1,970	)		(967	)		1,585		493

	Net Income (loss)		$	(11,325	)	$	(2,350	)	$	(75	)		5,376		2,069

Net income (loss) per share: basic			$	(1.26	)	$	(0.29	)	$	(0.01	)	$	0.67	$	0.24

Net income (loss) per share: diluted			$	(1.26	)	$	(0.29	)	$	(0.01	)	$	0.67	$	0.24

Cash dividends declared per share			$	0.00		$	0.00		$	0.00		$	0.00	$	0.00

	December 31,
	2001			2000			1999			1998			1997
Balance Sheet Data:
Total investments	$	130,598		$	130,102		$	129,385		$	126,028		$	121,098
Total assets		196,184			189,718			175,958			168,305			162,661
Liabilities for gross unpaid losses and loss adjustment expenses		133,904			114,694			104,493			92,417			99,087
Notes payable		10,250			10,750			11,150			9,300			4,800
Total liabilities		163,101			146,897			139,248			127,183			127,521
Total shareholders' equity		33,077			42,821			36,710			41,122			35,140
Book value per share	$	3.44		$	4.74		$	4.58		$	5.13		$	4.40
Statutory Combined Ratio		136.2	%		117.1	%		110.7	%		100.9	%		109.6	%
GAAP Combined Ratio		137.2	%		116.6	%		111.4	%		102.6	%		109.9	%

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis should be read in conjunction with the 2001 Consolidated Financial Statements and notes thereto.

Overview

American Country Holdings Inc. is engaged in the specialty property and casualty insurance, premium finance and collateralized loan financing, through its subsidiaries American Country Insurance Company, American Country Financial Services Corp. and American Country Professional Services Corp. It will engage in the managing general underwriter and third party claims administrator business through its subsidiaries American Country Professional Services Corp. and American Country Underwriting Agency Inc.

American Country is a property and casualty insurance carrier domiciled in the State of Illinois. American Country and its predecessor has been a writer of commercial and personal lines of business, specializing in public livery risks, principally taxicabs and limousines, since 1978.

In 2000, American Country continued to be adversely affected by the continuing pricing pressures in the contractor commercial insurance market. Due to this competition, American Country believes that its commercial lines products are currently under-priced, even with the current hardening of the market, and therefore American Country decided to non-renew its contractor commercial lines business effective April 1, 2001 and its non-Illinois hospitality business effective June 1, 2001 and refocus its underwriting efforts in the public livery lines.

The Calendar Year 2001 Compared to the Calendar Year 2000

The following table sets forth the net premiums earned by the principal lines or products of insurance underwritten by American Country for the periods indicated and the dollar amount and percentage of change therein from year to year:

Net Premiums Earned:

		Year Ended December 31,				Increase (Decrease) 2001 to 2000
		2001		2000		Amount		%
Transportation lines		$	55,882	$	49,978	5,904		11.8	%
Other Commercial lines			5,601		13,786	(8,185	)	(59.3	)
Hospitality lines			6,013		8,487	(2,474	)	(29.1	)
Personal lines			0		11	(11	)	(99.9	)
	Totals	$	67,496	$	72,262	(4,766	)	(6.5	)%

Transportation lines, which consists of taxi and limousine liability and physical damage programs and Workers Compensation, grew during 2001 as a result of increased writings in the Chicago taxi market as well as American Country's geographic expansion into additional states. Total premium revenues generated by transportation lines grew 11.8% to $55.9 million in 2001 as compared to $50.0 million in 2000. In 2001, revenues generated outside of Illinois increased from $18.8 million in 2000 to $21.4 million in 2001. This represents 38.3% of total transportation premium earned in 2001. This increase is attributable to the programs in Connecticut, Indiana, Michigan, Minnesota, New York and Wisconsin.

Premium revenues generated from American Country's other commercial lines decreased significantly in 2001 to $5.6 million from $13.8 million for 2000, a 59.3% decrease. This decrease is primarily

attributable to American Country's decision to exit the contractor commercial lines market effective April 1, 2001.

American Country's hospitality lines experienced a decrease in premium revenues of 29.1% to $6.0 million in 2001 as compared to $8.5 million in 2000. In 2000, the hospitality program accomplished its significant growth outside of Illinois by expanding into the states of Massachusetts, Michigan, Minnesota, New Jersey and Pennsylvania. In 2001, American Country chose to non-renew the non-Illinois hospitality program effective June 1, 2001, resulting in the current year decrease in premium revenue. The decrease is also the result of a quota share reinsurance agreement entered into on April 1, 2000. Under the treaty, American Country ceded 50% of the hospitality lines premium for the period of January 1 through June 1, 2001.

Net investment income increased $34,000 or less than 1% during 2001, primarily due to increased yields on bonds held during 2001, offset by low yields on the Company's convertible portfolio. Income earned on invested assets amounted to $8.5 million in both 2001 and 2000. Realized gains for 2001 increased $505,000, a 260.3% increase from 2000, as compared to realized losses of $194,000 in 2000. This is the result of increased market values for the Company's fixed income securities. Investment expenses for 2001 increased $181,000 or 26.8% as compared to 2000. This is due to changing investment advisors in early 2001.

Other income, which consists of interest and fees earned on premium financing activities decreased to $108,000 in 2001 as compared to $217,000 for 2000. This is due to reduced premium finance activity.

The following table sets forth American Country's Statutory Combined Ratio and GAAP Combined Ratio for the periods indicated:

		Statutory Combined Ratio Year Ended December 31,				GAAP Combined Ratio Year Ended December 31,
		2001		2000		2001		2000
Losses		91.9	%	75.5	%	91.9	%	75.5	%
Loss Adjustment Expenses (LAE)		20.7		19.0		20.8		19.0

Losses and LAE		112.6		94.5		112.7		94.5
Policy acquisition, other Underwriting expenses		23.6		22.6		24.5		22.1

	Total combined ratio	136.2	%	117.1	%	137.2	%	116.6	%

Loss and loss adjustment expenses for 2001 increased from 94.5% of premium revenues in 2000 to 112.6% for 2001. This increase is attributable to the substantial reserve increase taken in 2001, as described in Note 6.

Transportation lines loss ratio increased in 2001 to 84.3% as compared to 80.1% for 2000. This increase is attributable to higher claims activity in states other than Illinois.

Loss and loss adjustment expenses for commercial lines increased by $1.3 million in 2001. Earned premium for this line decrease by $8.2 million in 2001. These factors resulted in an increase in the loss ratio to 375.7% in 2001 from 142.9% in 2000. This is primarily due to adverse development in American Country's workers compensation and commercial package business, particularly for the contractors. This adverse development resulted in the reserve increase discussed in Note 6. American Country believes that the commercial lines products were under-priced, even with the current hardening of the market, and therefore American Country decided to non-renew its contractor commercial lines business effective April 1, 2001, and refocus its underwriting efforts in the public livery lines.

The ratio for losses and LAE for hospitality lines increased to 129.0% in 2001 from 98.9% in 2000. This is primarily due to increased losses in the non-Illinois book. This includes adverse development in prior years as well as higher losses for the current accident year.

Policy acquisition costs increased $1.6 million or 14.8% during 2001. The increase is attributable to an increase in net commission expense as the result of the expiration of the quota share reinsurance agreements.

Administrative and general expenses decreased 23.1% in 2001 as a result of lower corporate expenses incurred as a result of exiting the commercial lines and non-Illinois hospitality markets.

The Calendar Year 2000 Compared to the Calendar Year 1999

Net Premiums Earned:

		Year Ended December 31,				Increase (Decrease) 2000 to 1999
		2000		1999		Amount			%
Transportation lines		$	49,978	$	45,246	$	4,732		10.5	%
Other Commercial lines			13,786		17,221		(3,435	)	(19.9	)
Hospitality lines			8,487		7,116		1,371		19.3
Personal lines			11		94		(83	)	(88.3	)

	Totals	$	72,262	$	69,677	$	2,585		3.7	%

Transportation lines, which consists of taxi and limousine liability and physical damage programs, grew during 2000 as a result of American Country's geographic expansion into additional states. Total premium revenues generated by transportation lines grew 10.5% to $50.0 million in 2000 as compared to $45.2 million in 1999. In 2000, revenues generated outside of Illinois increased from $11.7 million or 25.8% in 1999 to $18.8 million or 37.6% in 2000. This increase is attributable to the programs in Connecticut, Indiana, Michigan, Minnesota, New York and Wisconsin.

Premium revenues generated from American Country's other commercial lines decreased significantly in 2000 to $13.8 million from $17.2 million for 1999, a 19.9% decrease. This decrease is attributable to American Country's re-underwriting program and is also attributable to a quota share reinsurance agreement entered into on April 1, 2000. Under the treaty, American Country ceded 30% of the commercial lines premium for the 2^nd quarter, and 50% of the commercial lines premium for the 3^rd and 4^th quarters.

American Country's hospitality lines experienced the largest percentage growth in premium revenues over other lines, increasing over 19% to $8.5 million in 2000 as compared to $7.1 million in 1999. The hospitality program accomplished its significant growth outside of Illinois by expanding into the states of Massachusetts, Michigan, Minnesota, New Jersey and Pennsylvania. The increase was offset by a quota share reinsurance agreement entered into on April 1, 2000. Under the treaty, American Country ceded 30% of the hospitality lines premium for the 2^nd quarter, and 50% of the hospitality lines premium for the 3^rd and 4^th quarters.

Net investment income increased $904,000 or 11.9% during 2000, primarily due to increased yields on bonds held during 2000. Income earned on invested assets amounted to $8.5 million during 2000 as compared to $7.6 million for 1999, again the result of increased yield on the bond portfolio. Realized losses

for 2000 decreased $148,000, a 43.3% decrease from 1999. This is the result of management's focus on investment income rather than total return. Investment expenses for 2000 increased $7,000 or 1.1% as compared to 1999.

Other income, which consists of interest and fees earned on premium financing activities remained flat at $217,000 in 2000 as compared to $215,000 for 1999.

The following table sets forth American Country's Statutory Combined Ratio and GAAP Combined Ratio for the periods indicated:

		Statutory Combined Ratio Year Ended December 31,				GAAP Combined Ratio Year Ended December 31,
		2000		1999		2000		1999
Losses		75.5	%	74.1	%	75.5	%	74.1	%
Loss Adjustment Expenses (LAE)		19.0		17.2		19.0		17.2

Losses and LAE		94.5		91.3		94.5		91.3
Policy acquisition, other Underwriting expenses		22.6		19.4		22.1		20.1

	Total combined ratio	117.1	%	110.7	%	116.6	%	111.4	%

Loss and loss adjustment expenses for 2000 increased from 91.3% of premium revenues in 1999 to 94.5% for 2000. This increase is attributable to higher claims activity in all lines.

Transportation lines loss ratio declined in 2000 to 80.1% as compared to 80.3% for 1999. This decrease is attributable to lower claims activity in the State of Illinois.

The loss ratio for commercial lines increased substantially in 2000 to 142.9% from 115.0% in 1999. This is primarily due to adverse development in American Country's Workers Compensation and commercial package business. Additionally, the quota share reinsurance agreement is a loss only treaty. Therefore American Country incurs all of the loss adjustment expense, which results in an increase in the loss ratio. American Country believes that the commercial lines products are currently under-priced, even with the current hardening of the market, and therefore American Country has decided to non-renew its contractor commercial lines business and refocus its underwriting efforts in the public livery lines.

The ratio for losses and LAE for hospitality lines increased to 98.9% in 2000 from 92.7% in 1999. This is primarily due to three substantial fire losses during the year. Additionally, the quota share reinsurance agreement is a loss only treaty. Therefore, American Country incurs all of the loss adjustment expense, which results in an increase in the loss ratio.

Policy acquisition costs increased $550,000 or 5.3% during 2000. The increase is attributable to additional acquisition expenses being incurred in connection with American Country's geographical expansion into new states and increased costs, primarily commissions paid to producers. Due to premium deficiencies in the commercial lines, certain expenses were not capitalized, but rather immediately expensed.

Administrative and general expenses increased 45.8% in 2000 as a result of higher corporate expenses incurred. The increase is also due to a reduction in the amount of expenses capitalized as deferred acquisition costs. Expenses that are not capitalized are included in administrative and general expenses. Interest expense for 2000 increased by $239,000 to $823,000, due to a lump sum interest payment due on the revolving credit agreement, and also due to increased interest rates.

Asset Portfolio Review

At December 31, 2001, the Company's total assets of $196.2 million was comprised of the following: cash and investments, 70.0%; reinsurance recoverables, 12.1%, premiums receivable, 7.6%; deferred expenses (policy acquisition costs and deferred taxes) 6.5%; fixed assets, 0.5%; and other assets, 1.7%.

The Company generally invests in securities with fixed maturities with the objective of providing reasonable returns while limiting liquidity and credit risk. In February 2001, the Company began investing in convertible securities. Embedded derivatives are classified as fixed maturities or equity securities in the Consolidated Balance Sheets, consistent with the host instruments. The Company's investment portfolio consists primarily of fixed income debt securities of which the vast majority are rated as investment grade. The fixed maturity investment portfolio has a carrying value of $126.9 million and constitutes 97% of the Company's total investments.

At December 31, 2001 and 2000, the Company's fixed asset maturity securities included mortgage-backed bonds of $52.1 million and $46.1 million, respectively, which are subject to risks associated with variable prepayments of the underlying mortgage loans. Prepayments can cause those securities to have different actual maturities than that expected at the time of purchase. Securities that have an amortized cost greater than par that are backed by mortgages that prepay faster than expected will incur a reduction in yield or loss, while securities that have an amortized cost less than par that are backed by mortgages that prepay faster than expected will generate an increase in gain or yield. The degree to which a security is susceptible to either gains or losses is influenced by the difference between its amortized cost and par, the relative sensitivity of the underlying mortgages backing the assets to prepayments in a changing interest rate environment and the repayment priority of the securities in the overall securitization structure.

Realized gains (losses) on investments are as follows:

		Year Ended December 31,
		2001			2001			1999
		(in thousands)
Fixed maturities:
	Gross gains	$	3,211		$	1,524		$	760
	Gross losses		(2,900	)		(1,718	)		(1,102	)
	Equity securities:
	Gross gains		93			—			—
	Gross losses		(93	)		—			—

Net realized gains (losses) on investments		$	311		$	(194	)	$	(342	)

The amortized cost and fair value of fixed maturities by contractual maturity at December 31, 2001, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized Cost		Fair Value
	(in thousands)
Due in one year or less	$	1,894	$	1,851
Due after one year through five years		34,283		35,554
Due after five years through ten years		24,540		25,589
Due after ten years		10,367		10,862
Mortgage-backed-securities		52,123		53,005

Total	$	123,207	$	126,861

At December 31, 2001, the following table provides a profile of the Company's fixed maturity investment portfolio by rating:

S&P/Moody's Rating		Amount Market Value		Percent of Portfolio
AAA/Aaa (including US Treasuries of $3,945)		$	60,397	47.6	%
AA/Aa			15,256	12.0	%
A/A			32,939	26.0	%
BBB/Ba			13,838	10.9	%
All other (non-investment grade)			4,431	3.5	%

	Total	$	126,861	100.0	%

The Company utilizes derivative financial instruments for the purpose of enhancing the overall return of its investment portfolio. The only derivatives owned by the Company are convertible securities. The Company does not utilize derivative financial instruments for the purpose of hedging or reducing the cost of its debt obligations. The Company employs traditional investment management tools and techniques to address the yield and valuation exposures of its invested assets. The long term fixed maturity investment portfolio is managed so as to limit various risks inherent in the bond market. Credit risk is addressed through adequate diversification and the purchase of investment grade securities. Reinvestment rate risk is controlled by concentrating on non-callable issues, and through asset-liability matching practices. Purchases of mortgage and asset backed securities, which have variable principal prepayment options, are monitored. Market value risk is limited through the purchase of bonds of intermediate maturity. The combination of these investment management tenets generally provides a more stable long term fixed maturity investment portfolio that is not subject to extreme interest rate sensitivity and principal deterioration. The market value of the Company's long term fixed maturity investment portfolio is sensitive, however, to fluctuations in the level of interest rates, but not materially affected by changes in anticipated cash flows caused by any prepayments. The impact of interest rates movements on the long term fixed maturity investment portfolio generally affects net realized gains or losses when securities are sold. With a market value of approximately $119.8 million, the non-convertible long term fixed maturity investment portfolio has an average maturity of 5.0 years and an indicated duration of 3.31 years. This implies that a 100 basis point parallel increase in interest rates from current levels would result in a possible decline in the market value of the long term fixed maturity investment portfolio of approximately 2.5%, or $3.0 million. With a market value of approximately $13.8 million, the convertible investment portfolio has an average maturity of 5.89 years and an indicated duration of 1.95 years. This implies that a 100 basis point parallel increase in interest rates from current levels would result in a possible decline in the market value of the convertible investment portfolio of approximately 1.95%, or $270,000, for a total possible decline in the total portfolio of $3.27 million. These possible declines in values for bond portfolios would affect negatively the common stockholders' equity at any point in time, but would not necessarily result in the recognition of realized investment losses as long as operating cash flow and the ongoing emergence of bond maturities continued to provide sufficient funds to meet obligations to policyholders and claimants, as well as debt service and cash dividend requirements at the holding company level.

Liquidity and Capital Resources

As a holding company, the Company receives cash principally through fees and dividends from subsidiaries and borrowings, certain of which are subject to restrictions and regulatory approval. The ability of insurance companies to underwrite insurance is based on maintaining liquidity and capital resources sufficient to pay claims and expenses as they become due. The primary sources of liquidity for American Country are funds generated from insurance premiums, investment income, and proceeds from the sales and maturities of portfolio investments. The principal expenditures are for payment of losses and

LAE, operating expenses, commissions and dividends to stockholders. The Company believes its sources of liquidity are sufficient to meet its cash requirements.

The Company maintains a liquid operating position and follows investment guidelines that are intended to provide acceptable return on investment while preserving capital, maintaining sufficient liquidity to meet obligations and maintaining a sufficient margin of capital and surplus to ensure American Country's unimpaired ability to write insurance.

Cash flow used by operations for the year ended December 31, 2001 was $11.2 million. Operating activities did not provide sufficient cash to fund short term obligations, so the Company relied on cash provided by investing activities. The decrease in operating cash flow is attributable to the decrease in collected premiums, which was caused by both a decrease in written premium and an increase in premiums receivable. The Company believes that as claim payments run off on non-renewed lines of business and the receivables are collected, there will be adequate operating cash flow to fund future obligations.

Debt

On October 5, 1999, the Board of Directors entered into a loan agreement with Northern Trust wherein the Company's existing $15.0 million line of credit was converted to an $8.0 million four-year term loan and a $7.0 million 364 day revolving credit facility.

At September 30, 2001, the Company was in violation of the minimum shareholders' equity covenant requirement. On November 7, 2001, the bank waived this covenant for the period of September 1, 2001 through January 1, 2002. On March 5, 2002, an amended agreement was signed which rescheduled the principal payment, reduced the minimum shareholders' equity requirement, and waived any prior breach. Under the amended agreement, the principal payments are scheduled as follows:

$2 million due on 5/31/02
$2 million due on 4/30/03
$2 million due on 4/30/04
$2 million due on 4/30/05

The amended agreement contains a Pledge Agreement under which the Company pledged as collateral for the outstanding debt, 100% of the outstanding stock of both American Country and Financial Services.

On November 7, 2001, the outstanding balance on the revolver was $2.25 million. On March 5, 2002, the amendment reduced the amount available under the agreement to $2.0 million through May 30, 2002, and to $1.0 million thereafter. The Company made a payment of $250,000 on March 20, 2002 to reduce the balance to $2.0 million. Under the terms of the amended agreement, the revolving line of credit matures on November 30, 2002.

The amended agreement contains various debt covenants including conditions for prepayment and certain financial covenants, the most restrictive covenants being minimum shareholders' equity and the ratio of debt to equity. The Company was in compliance with all covenants of the agreement, as amended, as of March 5, 2002.

The Company intends to fund the $1.0 million payment on the revolver due May 30, 2002 and the $2.0 million payment on the term loan due on May 31, 2002 via a loan from the insurance company. The Illinois Insurance Code allows for a loan of the lessor of 3% of admitted assets or 25% of policyholders surplus of the prior year without prior approval by the Illinois Insurance Department. Statutory Admitted Assets at December 31, 2001 were $157,296,658 and Policyholders Surplus was $25,557,272. Therefore, the Company may borrow up to $4.7 million from the insurance company without prior approval from the Illinois Insurance Department.

In the event of a change in control, which is defined in part as the ceasing of Wilmer J. Thomas, Jr. and Martin L. Solomon to own collectively, at least 51% of the outstanding voting shares of the Company, the full amount of the debt becomes immediately due and payable. If the Tender Offer by KFS Acquisition Corp. ("KFS") (see Note 15) is successful, the change in control provision in the amended agreement would be triggered. KFS has indicated that it has sufficient cash on hand to repay the debt in full.

Income Taxes

The Company files a consolidated return with its subsidiaries, and accordingly the Company has executed a tax sharing agreement, which requires the subsidiaries to pay the Company amounts equal to the federal income tax that would be payable if the subsidiaries filed on a stand-alone basis.

At 12/31/01, the Company had a deferred tax asset of $10.l million, $5.5 million of which is related to a net operating loss carryforward. Realization of the deferred tax asset is dependent on generation of sufficient future taxable income to absorb both the applicable reversing temporary differences and the net operating loss carryforward. The Company expects to generate sufficient taxable income to realize its loss and credit carryforwards within the statutory carryforward period. The amount of taxable income needed to realize the net loss carryforward is $16.3 million. The statutory carryforward period is 20 years. Based on future income projections, management believes that it is more likely than not that the current temporary differences will reverse during the periods in which the Company generates net taxable income. These projections are based on the elimination of both the contractor and non-Illinois restaurant books, and the substantial reserve increase taken in 2001. The combination of these events should result in sufficient income to utilize the loss carryforwards. There are, however, no assurances that the Company will generate any earnings or any specific level of continuing earnings in future years. Certain tax planning strategies, such as the realization of gains in the investment portfolio, could be implemented to supplement income from operations to fully utilize recorded tax benefits.

Regulation

In their ongoing effort to improve solvency regulation, the NAIC and individual states have enacted certain laws and financial statement changes. The NAIC has adopted Risk-Based Capital ("RBC") requirements for property and casualty insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, mortality and morbidity, asset and liability matching, benefit and loss reserve adequacy, and other business factors. The RBC formula is used by state insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized. In addition, the formula defines new minimum capital standards that supplement the current system of low fixed minimum capital and surplus requirements on a state-by-state basis. Regulatory compliance is determined by a ratio of the company's regulatory total adjusted capital, as defined by the NAIC, to its authorized control level RBC, as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, each of which requires specific corrective action. The levels and ratios are as follows:

Regulatory Event		Ratio of Total Adjusted Capital to Authorized Control Level RBC (Less Than or Equal to)
Company action level		2*
Regulatory action level		1.5
Authorized control level		1
Mandatory control level		0.7

*: Or, 2.5 with negative trend.

The ratios of total adjusted capital to authorized control level RBC for American Country were in excess of their required amounts at both December 31, 2001 and 2000.

The NAIC recently completed its process of re-codifying statutory accounting practices ("codification"), the result of which is the only source of "prescribed" statutory accounting practices after adoption by the state of domicile. Codification was adopted by the State of Illinois and implemented in 2001, which changed, to some extent, prescribed, statutory accounting practices, and resulted in changes in the Company's insurance subsidiary's statutory surplus.

The purpose of these regulatory efforts at all levels is to improve the monitoring of insurer solvency. These regulatory initiatives, and the overall focus on solvency, may intensify the restructuring and consolidation of the insurance industry. While the impact of these regulatory efforts on the Company's operations cannot be quantified until enacted, the Company believes it will be adequately capitalized to compete in an environment of more stringent regulation.

Impact of Inflation

Property and casualty insurance premiums are established before the amount of losses and LAE, or the extent to which inflation may affect such expenses, are known. Consequently, American Country attempts, in establishing its premiums, to anticipate the potential impact of inflation. However, for competitive and regulatory reasons, American Country may be limited in raising its premiums commensurate with anticipated inflation, in which event American Country, rather than its insureds, would absorb inflation costs. Inflation also affects the rate of investment return on American Country's investment portfolio with a corresponding effect on American Country's investment income.

Effect of Terrorist Acts on our Business

The terrorist acts of September 11, 2001, the military response, the actual and perceived threat of further terrorist acts and future possible military and political actions have created an atmosphere of economic uncertainty in the United States and our results may be impacted by the adverse macroeconomic effect of those events, especially if the conditions persist. As a result of the attacks on September 11, we did not suffer the loss of any employees or assets. However, because both the transportation and hospitality lines are heavily dependent upon travel and tourism, our customers have faced slowdowns in their businesses, which may have a material effect on our business. The reinsurance market has also become more restrictive, and the future availability of reinsurance can not be assured. An inability to obtain reinsurance would have a material adverse effect on our ability to market insurance to our customers. While we have taken all prudent precautions against foreseeable threats, recent events have proven that the object of terrorist activities is inherently uncertain. Any terrorist occurrence may have a material adverse effect on our financial position, cash flow or profit from operations in any reporting period.

Forward Looking Statements

The Company cautions readers regarding certain forward-looking statements contained in the foregoing sections and elsewhere and in any other statements made by, or on behalf of, the Company, whether or not in future filings with the Securities and Exchange Commission. Forward-looking statements are statements not based on historical facts. In particular, statements using verbs such as "expect," "intend," "plan," "anticipate," "believe" or similar words generally involve forward-looking statements. Forward-looking statements include but may not be limited to, statements relating to future plans, targets and objectives, financial results, cyclical industry conditions, government and regulatory policies, the uncertainties of the reserving process and the competitive environment in which the Company operates.

Forward-looking statements are based upon estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond the Company's control and subject to change. These uncertainties can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable events or developments, some of which may be national in scope, such as general economic conditions and interest rates. Some of these events or developments may be related to the insurance industry generally, such as pricing competition, regulatory developments and industry consolidation. Others may relate to the Company specifically, such as credit, volatility and other risks associated with the Company's investment portfolio, and other factors. Investors are also directed to consider other risks and uncertainties discussed in documents filed by the Company with the SEC, including Exhibit 99 to the Annual Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 2001. The Company disclaims any obligation to update forward-looking information.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

See Index to Financial Statements on Page F-1.

SUPPLEMENTAL DATA

Unaudited Quarterly Results of American Country Holdings Inc. and Subsidiaries

The following is a summary of unaudited quarterly results of operations for 2001 and 2000 (in thousands, except per share data):

	2001										2000
	March 31		June 30			Sept. 30			Dec. 31		March 31		June 30		Sept. 30			Dec. 31
Net premiums earned	$	16,591	$	17,492		$	16,957		$	16,456	$	17,743	$	20,307	$	19,778		$	14,434
Total net investment income		2,347		2,291			1,861		$	1,982		2,038		2,061		2,141			2,282
Income before income tax		127		(1,214	)		(16,762	)	$	1,142		494		493		(1,256	)		(4,050	)
Net income (loss)		104		(974	)		(12,695	)		2,240		399		410		(880	)		(2,278	)
Per share data: Basic earnings per common share		.01		.(11	)		(1.33	)	$	.23		.05		.05		.(11	)		.(28	)
Diluted earnings per common share		.01		.(11	)		(1.33	)	$	.20		.05		.05		.(11	)		.(27	)

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

The Company had no changes in nor disagreements with accountants on accounting and financial disclosure for the periods presented.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The following table lists each director and each executive officer of the Company, together with their respective age and office(s) held:

Name	Age	Office
William J. Barrett	62	Director
John A. Dore	51	Chairman of the Board, President, CEO and Director
Edwin W. Elder III	59	Director
Ronald Jay Gold	60	Secretary
Richard H. Konrad	49	Director
Martin L. Solomon	65	Director
Wilmer J. Thomas, Jr.	75	Director
Karla M. Violetto	34	Vice President and Chief Financial Officer

William J. Barrett served as a director of the Company, and its predecessors since January 1997. Mr. Barrett has been employed as a Senior Vice President of Janney Montgomery Scott Inc., an investment banking firm, for more than five years. Mr. Barrett is a director of the following publicly held corporations: Supreme Industries, Inc., a specialized truck body manufacturer; TGC Industries, Inc., a provider of geophysical services to the oil and gas industries; and serves as the Chairman of the Board of Rumson-Fairhaven Bank and Trust Company, a New Jersey community bank. Mr. Barrett served as the Secretary of the Company from August 1992 until March 9, 1999.

John A. Dore was appointed Co-Chairman and Chief Executive Officer of the Company in August 2000. In February 2001, Mr. Dore was appointed to the additional positions of Chairman and President. From 1990-1998, Mr. Dore was President and Chief Executive Officer of Financial Institutions Insurance Group Ltd. and its successor company, Dearborn Risk Management Inc. From 1998-1999, Mr. Dore was Executive Vice President and Director of Gryphon Holding, Inc. Mr. Dore is a director of Dearborn Risk Management Inc. and Realm National Insurance Company. Mr. Dore has a B.A. from Yale University and an MBA from Northwestern University's Kellogg Graduate School of Management.

Edwin W. Elder served as President and a director of American Country from 1993 until February of 2001. Mr. Elder has served as a director of the Company since July 1997. From 1985 to 1993, Mr. Elder served as Senior Vice President of Operations for Employer's Health Insurance Company and IDS Property Casualty. Mr. Elder has 30 years of experience in the insurance industry and started his career with State Farm Insurance Company after leaving the United States Army, where he attained the rank of Captain. He is a CPCU and an FLMI.

Ronald J. Gold became Secretary of the Company on March 9, 1999. Mr. Gold has been an attorney for Jesmer & Harris, the in-house law firm of American Country since 1968. Since 1993, he has served as the Secretary of American Country and the senior attorney in American Country's legal department.

Richard H. Konrad is a private investor and management consultant. He has served as a director of the Company since February 15, 2001. From 1989 to 2000, Mr. Konrad was a director and Vice President of Lincluden Management Limited, a Canadian investment counseling firm, and affiliate of United Asset Management. From 1983 to 1989, Mr. Konrad was a portfolio manager, vice-president and director of Sceptre Investment Counsel, a Canadian investment management firm. He is a Chartered Financial Analyst and has served as a member of shareholder advisory councils to a number of publicly traded corporations.

Martin L. Solomon served as a director of the Company and its predecessors since 1985, and as the Chairman and Chief Executive Officer from July 1997 until August 2000, when he became Co-Chairman. He served as Co-Chairman until February 2001. He has been a private investor since 1990. From 1988 to 1990 he was a Managing Director and general partner of Value Equity Associates, I, L.P., an investment partnership. From 1985 to 1987, Mr. Solomon was an investment analyst and portfolio manager with Steinhardt Partners, an investment partnership. From 1985 to 1996, Mr. Solomon was a Director and Vice-Chairman of the Board of Great Dane Holdings, Inc., a company engaged in the manufacture of transportation equipment, automobile stamping, the leasing of taxis and insurance. From 1990 to 2001, Mr. Solomon was a Director of XTRA Corp., a lessor of truck trailers, marine containers, and intermodal equipment. In May 1996 he was appointed a Director of Hexel Corp. and, since June 1997, Mr. Solomon has been a Director of Telephone and Data Systems, Inc., a diversified telecommunications service company with established wireless and wireline operations. From March 1999 until March 2002, Mr. Solomon was a director of MFN Financial Corporation, a consumer finance company. Mr. Solomon is also a director of various privately held corporation and civic organizations.

Wilmer J. Thomas, Jr. is a private investor and financial consultant. He has served as a director of the Company since July 1997. From 1989 to 1996, Mr. Thomas was a director and Vice President of Great Dane Holdings Inc. (former parent of American Country), formerly in the business of manufacturing truck trailers and automobile stampings, leasing taxis, and through American Country, property and casualty insurance. Mr. Thomas is a director of Moore Medical Corp., a publicly held pharmaceutical and surgical supply company.

Karla M. Violetto was appointed Vice President and Chief Financial Officer of American Country in March, 2000. Ms. Violetto has 14 years of experience in the insurance industry. Prior to joining American Country as Manager, Corporate Reporting and Financing in July of 1999, Ms. Violetto was a senior associate at PricewaterhouseCoopers, LLP. Ms. Violetto received her bachelor's degree in accountancy from De Paul University in 1989 and is a certified public accountant.

All directors hold office until the next annual meeting of stockholders and until their successors are elected and qualified. Officers are elected annually and serve at the pleasure of the Board of Directors, subject to rights, if any, under contracts of employment.

ITEM 11. EXECUTIVE COMPENSATION.

Set forth in the table below is information regarding the annual and long-term compensation for the fiscal years ended December 31, 2001, 2000 and 1999, for the Chief Executive Officer, executive officers of American Country and certain executive officers of American Country Insurance Company (collectively, the "Named Officers").

SUMMARY COMPENSATION TABLE

		Annual Compensation					Long-Term Compensation
Name and Principal Position	Fiscal Year	Salary		Bonus		Other Annual Compensation	Stock Options (# of Shares)	All Other Compensation(1)
John A. Dore, Chairman of the Board, President and Chief Executive Officer(2)	2001 2000	$	250,000 91,146	$ $	0 0	—	0 500,000	17,994 7,410
Karla M. Violetto, Vice President and Chief Financial Officer(3)	2001 2000		114,200 104,650	$ $	0 25,000	—	30,000 15,000	12,314 7,216
Daniel R. DeLeo, Executive Vice President of American Country(4)	2001 2000 1999		149,000 149,000 143,200		0 25,000 0	— — —	21,325 60,000 2,500	16,935 10,342 6,086
Ronald J. Gold, Corporate Secretary	2001 2000 1999	$	157,232 149,742 128,153	$	2,000 2,500 5,500	— — —	5,000 9,000 625	2,772 1,806 2,478

(1): The compensation reported represents expense reimbursement, car allowance and travel allowance.
(2): Mr. Dore is employed as Chairman, President and Chief Executive of American Country through August 17, 2003 pursuant to an Employment Agreement dated August 17, 2000. Mr. Dore's Employment Agreement automatically renews for one additional year on the anniversary date beginning in 2002, unless either American Country or Mr. Dore has given written notice of non-renewal at least thirty (90) days prior to that anniversary date. He receives an annual base salary of $250,000, and he is eligible to participate in incentive plans as the Company may have in effect from time to time. He will receive severance benefits of twice his compensation if his employment is terminated under certain circumstances after a change in control and lesser benefits if his employment is terminated under other circumstances. Mr. Dore joined American Country in August, 2000. Compensation information, therefore, is included for Ms. Dore only for 2001 and 2000.
(3): Ms. Violetto is employed as Vice President and Chief Financial Officer of American Country through September 1, 2003 pursuant to an Employment Agreement dated September 1, 2000. Ms. Violetto's Employment Agreement automatically renews for one additional year on the anniversary date beginning in 2002, unless either American Country or Ms. Violetto has given written notice of non-renewal at least thirty (30) days prior to that anniversary date. She receives an annual base salary of $114,400, and she is eligible to participate in American Country's Senior Officer Bonus Plan. She will receive severance benefits of twice her compensation if her employment is terminated under certain circumstances after a change in control and lesser benefits if her employment is terminated under other circumstances. Ms. Violetto was appointed Vice President and Chief Financial Officer in March, 2000. She joined American Country in July, 1999. Compensation information, therefore, is included for Ms. Violetto only for 2001 and 2000.

(4): Mr. DeLeo is employed as an Executive Vice President of American Country through April 1, 2003 pursuant to an Employment Agreement dated April 1, 2000. Mr. DeLeo's Employment Agreement automatically renews for one additional year on the anniversary date beginning in 2002, unless either American Country or Mr. DeLeo has given written notice of non-renewal at least thirty (30) days prior to that anniversary date. He receives an annual base salary of $149,000, and he is eligible to participate in American Country's Senior Officer Bonus Plan. He will receive severance benefits of twice his compensation if his employment is terminated under certain circumstances after a change in control and lesser benefits if his employment is terminated under other circumstances.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth, as of December 31, 2001, the ownership of Common Stock, Common Warrants, Class A Warrants and Preferred Stock by each director of American Country, by each of the Named Officers (as defined above under "Executive Compensation"), by all current executive officers and directors of American Country as a group, and by all persons known to American Country to be beneficial owners of more than five percent of the Common Stock, the Common Warrants, the Class A Warrants or the Preferred Stock. The Common Stock and the Preferred Stock are our only outstanding classes of voting securities. The information set forth in the table as to directors and officers is based upon information provided to us by such persons in connection with the preparation of this proxy statement. Except where otherwise indicated, the mailing address of each of the stockholders named in the table is c/o American Country Holdings Inc., 222 North LaSalle Street, Suite 1600, Chicago, Illinois 60601.

	Common Stock(1)			Common Warrants(1)(2)
Name and Position of Beneficial Owner	Ownership(3)		Percent of Class(3)	Ownership	Percent of Class(3)

Martin L. Solomon, Director	2,847,856	(4)	29.58	—	—
Wilmer J. Thomas, Jr., Director	2,774,086	(5)	28.82	—	—
John A. Dore, Chairman of the Board, President and Chief Executive Officer	1,021,096	(6)	10.60	—	—
William J. Barrett, Director	338,192	(7)	3.51	—	—
Edwin W. Elder, Director	43,853	(8)	*	—	—
Richard H. Konrad	160,000	(9)	*
Ronald J. Gold, Secretary	18,904	(10)	*
Karla M. Violetto, Vice President and Chief Financial Officer	53,271	(11)	*	—	—
Kingsway Financial Services Inc. 5310 Explorer Drive Mississauga, Ontario L4W 5H8 Canada	555,471		5.57
Philo Smith & Co., Inc. Financial Centre 695 East Main Street Stamford, CT 06901	1,101,600		11.44	—	—
All directors and executive officers as a group (8 persons)	7,257,258		75.41	—	—

and

	Class A Warrants(1)(12)		Preferred Stock(1)(11)
Name and Position of Beneficial Owner	Ownership	Percent of Class	Ownership	Percent of Class
Martin L. Solomon, Director	—	—	100,000	32.78
Wilmer J. Thomas, Jr., Director	—	—	100,000	32.78
John A. Dore, Chairman of the Board, President and Chief Executive Officer	142,857	17.54	—	—
William J. Barrett, Director	57,143	7.02	—	—
Karla M. Violetto, Vice President and Chief Financial Officer	—	—	—	—
PSCO Partners Limited Partnership	300,000	36.84	—	—
PSCO Partners Limited Partnership Two	200,000	24.56	—	—
Thomas M. Dore and Catherine L. Dore	57,143	7.02	—	—
Research Underwriters	57,143	7.02	—	—
Kingsway Financial Services Inc.	—	—	100,000	32.78
All directors and executive officers as a group (8 persons)	200,000	24.56	200,000	65.57

(1): The table reflects the number of Common Shares, Preferred Stock, Common Warrants and Class A Warrants outstanding at December 31, 2001.
(2): Common Warrants are not entitled to vote. Each Common Warrant entitles the holder to purchase 2.19 shares of Common Stock for $1.83 per share through August 31, 2002. On December 31, 2001, there were 2,054,129 common warrants outstanding.
(3): Each holder has sole voting and investment power with respect to the shares listed unless otherwise indicated.
(4): Includes options to purchase 135,000 shares of Common Stock.
(5): Includes options to purchase 72,500 shares of Common Stock.
(6): Includes (i) options to purchase 500,000 shares of Common Stock, (ii) 7,000 shares owned by Mr. Dore's qualified retirement plan and (iii) 7,365 shares beneficially owned of record by Mr. Dore's children, with respect to which Mr. Dore disclaims beneficial ownership.
(7): Includes (i) options to purchase 72,500 shares of Common Stock, (ii) 101,284 shares owned by Mr. Barrett's qualified retirement plan and (iii) 30,053 shares beneficially owned of record by Mr. Barrett's spouse, with respect to which Mr. Barrett disclaims beneficial ownership.
(8): Includes options to purchase 10,000 shares of Common Stock.
(9): Includes options to purchase 10,000 shares of Common Stock.
(10): Includes options to purchase 17,053 shares of Common Stock.
(11): Includes options to purchase 45,000 shares of Common Stock.
(12): Class A Warrants are not entitled to vote. Each Class A Warrant entitles the holder to purchase one share of Common Stock for $1.925 per share through December 29, 2005.

(13): Each share of Series A convertible preferred stock has an initial stated value of $10 and an initial conversion price of $1.75 per share. On December 31, 2001, there were 305,000 shares of preferred stock outstanding.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Janney Montgomery Scott LLC, an investment banking firm, was engaged by the Company to provide a valuation of the Company in connection with a contemplated sale of the Company. Janney Montgomery Scott received $50,000 for providing the valuation. Janney Montgomery Scott was also engaged to provide a Fairness Opinion with respect to the Tender Offer by KFS (see Note 15 to the Consolidated Financial Statements). Janney Montgomery Scott received $150,000 for providing the Fairness Opinion.

Janney Montgomery Scott also provided consulting services to the Company and assisted in the valuation of the stock options granted in 2001. Janney Montgomery Scott received $5,000 for providing the stock option valuation.

William J. Barrett, who serves on the board of directors of the Company, is a Senior Vice President of Janney Montgomery Scott.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K.

List of documents filed as part of this report.

(a)(1)		Financial Statements and Schedules. See List of Financial Statements and Financial Statement Schedules on page F-1.
(a)(2)		The following consolidated financial statement schedules of the Company listed below are contained in the index to Financial Statement Schedules on page F-1 herein: Schedule II Condensed Financial Information of Registrant Schedule IV Reinsurance Schedule V Valuation and Qualifying Accounts Schedule VI Supplemental Information concerning Property/Casualty Insurance Operations
(b)		Reports on Form 8-K.
(c)		Exhibits. See Exhibit Index immediately following financial statement schedules.
(d)		Financial statements, fifty percent or less owned persons. Not applicable.

ANNUAL REPORT ON FORM 10-K

ITEM 14(a)(1) AND (2), (c), AND (d)

LIST OF FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FINANCIAL STATEMENT SCHEDULES
Year Ended December 31, 2001

AMERICAN COUNTRY HOLDINGS INC.
Chicago, Illinois

Item 14.

Report of Independent Accountants on Financial Statement Schedules		F-2
Schedule II	Condensed Balance Sheet	F-3
	Condensed Statement of Income	F-4
	Condensed Statement of Cash Flows	F-5
	Condensed Statement of Stockholders' Equity	F-6
Schedule IV	Reinsurance	F-10
Schedule V	Valuation and Qualifying Accounts	F-11
Schedule VI	Supplemental Information Concerning Property/Casualty Insurance Operations	F-12
Reports of Independent Accountants		F-13
Consolidated Balance Sheets		F-14
Consolidated Statements of Income		F-15
Consolidated Statements of Stockholders' Equity		F-16
Consolidated Statements of Cash Flows		F-17
Notes to Consolidated Financial Statements		F-18

F-1

REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES

Board of Directors
American Country Holdings Inc.

Our audits of the consolidated financial statements referred to in our report dated March 27, 2002 appearing under Item 14(a)(1) of this Form 10-K also included audits of the financial statement schedules listed in Item 14(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP

Chicago, Illinois
March 27, 2002

F-2

SCHEDULE II

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

AMERICAN COUNTRY HOLDINGS INC.

CONDENSED BALANCE SHEET

(Parent Company Only)

(In Thousands, except per share data)

			December 31,
			2001			2000
ASSETS
Cash and cash equivalents			$	392		$	5,179
Investments in subsidiaries:
	American Country Insurance Company			40,976			49,791
	American Country Financial Services Corp.			886			1,369
	American Country Professional Services Corp.			27			23
Deferred Income Taxes				27			505
Income taxes recoverable				1,733			2,019
Due from subsidiaries				0			411
Prepaid Expenses				205			166

		Total assets	$	44,246		$	59,463

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued expenses			$	163		$	104
Income taxes payable							—
Notes payable to subsidiary				752			5,788
Deferred income taxes							—
Note payable and line of credit				10,250			10,750

		Total liabilities		11,165			16,642
Stockholders' equity:
Common stock—$.01 par value. Authorized 60,000,000 shares Issued and outstanding: 2001—9,624,795; 2000—9,041,237				96			90
Preferred stock Authorized—2,000,000 shares Issued and outstanding shares: 2001—305,000; 2000—405,000				31			41
Additional paid in capital				42,840			42,828
Accumulated other comprehensive income				2,692			902
Retained earnings (deficit)				(12,578	)		(1,040	)

		Total equity		33,081			42,821

		Total liabilities and stockholders' equity	$	44,246		$	59,463

See notes to consolidated financial statements.

F-3

SCHEDULE II

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

AMERICAN COUNTRY HOLDINGS INC.

CONDENSED STATEMENTS OF INCOME

(Parent Company Only)

(In Thousands)

		Year Ended December 31, 2001			Year Ended December 31, 2000			Year Ended December 31, 1999
REVENUES
Net investment income		$	42		$	73		$	39
Management fees from subsidiaries			980			970			900

	Total Revenues		1,022			1,043			939

EXPENSES
General and administrative expenses			829			743			580
Interest expense			532			828			584

	Total Expenses		1,361			1,571			1,164

Loss before income tax benefit and equity in undistributed income of subsidiaries			(339	)		(528	)		(225	)
Income tax expense (benefit)			398			(736	)		114

Income (Loss) before equity in undistributed income of subsidiaries			(737	)		208			(339	)
Undistributed income (loss) of subsidiaries			(10,588	)		(2,558	)		264

Net income (Loss)		$	(11,325	)	$	(2,350	)	$	(75	)

See notes to consolidated financial statements.

F-4

SCHEDULE II

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

AMERICAN COUNTRY HOLDINGS INC.

CONDENSED STATEMENT OF CASH FLOWS

(Parent Company Only)

(In Thousands)

		Year Ended December 31, 2001			Year Ended December 31, 2000			Year Ended December 31, 1999
Net cash used in operating activities		$	65		$	(98	)	$	(1,670	)
Investing Activities:
	Dividend from subsidiary		500			700			—
	Capital contribution to subsidiary		(5,000	)		(1,000	)		—

Net cash used in investing activities			(4,500	)		(300	)		—
Financing activities:
	Proceeds from (repayment of) note payable		(500	)		(400	)		1,850
	Issuance of common and preferred stock		148			5,487			—
	Exercise of options and warrants		—			288			—

Net cash provided by financing activities			(352	)		5,375			1,850

Net increase (decrease) in cash			(4,787	)		4,977			180
Cash at beginning of year			5,179			202			22

Cash at end of year		$	392		$	5,179		$	202

See notes to consolidated financial statements.

F-5

SCHEDULE II

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

AMERICAN COUNTRY HOLDINGS INC.

CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY

(Parent Company Only)

(In Thousands)

	Number of Shares	Common Stock		Number Of Shares		Preferred Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income			Retained Earnings (Deficit)			Total Stockholders' Equity
Balance at January 1, 1999	8,011	$	80	0		$	0		$	37,104	$	2,553		$	1,385		$	41,122
Comprehensive income, net of tax:
Net income	0		0	0			0			0		0			(75	)		(75	)
Change in net unrealized investment gains (net of applicable income tax of ($2,160))	0		0	0			0			0		(4,522	)		0			(4,522	)
Less: Elimination of realized gains included in income as reported (net of applicable income tax of $116)	0		0	0			0			0		226			0			226
Other	0		0	0			0			0		(41	)		0			(41	)
Total comprehensive income																		(4,412	)
Issuance of additional shares upon exercise of options and warrants	0		0	0			0			0		0			0			0

Balance at December 31, 1999	8,011	$	80	0		$	0		$	37,104	($	1,784	)	$	1,310		$	36,710
Comprehensive income, net of tax:
Net income	0		0	0			0			0		0			(2,350	)		(2,350	)
Change in net unrealized investment gains (net of applicable income tax of $1,710)	0		0	0			0			0		2,814			0			2,814
Less: Elimination of realized gains included in income as reported (net of applicable income tax of ($66))	0		0	0			0			0		(128	)		0			(128	)
Total comprehensive income	0		0	0			0			0		0			0			336
Issuance of additional common shares and preferred shares pursuant to the private placement	814		8	405			41			5,202		0			0			5,251
Issuance of additional shares upon exercise of options and warrants	100		1	0			0			287		0			0			288
Issuance of additional shares to employee benefit plans	116		1	0			0			235		0			0			236

Balance at December 31, 2000	9,041	$	90	405		$	41		$	42,828	$	902		$	(1,040	)	$	42,821
Comprehensive income, net of tax:
Net Income	0		0	0			0			0		0			(11,325	)		(11,325	)
Change in net unrealized investment gains (net of applicable income taxes of $931)	0		0	0			0			0		1,995			0			1,995
Less: Elimination of realized gains included in income as reported (net of applicable income tax of $106)	0		0	0			0			0		(205	)		0			(205	)
Total comprehensive income	0		0	0			0			0		0			0			(9,535	)
Payment of preferred dividends	0		0	0			0			0		0			(213	)		(213	)
Issuance of additional common shares pursuant to conversion of preferred stock	571		6	(100	)		(10	)		0		0			0			(4	)
Issuance of additional shares to employee benefit plans	13		0	0			0			12		0			0			12

Balance at December 31, 2001	9,625	$	96	305		$	31		$	42,840	$	2,692		$	(12,578	)	$	33,081

See notes to consolidated financial statements.

F-6

SCHEDULE II

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

AMERICAN COUNTRY HOLDINGS INC.

(Parent Company Only)

Notes to Condensed Financial Statements

1. These condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto.

2. RELATED PARTY TRANSACTIONS

The following related party transactions occurred in the year ended December 31, 2001:

On January 26, 2001, ACHI repaid a $250,000 loan to Financial Services.

On January 26, 2001, Professional Services made a $350,000 loan payment to ACHI. On May 31, 2001, Professional Services made a $550,000 loan payment to ACHI.

On January 31, 2001, ACHI made a $4.5 million capital contribution to American Country. On March 30, 2001, ACHI made a $500,000 capital contribution to American Country.

On May 31, 2001, American Country purchased $1.7 million of collateralized loans from Professional Services. On May 31, 2001, Professional Services repaid a $1.5 million loan to American Country.

In 2001, ACHI recorded a receivable of $103,000 from American Country for shares purchased under the Employee Stock Purchase Plan, of which $83,000 was received.

In 2001, American Country paid $900,000 in management fees to ACHI under a management fee contract. In 2001, Financial Services paid $80,000 in management fees to ACHI under a management fee contract.

At December 31, 2001, the components of Payable to Affiliates are:

Payable to American Country	$	752
Payable to (receivable from) Financial Services.		(3	)
Payable to Professional Services.		3

Payable to Professional Services—$3

Receivable from Financial Services—$3

At December 31, 2001, Investment in subsidiaries is as follows:

American Country Insurance Company	$	40,976
American Country Financial Services Corp.		886
American Country Professional Services Corp.		27

F-7

William J. Barrett, who serves on the board of directors of the Company, is a Senior Vice President of Janney Montgomery Scott.

3. DEBT.

At September 30, 2001, the Company was in violation of the minimum shareholders' equity covenant requirement. On November 7, 2001, the bank waived this covenant for the period of September 1, 2001 through January 1, 2002. On March 5, 2002, the agreement was amended to reschedule the principal payments, reduce the minimum shareholders' equity requirement, and waive any prior breach. The principal payments are scheduled as follows:

$2 million due on 5/31/02
$2 million due on 4/30/03
$2 million due on 4/30/04
$2 million due on 4/30/05

The amended agreement contains a pledge agreement whereby the Company pledged as collateral for the outstanding debt, 100% of the outstanding shares of both American Country and Financial Services.

At December 31, 2001, the outstanding balance on the revolving line of credit was $2.25 million. On March 5, 2002, the amendment reduced the amount available under the agreement to $2.0 million through May 30, 2002, and to $1.0 million thereafter. The Company made a payment of $250,000 on March 20, 2002 to reduce the balance to $2.0 million. Under the terms of the amended agreement, the revolving line of credit matures on November 30, 2002.

F-8

F-9

SCHEDULE IV—REINSURANCE

AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES

(In Thousands)

Col. A		Col. B		Col. C				Col. D		Col. E
Description		Direct		a Ceded to Other Companies		b Assumed from Other Companies		Net Amount		Percentage of Amount Assumed to Net
Year ended December 31, 2001
	Premiums written	$	81,973	$	15,785	$	1,392	$	67,580	2.0	%
Year ended December 31, 2000
	Premiums written	$	84,177	$	18,539	$	1,315	$	66,953	2.0	%
Year ended December 31, 1999
	Premiums written	$	76,027	$	3,972	$	1,928	$	73,983	2.6	%

F-10

SCHEDULE V

VALUATION AND QUALIFYING ACCOUNTS

AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES

(In Thousands)

			Col. A			Col. B			Col. C	Col. D		Col. E
Description			Balance at Beginning of Period			Charged to Costs and Expenses			Charged to Other Accounts (Describe)	(A) Deductions (Describe)		Balance at End of Period
Year ended December 31, 2001
	Reserves and allowances deducted from asset accounts:
		Allowance for bad debts	$	(386	)	$	(120	)		$	89	$	(417	)
Year ended December 31, 2000
	Reserves and allowances deducted from asset accounts:
		Allowance for bad debts	$	(348	)	$	(120	)		$	82	$	(386	)
Year ended December 31, 1999
	Reserves and allowances deducted from asset accounts:
		Allowance for bad debts	$	(262	)	$	(120	)		$	34	$	(348	)

(A): Amounts charged off less recoveries.

F-11

SCHEDULE VI—SUPPLMENTAL INFORMATION

CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS

AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES

(In Thousands)

	December 31,							Year Ended December 31,
Col. A	December 31,							Year Ended December 31,
Col. A	Col. B		Col. C		Col. D	Col. E		Col. F		Col. G		Col. H					Col. I		Col. J		Col. K
			Reserves for Unpaid Loss and Claim Adjustment Expenses									Loss and Loss Adjustment Expenses
					Discount, if any, Deducted in Column C
																	Amortization of Deferred Policy Acquisition Costs		Paid Losses and Loss Adjustment Expenses
Period	Deferred Policy Acquisition					Unearned Premiums		Earned Premiums		Total Net Investment Income		Incurred Current Year		Related to Prior Year			Amortization of Deferred Policy Acquisition Costs		Paid Losses and Loss Adjustment Expenses		Premiums Written
2001
Transportation	$	1,876	$	82,263	—	$	9,940	$	55,882	$	5,616	$	41,961	$	5,355		$	10,575	$	37,783	$	57,949
Hospitality		536		16,757	—		2,839		6,013		912		5,418		2,513			1,051		4,913		5,993
Commercial		129		34,189	—		683		5,601		1,708		5,624		15,028			922		17,172		3,638
Other		—		695	—										138					919
Not allocated		—		—	—						245

Totals	$	2,541	$	133,904	—	$	13,462	$	67,496	$	8,481	$	53,003	$	23,034		$	12,548	$	60,787	$	67,580

2000
Transportation	$	1,630	$	71,444	—	$	8,937	$	49,978	$	4,467	$	41,870	$	(1,819	)	$	7,165	$	32,904	$	49,301
Hospitality		773		10,170	—		4,241		8,487		686		7,808		583			1,547		6,400		7,131
Commercial		782		31,660	—		4,286		13,786		1,771		16,048		3,652			2,218		21,126		10,521
Other		0		1,420	—		0		11		0		155		20			2		865		0
Not allocated		0		0	—		0		0		1,598		0		0			0		0		0

Totals	$	3,185	$	114,694	—	$	17,464	$	72,262	$	8,522	$	65,881	$	2,436		$	10,932	$	61,295	$	66,953

1999
Transportation	$	1,296	$	61,023	—	$	8,557	$	45,246	$	3,429	$	36,568	$	(211	)	$	5,761	$	29,095	$	48,590
Hospitality		868		7,553	—		3,915		7,116		513		5,973		625			1,170		3,382		7,930
Commercial		1,084		33,248	—		6,244		17,221		1,779		16,415		3,385			3,441		18,916		17,388
Other		3		2,669	—		12		94		140		271		590			5		1,337		75
Not allocated		0		0	—		0		0		1,757		0		0			0		0		0

Totals	$	3,251	$	104,493	—	$	18,728	$	69,677	$	7,618	$	59,227	$	4,389		$	10,377	$	52,730	$	73,983

Investment income is allocated to segments based on each segment's percentage of insurance reserves. Investment income not allocated to segments includes investment income allocable to capital and surplus and realized gains and losses.

F-12

REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors and Stockholders
American Country Holdings Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, stockholders' equity, and cash flows present fairly, in all material respects, the financial position of American Country Holdings Inc. and Subsidiaries (the "Company") at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP

Chicago, Illinois
March 27, 2002

F-13

AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		December 31,
		2001			2000
		(in thousands)
ASSETS
Investments (NOTES 2 AND 3):
Available-for-sale:
	Fixed maturities—At fair value (amortized cost: 2001—$123,207; 2000—$125,346)	$	126,861		$	126,457
	Equity securities—At fair value (cost: 2001—$2,072; 2000—$1,636)		2,078			1,640
Collateral loans (at amortized cost, which approximates fair value)			1,659			2,005

Total investments			130,598			130,102
Cash and cash equivalents			6,773			16,790
Premiums receivable (net of allowance: 2001—$417; 2000—$386)			14,907			5,482
Reinsurance recoverable			23,791			22,880
Deferred income taxes (NOTE 5)			10,152			5,438
Income taxes receivable			1,733			2,018
Deferred policy acquisition costs			2,541			3,185
Accrued investment income			1,495			1,808
Property and equipment			933			633
Other assets			3,259			1,382

Total assets		$	196,182		$	189,718

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
	Unpaid losses and loss adjustment expenses (NOTE 6)		133,904		$	114,694
	Unearned premiums		13,462			17,464
	Note payable and line of credit (NOTE 8)		10,250			10,750
	Accrued expenses		5,091			3,070
	Premium deposits		0			182
	Drafts outstanding		394			737

Total liabilities			163,101			146,897
Commitments and contingent liabilities (NOTES 11 AND 12)
Stockholders' equity (NOTES 1 AND 7):
	Common Stock—$.01 par value. Authorized—60,000,000 shares Issued and outstanding shares: 2001—9,624,795; 2000—9,041,207		96			90
	Preferred Stock Authorized—2,000,000 shares—$.10 par value Issued and outstanding shares: 2001—305,000; 2000—405,000		31			41
	Additional paid-in capital		42,840			42,828
	Accumulated other comprehensive income		2,692			902
	Retained earnings (deficit)		(12,578	)		(1,040	)

Total stockholders' equity			33,081			42,821

Total liabilities and stockholders' equity		$	196,182		$	189,718

See notes to consolidated financial statements.

F-14

AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

		Year Ended December 31
		2001			2000			1999
		(in thousands, except per share data)
REVENUES
Premiums earned		$	67,496		$	72,262		$	69,677
Net investment income			8,481			8,522			7,618
Net realized gains (losses) on investments			311			(194	)		(342	)
Other income			108			217			215

Total revenues			76,396			80,807			77,168
LOSSES AND EXPENSES
Losses and loss adjustment expenses			76,037			68,317			63,617
Amortization of deferred policy acquisition costs			12,548			10,932			10,377
Administrative and general expenses			4,518			5,878			4,216

Total losses and expenses			93,103			85,127			78,210

Income (loss) before income taxes			(16,707	)		(4,320	)		(1,042	)
Provision for income tax (NOTE 5):
	Current		342			(1,424	)		125
	Deferred		(5,724	)		(546	)		(1,092	)

			(5,382	)		(1,970	)		(967	)

Net income (loss)		$	(11,325	)	$	(2,350	)	$	(75	)

Basic and dilutive earnings per share		$	(1.26	)	$	(0.29	)	$	(.01	)

See notes to consolidated financial statements.

F-15

AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In Thousands)

	Number of Shares	Common Stock		Number of Shares		Preferred Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income			Retained Earnings (Deficit)			Total Stockholders' Equity
OPERATING ACTIVITIES
Balance at January 1, 1999	8,011	$	80	0		$	0		$	37,104	$	2,553		$	1,385		$	41,122
Comprehensive income, net of tax:
Net Income	0		0	0			0			0		0			(75	)		(75	)
Change in net unrealized investment gains (net of applicable income taxes of $(2,160))	0		0	0			0			0		(4,522	)		0			(4,522	)
Less: Elimination of realized gains included in income as reported (net of applicable income tax of $116)	0		0	0			0			0		226			0			226
Other	0		0	0			0			0		(41	)					(41	)

Total comprehensive income																		(4,412	)
Issuance of additional shares upon exercise of options and warrants	0		0	0			0			0		0			0			0

Balance at December 31, 1999	8,011	$	80	0		$	0		$	37,104	$	(1,784	)	$	1,310		$	36,710
Comprehensive income, net of tax:
Net Income	0		0	0			0			0		0			(2,350	)		(2,350	)
Change in net unrealized investment gains (net of applicable income taxes of $1,710)	0		0	0			0			0		2,814			0			2,814
Less: Elimination of realized gains included in income as reported (net of applicable income tax of $(66))	0		0	0			0			0		(128	)		0			(128	)

Total comprehensive income	0		0	0			0			0		0			0			336
Issuance of additional common shares and issuance of preferred shares pursuant to Private Placement	814		8	405			41			5,202		0			0			5,251
Issuance of additional shares upon exercise of options and warrants	100		1	0			0			287		0			0			288
Issuance of additional shares to employee benefit plans	116		1	0			0			235		0			0			236

Balance at December 31, 2000	9,041	$	90	405		$	41		$	42,828	$	902		$	(1,040	)	$	42,821
Comprehensive income, net of tax:
Net Income	0		0	0			0			0		0			(11,325	)		(11,325	)
Change in net unrealized investment gains (net of applicable income taxes of $931)	0		0	0			0			0		1,995			0			1,995
Less: Elimination of realized gains included in income as reported (net of applicable income tax of $106)	0		0	0			0			0		(205	)		0			(205	)

Total comprehensive income	0		0	0			0			0		0			0			(9,535	)
Payment of preferred dividends	0		0	0			0			0		0			(213	)		(213	)
Issuance of additional common shares pursuant to conversion of preferred stock	571		6	(100	)		(10	)		0		0			0			(4	)
Issuance of additional shares to employee benefit plans	13		0	0			0			12		0			0			12

Balance at December 31, 2001	9,625	$	96	305		$	31		$	42,840	$	2,692		$	(12,578	)	$	33,081

See notes to consolidated financial statements.

F-16

AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31
	2001			2000			1999
	(in thousands)
OPERATING ACTIVITIES
Net income	$	(11,325	)	$	(2,350	)	$	(75	)
Adjustments to reconcile net income to net cash provided by operating activities:
Change in premiums receivables and reinsurance recoverables		(10,336	)		(81	)		(7,499	)
Change in reserve for unpaid losses and loss adjustment expenses		19,210			10,201			12,076
Change in reserve for unearned premiums		(4,002	)		(1,264	)		4,267
Amortization of deferred policy acquisition costs		12,548			10,932			10,377
Deferred policy acquisition costs capitalized		(11,904	)		(10,866	)		(11,273	)
Change in deferred income taxes		(5,644	)		—
Net realized losses (gains) on investments		(311	)		194			342
Provision for depreciation		358			431			475
Change in accrued expenses		1,811			(1,222	)		(5,383	)
Change in income taxes payable		285			(1,684	)		(724	)
Change in other assets and liabilities		(1,878	)		(1,033	)		717

Net cash provided by (used in) operating activities		(11,188	)		3,258			3,300

INVESTING ACTIVITIES
Fixed maturities Available-for-sale:
Purchases		(66,194	)		(172,910	)		(155,717	)
Sales		53,170			167,030			133,926
Maturities, calls, and prepayments		15,744			9,778			13,803
Equity securities Available-for-sale:
Purchases		(2,083	)		(1,283	)
Sales		1,647			—
Sale or maturity or (purchase) of other investments		(753	)		2,011			564
Net issuance of collateral loans and other investments		346			(1,442	)		(3,106	)

Net cash provided by (used in) investing activities		1,877			3,184			(10,530	)

FINANCING ACTIVITIES
Repayment of note payable		(500	)		(400	)		1,850
Issuance of common stock and preferred stock		7			5,487
Options and warrants exercised		—			288
Dividends paid to stockholders		(213	)		—

Net cash and cash equivalents provided by (used in) financing activities		(706	)		5,375			1,850

Net increase (decrease) in cash and cash equivalents		(10,017	)		11,817			(5,380	)
Cash and cash equivalents at beginning of year		16,790			4,973			10,353

Cash and cash equivalents at end of year	$	6,773		$	16,790		$	4,973

See notes to consolidated financial statements.

F-17

AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION.

Nature of Operations

American Country Holdings Inc. ("ACHI" or "the Company") is an insurance holding company which has as its direct subsidiaries American Country Insurance Company ("American Country"), American Country Financial Services Corp. ("Financial Services"), American Country Professional Services Corp. ("Professional Services") and American Country Underwriting Agency Inc. Through its subsidiaries, the Company conducts business as a specialty property and casualty insurer, provides premium financing and collateralized loans for certain of American Country's customers. Through its subsidiaries, the Company will provide underwriting management and third party claims administration to other insurance companies in the future.

American Country is an Illinois domestic insurance company that specializes in the underwriting and marketing of commercial property and casualty insurance for the transportation and hospitality industry. Prior to April 1 2001, American Country also wrote commercial lines insurance for contractors. This business is currently being run-off. American Country's specialty public livery coverages (taxicab and limousine) are primarily written on risks in the City of Chicago and the surrounding suburbs, Connecticut, Indiana, Michigan, Minnesota, New York, Pennsylvania and Wisconsin. American Country has extended its geographic coverage as part of its expansion program for the transportation and restaurant lines. American Country is licensed in the states of Connecticut, Illinois, Indiana, Iowa, Kentucky, Massachusetts, Michigan, Minnesota, New York, Ohio, Oklahoma, Pennsylvania, Wisconsin, and in the District of Columbia, and is pursuing a license in Nevada. American Country also is admitted as an excess and surplus lines carrier in 19 states.

American Country writes transportation and hospitality lines insurance. Transportation lines, which include automobile liability and physical damage coverages for taxicabs and limousines and workers compensation coverage for drivers, accounted for 77.1% of total gross premiums written in 2001. Hospitality lines, which include coverage for restaurants, taverns and banquet halls, accounted for 13.7% of total gross premiums written in 2001. Commercial lines, which include multi-peril risks and workers' compensation, accounted for 9.2% of total gross premiums written in 2001. American Country's business is written by salaried employees and through approximately 25 independent insurance producers located in the states in which American Country is licensed.

Financial Services operates principally as a premium finance company.

Professional Services provides collateralized loans to certain of American Country's larger customers, and is licensed as a third party claims administrator.

American Country Underwriting Agency was created in December 2000 to operate as a managing general underwriter.

A discussion of operating segments is contained in Note 14 of the financial statements that are included in Item 14 of this Report on Form 10-K.

2. SIGNIFICANT ACCOUNTING POLICIES.

Basis of Presentation

The accompanying consolidated financial statements of the Company have been prepared in conformity with generally accepted accounting principles ("GAAP") and include the accounts and operations of ACHI and its wholly owned subsidiaries, American Country, Financial Services and Professional Services.

F-18

Significant inter-company accounts and transactions have been eliminated. American Country maintains its records in accordance with accounting practices prescribed or permitted by the Illinois Department of Insurance. In consolidating American Country, adjustments have been made to conform its accounts to GAAP.

Use of Estimates and Concentration of Risk

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates and assumptions, which include the reserves for losses and loss adjustment expenses and fair market value of financial instruments, could change in the future as more information becomes known which could impact the amounts reported and disclosed herein. American Country has a concentration of risk that is both geographic and customer-based in Chicago.

Premium Revenue

Premiums are earned pro rata over the terms of the policies. The reserve for unearned premiums is determined on a daily basis.

Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses (LAE) represent the estimated ultimate net cost of all reported and unreported losses incurred through December 31. The reserves for unpaid losses and LAE are estimated using individual case-basis valuations and statistical analyses and are not discounted. Those estimates are subject to the effects of trends in loss severity and frequency. Although considerable variability is inherent in the estimates of reserves for losses and LAE, management believes that the reserves for losses and LAE are adequate. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known; such adjustments are included in current operations. Estimated salvage and subrogation recoveries are accrued when the related losses are incurred.

Reinsurance

Reinsurance premiums, losses, and LAE are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums earned and losses incurred ceded to other companies have been reported as a reduction of premium revenue and losses and LAE. Commissions allowed by reinsurers on business ceded have been accounted for as a reduction of the related policy acquisition costs. Reinsurance recoverables are reported relating to the portion of reserves and paid losses and LAE that are ceded to other companies. The Company remains contingently liable for all loss payments, in the event of failure to collect from the reinsurers.

Deferred Policy Acquisition Costs

Costs of acquiring new business, principally commissions and premium taxes, are deferred, subject to recoverability, and amortized as the related premium is earned. The Company considers anticipated investment income in determining whether a premium deficiency relating to short duration contracts exists.

F-19

Investments

The Company follows Financial Accounting Standards Board (FASB) Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which requires categorization of fixed maturities either as held to maturity, available for sale, or trading and equity securities as available for sale or trading.

Fixed maturities (bonds and redeemable preferred stocks) that the Company has both the positive intent and ability to hold to maturity are carried at amortized cost. Fixed maturities that the Company does not have the positive intent and ability to hold to maturity and all equity securities (common stocks and nonredeemable preferred stocks) are classified as available-for-sale and are reported at fair value. Unrealized gains and losses on fixed maturities available for sale and equity securities are excluded from income and are recorded directly to stockholders' equity as accumulated other comprehensive income, net of related deferred income taxes. The Company has not classified any fixed maturity or equity securities as trading. The Company does not hold any fixed maturities as held-to-maturity.

Collateral loans are carried at amortized cost, which approximates fair value. Short-term investments are carried at cost, which approximates fair value, and include investments with maturities of less than one year at the date of acquisition.

Net investment income consists primarily of interest and dividends less expenses. Interest on fixed maturities and mortgage loans, adjusted for any amortization of discount or premium, is recorded as income when earned and includes adjustments resulting from anticipated prepayments of collateralized mortgage obligations. Investment expenses are accrued as incurred. Realized investment gains or losses are computed using specific costs of securities sold, and include write-downs on investments having an other-than-temporary decline in value.

At December 31, 2001, the Company did not own or utilize derivative financial instruments for the purpose of hedging or reducing the cost of its debt obligations. At December 31, 2001, the Company utilized derivative financial instruments for the purpose of enhancing the overall return of its investment portfolio. The only derivatives owned by the Company are convertible securities.

In the first quarter of 2001, the Company adopted the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities and Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities (collectively referred to as SFAS 133). The Company had no derivatives as of January 1, 2001. Initial adoption of SFAS 133 did not have a significant impact on the equity of the Company; however, adoption of SFAS 133 resulted in a pre-tax decrease to 2001 earnings of $289,000. This amount related to the Company's convertible investments, which were purchased in the first quarter of 2001. Because the Company already carried its investments at fair value through other comprehensive income, there was an equal and offsetting adjustment to stockholders' equity (accumulated other comprehensive income).

Effective in 2001, the Company accounts for derivatives and hedging in accordance with SFAS 133. A derivative is typically defined as an instrument whose value is "derived" from an underlying instrument, index or rate, has a notional amount, and can be net settled. Derivatives include, but are not limited to, the following types of investments: interest rate swaps, interest rate caps and floors, put and call options, warrants, swaptions, futures, forwards and commitments to purchase securities and combinations of the foregoing. Derivatives embedded within non-derivative instruments (such as call options embedded in convertible bonds) must be split from the host instrument and accounted for under SFAS 133 when the

F-20

embedded derivative is not clearly and closely related to the host instrument. In addition, non-investment instruments, including certain types of insurance contracts that have historically not been considered derivatives can be derivatives or contain embedded derivatives under SFAS 133. SFAS 133 requires that all derivatives be recorded in the balance sheet at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge of exposures to changes in fair value, cash flows or foreign currency exchange rates. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the nature of any hedge designation thereon. Options embedded in convertible debt and equity securities do not qualify for hedge accounting.

Embedded derivatives are classified as fixed maturities or equity securities in the Consolidated Balance Sheets, consistent with the host instruments. The change in the market value of the embedded derivatives resulted in a pre-tax loss of approximately $289,000 for the year ended December 31, 2001, and has been recorded as a realized investment loss in the consolidated statement of income and the statement of cash flows.

Income Taxes

Management believes that it is more likely than not that the current temporary differences will reverse during the periods in which the Company generates net taxable income. The Company expects to generate sufficient taxable income to realize its loss and credit carryforwards within the statutory carryforward period. There are, however, no assurances that the Company will generate any earnings or any specific level of continuing earnings in future years. Certain tax planning strategies could be implemented to supplement income from operations to fully utilize recorded tax benefits.

Property and Equipment

Property and equipment, primarily data processing equipment and leasehold improvements, are reported at depreciated cost, with depreciation recorded on a straight-line basis with lives of five years for data processing equipment and a range of six to eleven years for leasehold improvements. Accumulated depreciation amounted to $4,243,000 and $3,792,000 at December 31, 2001 and 2000, respectively. Depreciation expense amounted to $451,000, $346,000 and $346,000 for the years 2001, 2000 and 1999 respectively.

Stock Options

The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," (APB 25) and related interpretations in accounting for its employee stock options rather than the alternative fair value accounting provided for under Financial Accounting Standards Board (FASB) Statement No. 123, "Accounting for Stock-Based Compensation." Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

F-21

Earnings Per Share

Basic earnings per share is computed based on the weighted-average number of common shares outstanding, excluding any dilutive effect of options and warrants. Dilutive earnings per share is computed based on the weighted-average number of common shares outstanding plus the dilutive effects of options and warrants. The dilutive effect of options and warrants is calculated under the treasury stock method using the average market price for the period.

Earnings per share is calculated as follows (in thousands, except per share data):

	Year Ended December 31
	2001			2000			1999
Net income	$	(11,325	)	$	(2,350	)	$	(75	)

Weighted average basic shares outstanding		9,159			8,087			8,011
Shares for options and warrants		0			115			9

Dilutive shares outstanding		9,159			8,202			8,020

Basic earnings per share	$	(1.26	)	$	(0.29	)	$	(.01	)

Dilutive earnings per share	$	(1.26	)	$	(0.29	)	$	(.01	)

Because the Company is in a net loss position, all potentially dilutive securities are assumed to be anti-dilutive. Therefore, dilutive earnings per share is equal to basic earnings per share.

Cash Equivalents

Short-term investments, consisting principally of commercial paper which have a maturity of 90 days or less at date of purchase, are considered cash equivalents.

Cash Flows

Interest paid in 2001 amounted to $531,000. The Company did not pay income tax in 2001.

Financial Instruments

Fair value for fixed maturity and equity securities is based on quoted market prices or, if they are not actively traded, on estimated values obtained from independent pricing services. Fair values of other financial instruments approximate their carrying values.

Reclassification

Certain amounts in the prior years' consolidated financial statements have been reclassified to conform to the 2001 presentation.

F-22

Codification of Statutory Accounting Principles

On January 1, 2001, the Company adopted the Codification of Statutory Accounting Principles (Codification) for preparing its statutory-basis financial statements. Codification, which is intended to standardize regulatory accounting and reporting to state insurance departments, was effective January 1, 2001. However, statutory accounting principles will continue to be established by individual state laws and permitted practices. The states in which American Country conducts business required adoption of Codification (with certain modifications) for the preparation of statutory-basis financial statements effective January 1, 2001. The Company's adoption of Codification, as modified, resulted in an increase in statutory capital and surplus as of January 1, 2001 of approximately $2.9 million, which primarily relates to deferred tax assets, partially offset by insurance-related assessments and pension-related liabilities. This change had no impact on net earned premiums or net income.

3. INVESTMENTS

The components of net investment income are as follows:

	Year Ended December 31
	2001		2000		1999
Fixed maturities	$	8,502	$	8,347	$	7,568
Equity securities		217		124		30
Short-term investments		84		238		456
Other		537		491		232

Gross investment income		9,340		9,200		8,286
Investment expenses		859		678		668

Net investment income	$	8,481	$	8,522	$	7,618

Realized gains (losses) on investments are as follows:

		Year Ended December 31
		2001			2000			1999
		(in thousands)
Fixed maturities:
	Gross gains	$	3,211		$	1,524		$	760
	Gross losses		(2,900	)		(1,718	)		(1,102	)
	Equity securities:
	Gross gains		93			—			—
	Gross losses		(93	)		—			—

Net realized gains (losses) on investments		$	311		$	(194	)	$	(342	)

F-23

The components of net unrealized investment gains (losses), included in accumulated other comprehensive income, are as follows:

	December 31,
	2001			2000			1999
	(in thousands)
Fixed maturities available-for-sale	$	3,829		$	1,111		$	(3,230	)
Equity securities available-for-sale		6			4			14
Deferred tax credit (charge)		(1,143	)		(213	)		1,431

Net unrealized investment gains (losses)	$	2,692		$	902		$	(1,785	)

In connection with an acquisition, the tax basis of certain assets and liabilities changed. As a result, the deferred tax charges related to the net unrealized investment gains at December 31, 2001, 2000 and 1999 do not represent the corporate federal income tax rate of 34%, because the tax basis of these securities was changed to equal the market value on the acquisition date. As these securities are sold or mature, the deferred taxes will approach the federal income tax rate of 34%.

The changes in net unrealized investment gains (losses) are as follows:

	Year Ended December 31
	2001			2000			1999
	(in thousands)
Fixed maturities available-for-sale	$	2,718		$	4,340		$	(6,306	)
Equity securities available-for-sale		2			(10	)		(35	)
Deferred tax credit (charge)		(930	)		(1,644	)		2,044

Total	$	1,790		$	2,686		$	(4,297	)

F-24

The following is a summary of available-for-sale securities:

		Gross Unrealized
		Amortized Cost		Gains		Losses		Fair Value
		(in thousands)
DECEMBER 31, 2001
AVAILABLE-FOR-SALE SECURITIES
Fixed maturities:
	U.S. government	$	5,336	$	291	$	8	$	5,619
	States and political subdivision		1,726		96		—		1,822
	Foreign governments		1,011		17		—		1,028
	Corporate securities		63,011		2,746		370		65,387
	Mortgage-backed securities		52,123		970		88		53,005

Total fixed maturities			123,207		4,120		466		126,861
Equity securities			2,072		149		143		2,078

Total		$	125,279	$	4,269	$	609	$	128,939

DECEMBER 31, 2000
AVAILABLE-FOR-SALE SECURITIES
Fixed maturities:
	U.S. government	$	3,596	$	184	$	—	$	3,780
	States and political subdivision		1,987		81		—		2,068
	Foreign governments		1,281		5		9		1,277
	Corporate securities		72,379		1,545		755		73,169
	Mortgage-backed securities		46,103		303		243		46,163

Total fixed maturities			125,346		2,118		1,007		126,457
Equity securities			1,636		37		33		1,640

Total		$	126,982	$	2,155	$	1,040	$	128,097

	Amortized Cost		Fair Value
	(in thousands)
Due in one year or less	$	1,894	$	1,851
Due after one year through five years		34,283		35,554
Due after five years through ten years		24,540		25,589
Due after ten years		10,367		10,862
Mortgage-backed-securities		52,123		53,005

Total	$	123,207	$	126,861

F-25

At December 31, 2001, investments in fixed maturities with an admitted asset value of $2,585,000 were on deposit with state insurance departments to satisfy regulatory requirements.

4. REINSURANCE.

American Country reinsures a portion of its exposure by ceding to reinsurers a portion of the premiums received on the policies that are reinsured. Insurance is ceded primarily to reduce the net liability on individual risks and to protect against catastrophic losses. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of coverage, it does make the assuming reinsurer liable to the insurer to the extent of the losses reinsured. American Country seeks to maintain its risk exposure at appropriate levels by setting maximum coverage limits by class and type of business. These agreements also provide American Country with increased capacity to write larger risks and to maintain it exposure to loss within its capital resources.

Specialty Transportation Reinsurance

American Country currently purchases excess of loss reinsurance protection for its transportation business. Excess of loss reinsurance requires that a company retain a predetermined dollar amount of loss, known as the "retention." The insurance company is indemnified by the reinsurer for losses which exceed this dollar amount up to the limit of the reinsurance agreement. Any portion of the loss exceeding the agreement limit is either paid by the company or by other reinsurance agreements. Under its excess of loss program for its transportation business, American Country has a retention of $350,000 and reinsurance coverage of up to $4 million per occurrence.

Commercial and Hospitality Lines Reinsurance

American Country's commercial and hospitality lines business is reinsured on a multi-line, multi-layer excess of loss basis. Reinsurance coverage under the current treaty is as follows:

All Property Business		The reinsurer pays up to $1,650,000 in excess of American Country's retention of $350,000 per risk.
All Casualty Business (including workers' compensation)		The reinsurer pays up to $3,650,000 in excess of American Country's retention of $350,000 per occurrence. A supplemental reinsurance agreement provides coverage of statutory limits per occurrence and per claimant on American Country's Workers' compensation program.

Property catastrophe reinsurance also is in force, which provides American Country with $3,750,000 of protection after a retention of $350,000 per catastrophic loss occurrence.

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Assumed and ceded reinsurance arrangements are summarized as follows:

	Year Ended December 31
	2001		2000		1999
ASSUMED REINSURANCE
Premiums written	$	1,392	$	1,315	$	1,928
Premiums earned		1,612		1,661		2,352
Losses and LAE		1,782		3,116		2,385
Losses and LAE reserves*		4,776		4,454		4,503
Unearned premium reserves*		295		515		860
CEDED REINSURANCE
Premiums written		15,786		18,539		3,972
Premiums earned		19,872		14,493		4,011
Losses and LAE		17,380		12,530		7,116
Losses and LAE reserves*		20,283		16,323		13,144
Unearned premium reserves*		946		5,032		986

*: As of year-end.

The Company remains obligated for amounts reinsured in the event that reinsurers do not meet their obligations.

The largest balance of ceded premiums by American Country to any one reinsurer during 2001 was $14,875,000, or 17.83% of gross premiums written. This amount represents the placing of nearly all of the treaty reinsurance with General Reinsurance Corporation effective July 1, 1999. Although American Country remains ultimately responsible for the payment of losses and loss expenses, management does not believe that this presents an excess concentration of credit risk. The largest net amount recoverable from any one reinsurer was $13.7 million, or 6.98% of total assets. Although there may be a concentration of risk element in existence at December 31, 2001, the Company believes that this risk is manageable and not excessive as of that date.

5. FEDERAL INCOME TAXES.

The Company recognized a total income tax benefit of $5,382,000. This amount is comprised of current tax expense of $342,000 and deferred tax benefit of $5,724,000.

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Reconciliation of the corporate federal income tax rate to the Company's effective income tax rates are as follows:

	Year Ended December 31
	2001		2000		1999
Corporate federal income tax rate	34	%	34	%	34	%
Nontaxable investment income	—		9		44
Prior Year Return to Provision Adjustment	(2	)	6		14
State income taxes	—		—		—
Other	—		(1	)	—

Effective income tax rate	32	%	48	%	92	%

Significant components of the Company's deferred tax liabilities and assets are as follows:

		December 31
		2001			2000
		(in thousands)
Deferred tax assets:
	Insurance reserves	$	6,160		$	5,277
	Unrealized investment losses		—			—
	Pension liability		114			307
	Loss and Credit Carryforwards		5,531			811
	Other		693			721

Total deferred tax assets			12,498			7,116
Deferred tax liabilities:
	Policy acquisition costs		(863	)		(1,081	)
	Unrealized investment gains		(1,143	)		(213	)
	Other		(340	)		(384	)

Total deferred tax liabilities			(2,346	)		(1,678	)

Net deferred tax assets		$	10,152		$	5,438

Realization of the net deferred tax asset is dependent on generation of sufficient future taxable income to absorb both the applicable reversing temporary differences and the net operating loss. Management believes that it is more likely than not that the current temporary differences will reverse during the periods in which the Company generates net taxable income. The Company expects to generate sufficient taxable income to realize its loss and credit carryforwards within the statutory carryforward period, based on future income projections adjusted for the elimination of both the contractor and non-Illinois restaurant books, and the substantial reserve increase taken in 2001. There are, however, no assurances that the Company will generate any earnings or any specific level of continuing earnings in future years. Certain tax planning strategies could be implemented to supplement income from operations to fully utilize recorded tax benefits.

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A net operating loss carryforward of $1,368,000, which was generated in 2000, will expire in 2020. A net operating loss carryforward of $13,884,000, which was generated in 2001, will expire in 2021. An alternative minimum tax credit of $346,400 was generated in 1999 and 1998.

If KFS is successful in acquiring the Company (see footnote 15), there will be annual limitations on the amount of carryforward that could be utilized. Potential limitations include the requirements of Internal Revenue Code Section 382, which limits the annual utilization of net operating loss carryforwards to the fair value of the Company at the time of the acquisition multiplied by the federal tax exempt interest rate.

6. LOSSES AND LOSS ADJUSTMENT EXPENSES.

The following table sets forth a reconciliation of the beginning and ending losses and LAE reserve balances, net of reinsurance ceded for the past three years:

		Year Ended December 31,
		2001		2000		1999
		(in thousands)
Net reserves for losses and LAE, beginning of year		$	98,371	$	91,349	$	80,465
Incurred losses and LAE for claims relating to:
	Current year		53,003		65,881		59,227
	Prior years		23,034		2,436		4,389

Total net claims incurred			76,037		68,317		63,616
Losses and LAE payments for claims relating to:
	Current year		14,762		22,159		18,368
	Prior years		46,025		39,136		34,364

Total net claims paid			60,787		61,295		52,732

Net reserves for losses and LAE, end of year			113,621		98,371		91,349
Total reinsurance recoverable on unpaid losses and LAE			20,283		16,323		13,144

Gross reserves for losses and LAE, end of year		$	133,904	$	114,694	$	104,493

The $23,034,000 increase in prior years' reserves during 2001 is attributable to reserves strengthening for prior accident years. This includes additional reserves for Workers' Compensation of $11.8 million for accident years 1997 through 2000, Commercial Multiple Peril of $4.1 million for accident years 1997 through 2000 and Commercial Auto Liability of $6.2 million for accident years 1998 through 2000. The adverse development is the result of the continued deterioration of the all contractor lines, including workers compensation, commercial multiple peril and commercial auto liability, as well as deterioration in package and auto lines for the non-Illinois hospitality program. Additionally, certain areas of the non-Illinois transportation book developed at a higher rate than expected.

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The $4,389,000 increase in prior years' reserves during 1999 is attributable to reserve strengthening, including additional reserves for Workers' Compensation reserves of $3,500,000, for losses incurred in calendar years 1997 and prior. This is primarily due to increased medical costs and longer duration disabilities covered under these policies.

7. STOCKHOLDERS' EQUITY.

Statutory accounting practices prescribed or permitted for American Country by regulatory authorities differ from generally accepted accounting principles. American Country's statutory-basis capital and surplus was $25,557,000, and $40,238,000 at December 31, 2001 and 2000, respectively, and American Country's statutory-basis net income was $(14,730,792), $(3,061,149) and $(2,036,115) for the years ended December 31, 2001, 2000 and 1999 respectively.

American Country files statutory-based financial statements with state insurance departments in all states in which American Country is licensed. On January 1, 2001, significant changes to the statutory basis of accounting became effective. On January 1, 2001, the Company adopted the Codification of Statutory Accounting Principles (Codification) for preparing its statutory-basis financial statements. Codification, which is intended to standardize regulatory accounting and reporting to state insurance departments, was effective January 1, 2001. However, statutory accounting principles will continue to be established by individual state laws and permitted practices. The states in which American Country conducts business required adoption of Codification (with certain modifications) for the preparation of statutory-basis financial statements effective January 1, 2001. The Company's adoption of Codification, as modified, resulted in an increase in statutory capital and surplus as of January 1, 2001 of approximately $2.9 million, which primarily relates to deferred tax assets, partially offset by insurance-related assessments and pension-related liabilities. This change has no impact on net earned premiums or net income.

Property/casualty insurance companies are subject to certain Risk-Based Capital (RBC) requirements as specified by the National Association of Insurance Commissioners. Under those requirements, the amount of statutory capital and surplus maintained by a property/casualty insurance company is to be determined based on the various risk factors. At December 31, 2001, American Country exceeds the RBC requirements.

The maximum amount of dividends that can be paid from American Country to ACHI without regulatory approval is the greater of net income or 10% of capital and surplus, each as of the preceding December 31. Accordingly, the maximum total dividend amount available in 2001 is $2,555,700. American Country did not declare or pay dividends to ACHI during 2001.

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On December 27, 2000, the Company successfully completed a private placement which raised $5.25 million of additional capital, net of expenses. As a result of the private placement, 405,000 shares of convertible preferred stock and 814,286 units were issued. On July 11, 2001, 100,000 shares of preferred stock were converted into common stock by the holders.

The preferred stock has a stated value of $10.00 and a 6% annual dividend payable quarterly. The preferred stock is convertible at any time into 5.7142 shares of common stock, subject to anti-dilution adjustment. The preferred stock is callable by the Company any time after December 27, 2002.

Each unit consists of one share of common stock and one five-year Class A warrant. Each Class A Warrant allows the warrant holder to purchase one share of common stock at 10% above the unit offering price, or $1.925 per share, subject to anti-dilution adjustment, through December 27, 2005. The Class A Warrants were registered in May 2001, however, there currently is no public market for trading these warrants.

At December 31, 2000, the Company had 2,054,129 common warrants (Nasdaq: ACHIW) outstanding. These warrants allow the warrant holder to purchase .728 shares of common stock at a price of $5.50 through August 31, 2002.

8. DEBT.

At September 30, 2001, the Company was in violation of the minimum shareholders' equity covenant requirement. On November 7, 2001, the bank waived this covenant for the period of September 1, 2001 through January 1, 2002. On March 5, 2002, the agreement was amended to reschedule the principal payments, reduce the minimum shareholders' equity requirement, and waive any prior breach. The principal payments are scheduled as follows:

$2 million due on 5/31/02
$2 million due on 4/30/03
$2 million due on 4/30/04
$2 million due on 4/30/05

The amended agreement contains a pledge agreement whereby the Company pledged as collateral for the outstanding debt, 100% of the outstanding shares of both American Country and Financial Services.

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9. EMPLOYEE BENEFITS.

Retirement Plan

Substantially all salaried employees of the Company who are at least 21 years of age are eligible to participate in a 401(k) retirement plan. Employees may contribute from 1% to 15% of their eligible compensation to the plan. The Company matches 50% of employee contributions up to a maximum of 8% of eligible compensation. Total contributions by the Company to the plan were $208,000, $190,100, and $368,000 in 2001, 2000 and 1999, respectively.

Pension Plan

Prior to December 4, 1996, substantially all salaried employees of the Company were covered by a defined-benefit pension plan sponsored by its former Parent. Benefits were based on the employee's length of service and wages and minimum benefits, as defined by the plan. The former Parent's funding policy of the plan was generally to contribute amounts required to maintain minimum funding standards in accordance with the Employee Retirement Income Security Act. Pension cost allocated to the Company amounted to $43,000, $54,000 and $53,000 in 2001, 2000 and 1999.

Effective December 31, 1997, upon resolution by the board of directors, the plan was frozen.

Post-Retirement Benefits

In addition to the defined benefit plan and the 401(k) retirement plan, substantially all salaried employees of the Company are covered by a post-retirement benefit plan. The plan is noncontributory and provides medical and life insurance benefits for employees who retire after attaining age 65 with 20 years of service, and for employees with 35 years of service, regardless of age. The net periodic post-retirement benefit costs during 2001, 2000 and 1999 were $85,000, $85,000 and $77,000, respectively. The accumulated post-retirement benefit costs at December 31, 2001, 2000 and 1999 were $804,000, $744,000 and $793,000, respectively.

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The changes in the projected benefit obligation are as follows (in thousands):

		Pension Benefits Years Ended December 31,									Other Benefits Years Ended December 31,
		2001			2000			1999			2001			2000			1999
Projected benefit obligation at beginning of year:		$	2,825		$	2,748		$	2,617		$	744		$	682		$	638
Increases (decreases) during the year attributable to:
	Service cost		0			0			0			39			37			33
	Interest cost		200			188			183			46			48			44
	Actuarial (gains) losses		89			6			98			0			2			(8	)
	Benefits paid		(117	)		(117	)		(150	)		(25	)		(25	)		(25	)
	Effect of curtailment		0			0			0			0			0			0
Net (decrease) increase for year			172			77			131			60			62			44

Projected benefit obligation at end of year		$	2,997		$	2,825		$	2,748		$	804		$	744		$	682

The changes in the fair value of net assets available for plan benefits are as follows (in thousands):

		Pension Benefits Years Ended December 31,									Other Benefits Years Ended December 31,
		2001			2000			1999			2001		2000		1999
Fair value of net assets available for plan benefits at beginning of the year		$	1,849		$	1,604		$	1,560		$	0	$	0	$	0
Increases (decreases) during the year attributable to:
	Actual return on plan assets		187			162			(2	)		0		0		0
	Sponsor contributions		248			200			196			0		0		0
	Benefits paid		(117	)		(117	)		(150	)		0		0		0
Net increase for year			318			245			44			0		0		0

Fair value of net assets available for plan benefits at the end of the year		$	2,167		$	1,849		$	1,604		$	0	$	0	$	0

A reconciliation of the funded status of the plans is as follows (in thousands):

	Pension Benefits December 31,								Other Benefits December 31,
	2001			2000			1999		2001			2000		1999
Projected benefit obligations in excess of Plan Assets	$	831		$	975		$	1,144	$	804		$	744	$	793
Unrecognized prior service cost		0			0			0		0			0		0
Unrecognized net gain (loss)		(133	)		(72	)		0		(67	)		23		(88	)

Unfunded accrued pension liability recognized in the consolidated balance sheet	$	698		$	903		$	1,144	$	737		$	767	$	705

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Because the Pension Plan was frozen on December 31, 1997, American Country did not recognize service cost for 2001, 2000 and 1999. The components of annual net periodic benefit cost for the plans consisted of the following (in thousands):

	Pension Benefits Years Ended December 31,									Other Benefits Years Ended December 31,
	2001			2000			1999			2001		2000		1999
Service cost	$	0		$	0		$	0		$	39	$	37	$	33
Interest cost		200			188			183			46		48		44
Expected return on plan assets		(157	)		(134	)		(130	)		0		0		0
Amortization of unrecognized transition liability		0			0			0			0		0		0
Curtailment gain		0			0			0			0		0		0

Net cost	$	43		$	54		$	53		$	85	$	85	$	77

The projected benefit obligations for the plans were determined using the following weighted-average assumptions at the dates shown:

	Pension Benefits Years Ended December 31,						Other Benefits Years Ended December 31,
	2001		2000		1999		2001		2000		1999
Settlement discount rates	7.00	%	7.00	%	7.00	%	7.00	%	7.00	%	7.00	%
Rates of compensation increase	—		—		—		—		—		—
Long-term rates of return on assets	8.00	%	8.00	%	8.00	%	—		—		—

The assumed health care trend rates for 2001 that were used to measure the expected cost of the benefits covered by the plan are 9.0% for individuals age 65 and younger and 8.0% for individuals age 64 and older. The trend rates are expected to decrease every year through 2007, when the expected rates are 5.5% for individuals age 65 and younger and 5.0% for individuals age 64 and older.

The effect of a one-percentage point increase and decrease in the health care trend rates for each future year will result in the following:

		1-percentage point increase			1-percentage point decrease
Increase (decrease) of total service and interest cost components of post-retirement benefit expense		$	95		$	(75	)
Increase (decrease) of post-retirement benefit obligation		$	1,011		$	(804	)

10. STOCK COMPENSATION PLANS.

Stock Option Plan

The Company currently maintains a Stock Option Plan (the "Plan"), as amended, under which options to purchase up to a maximum of 1,601,181 shares of common stock may be granted to officers and other key employees. Stock options granted under this Plan, which may be either incentive stock-options or nonqualified stock options for federal income tax purposes, expire up to ten years after the date of grant.

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In January 1998, additional stock options were granted to employees of the Company. These additional options have five-year terms and vest at 20% per year and become fully exercisable five years after the date of grant. In January 1999, additional stock options were granted to employees of the company. These additional options have five-year terms and vest at 20% per year and become fully exercisable five years after the date of grant. In May, 1999, the stockholders of the Company approved an amendment of the Company's Stock Option Plan, whereby options to purchase 275,000 shares were granted to certain directors and officers of the Company. 25,000 of these additional options have a ten-year term and vest at 33¹/3% per year and become fully exercisable three years after the date of grant. The remaining 250,000 options were fully exercisable at the date of grant, and also have a 10 year term. In April 2000, additional stock options were granted to employees of the Company. These additional options have a seven-year term and vest at 33¹/3% per year and become fully exercisable three years after the date of grant. In August 2000, additional stock options were granted to employees of the Company. Some of these options are immediately exercisable and others vest at 33¹/3% per year and become fully exercisable four years after the date of grant. Regardless of the vesting provisions, these options have a five-year term. In November 2000, additional stock options were granted to employees of the Company. These additional options have a five year term and vest at 33¹/3% per year and become fully exercisable two years after the date of grant. Some of these options include a performance criteria clause which requires the Company's Common Stock to trade at a specified price for a specified length of time before the options are exercisable.

On May 8, 2000, the Company effected a one-for-four reverse stock split. No fractional shares were issued as a result of the reverse stock split. The number of common shares issued and outstanding has been restated for all periods presented. As a result of the reverse stock split, each option evidences the right to purchase twenty-five percent (25%) of the shares of Common Stock previously covered thereby, and the exercise price per share is four times the exercise price prior to the reverse stock split. All options and exercise prices have been restated for all periods presented.

Pro forma information regarding net income and earnings per share is required by FASB Statement No. 123. For the purposes of pro forma disclosures, the estimated fair value of the options at the date of grant is amortized to expense over the options vesting period.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 1999: dividend yield of 0, annualized standard deviation of 81.1%, risk free interest rate of 5.9%, and expected life of 9.6 years. For 2000, the following weighted average assumptions were used for grants: dividend yield of 0; expected volatility of 66%; risk-free interest rate of 5.6%; and expected life of 6.31 years. For 2001, the following weighted average assumptions were used for grants: dividend yield of 0; expected volatility of 87.9%; risk-free interest rate of 4.1%; and expected life of 5.0 years. A summary of the status of the Company's stock

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option plan as of December 31, 2001, 2000 and 1999, and changes during the years ending on those dates is presented below:

	2001					2000					1999
Fixed Options	Shares			Weighted Average Exercised Price		Shares			Weighted Average Exercised Price		Shares			Weighted Average Exercised Price
Outstanding at the beginning of the year		1,210,729		$	3.77		426,723		$	6.16		132,492		$	8.92
Granted		267,325			2.18		942,500			3.02		301,250			4.96
Exercised		—			—		(100,000	)		2.88		—			—
Forfeited		(115,336	)		3.77		(7,244	)		6.99		(7,019	)		7.00
Expired		(12,500	)		7.75		(51,250	)		10.92		0			—

Outstanding at the end of the year		1,350,218			3.42		1,210,729		$	3.77		426,723		$	6.16

Options Exercisable at year end		553,038					418,625					369,772			—

Weighted average grant date fair value of options granted during the year	$	0.5897				$	1.4927				$	1.0020

The following table summarizes information about stock options outstanding at December 31, 2001:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding as of 12/31/01	Weighted Average/ Remaining Average Contractual Life (Years)	Weighted Average Exercise Price		Number Exercisable at 12/31/01	Weighted Average Exercise Price
$2.18-2.40	277,575	4.6	$	2.19	88,692	$	2.21
2.41-4.00	744,500	5.7		3.00	161.917		3.10
4.01-6.00	275,000	7.3		4.80	266,667		4.79
6.01-8.00	35,643	2.4		6.92	18,262		6.99
8.01-13.00	17,500	1.9		11.94	17,500		11.94

$2.18-13.00	1,350,218	5.7	$	3.42	553,038	$	4.18

The Company applies APB Opinion 25 and related interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for its stock option plan. Had compensation cost for the Company's stock-based compensation been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement 123, the Company's net

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income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands):

		2001			2000			1999
Net Income	As Reported Pro Forma	$ $	(11,325 (11,521	) )	$ $	(2,350 (2,800	) )	$ $	(75 (795	) )
Preferred Dividends	As Reported Pro Forma	$ $	(213 (213	) )	$ $	0 0		$ $	0 0
Net Income Available to Common Shareholders	As Reported Pro Forma	$ $	(11,538 (11,734	) )	$ $	(2,350 (2,800	) )	$ $	(75 (795	) )
Basic EPS	As Reported Pro Forma	$ $	(1.26 (1.28	) )	$ $	(0.29 (0.35	) )	$ $	(0.01 (0.02	) )
Diluted EPS	As Reported Pro Forma	$ $	(1.26 (1.28	) )	$ $	(0.29 (0.34	) )	$ $	(0.01 (0.02	) )

Employee Stock Purchase Plan

Substantially all full-time salaried employees that have completed 60 days of service with the Company or any of its subsidiaries are eligible to participate in the Employee Stock Purchase Plan (the "Stock Purchase Plan"). The Stock Purchase Plan provides for a total of 375,000 shares of common stock for purchase by employees. Employees may purchase a maximum of $25,000 of the Company's stock (using fair value of the stock at the time of purchase) per calendar year. The purchase price is determined quarterly and is the lesser of 85% of our common stock's fair value on the first day of the purchase period or the last day of the purchase period, adjusted to the next highest $0.01. The Stock Purchase Plan defines fair market value as the closing price of our common stock on the first business day of the purchase period or the average closing price of our common stock on the last 5 business days of the purchase period. At December 31, 2001, 42,599 shares were purchased by employees under the Stock Purchase Plan. The Company recognizes as compensation expense, the difference between the fair market value and the employee purchase price. The Company recognized compensation expense in the amount of $15,500 in 2001 and $11,300 in 2000.

11. COMMITMENTS.

American Country leases office space and equipment under non-cancelable operating leases expiring in various years through 2002. Certain of those leases provide for escalation based on increases in operating expenses and the Consumer Price Index. Rent expense was $921,000, $910,000 and $851,000, in 2001, 2000 and 1999, respectively.

At December 31, 2001, future rental commitments under those leases are as follows (in thousands):

2002		495

	$	495

On March 1, 2002, American Country entered into a new lease for its principal office space. This lease is non-cancelable until December 31, 2007 and expires on December 31, 2012. The lease provides for

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escalation based on increases in operating expenses. Under this lease, future rental commitments are as follows (in thousands):

2002	$	179
2003	$	1,071
2004	$	1,095
2005	$	1,119
2006	$	1,142

12. CONTINGENCIES.

The Company is named as defendant in various legal actions arising principally from claims made under insurance policies and contracts. Those actions are considered by the Company in estimating the reserves for losses and LAE. The Company's management believes that the resolution of those actions will not have a material adverse effect on the Company's financial position or results of operations.

Pursuant to the assumption reinsurance agreements entered into with Mutual Services Casualty Insurance Company and Fairfield Insurance Company, the Company is required to fund the liabilities for loss and loss expense reserves and unearned premium reserves with letters of credit.

The Company is liable for guaranty fund assessments related to unaffiliated insurance companies that have become insolvent during 2001 and prior years. The Company includes a provision for all known assessments that will believed as well as an estimate of amounts (net of estimated future premium tax recoveries) that it believes will be assessed in the future.

13. FAIR VALUE OF FINANCIAL INSTRUMENTS.

Accounting standards require the disclosure of fair values for certain financial instruments. The fair value disclosures are not intended to encompass the majority of claim liabilities, various other non-financial instruments, or other assets related to the Company's business. Accordingly, care should be exercised in deriving conclusions about the Company's business or financial condition based on the fair value disclosures.

F-38

The Company does not have any financial instruments held or issued for trading purposes. The carrying value and fair value of certain of the Company's financial instruments are as follows:

	December 31
	2001				2000				1999
	Carrying— Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
ASSETS
Fixed maturities and equity securities (NOTE 3)	$	128,927	$	128,927	$	128,097	$	128,097	$	126,664	$	126,664
Collateral loans		1,659		1,659		2,005		2,005		2,721		2,721
Cash and cash equivalents and receivables		21,680		21,680		22,272		22,272		18,021		18,021
Accrued investment income		1,497		1,497		1,808		1,808		1,772		1,772
LIABILITIES
Note Payable	$	10,250	$	10,250	$	10,750	$	10,750	$	11,150	$	11,150

14. BUSINESS SEGMENTS.

The Company through American Country is engaged primarily as a property and casualty insurance carrier, providing automobile liability and physical damage, workers' compensation, multiple peril liability and property damage, among other coverage in two key niche markets: transportation and hospitality lines. Prior to April 1, 2001, American Country also wrote commercial lines insurance for contractors. In addition, the Company through its other subsidiaries provides premium and other financing services through secured loans to certain larger customers. All revenues are derived from markets in the United States.

Segment revenues for the years ended December 31, 2001, 2000 and 1999 were (in thousands):

		2001		2000		1999
SEGMENT REVENUES
Transportation		$	61,707	$	53,428	$	48,675
Hospitality			6,959		9,220		7,629
Other commercial			7,373		16,310		19,000
Personal lines			0		11		234
Other			137		1,135		215

	Total Segment revenues		76,176		80,104		75,753

Other Reconciling Items:
Investment and other income not attributable to segments			220		703		1,415

Total revenues		$	76,396	$	80,807	$	77,168

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Segment Operating Profit for the years ended December 31, 2001, 2000 and 1999 were (in thousands):

		2001			2000			1999
SEGMENT OPERATING PROFIT
Transportation		$	677		$	3,379		$	5,030
Hospitality			(2,093	)		(1,080	)		(151	)
Other commercial			(14,922	)		(6,571	)		(4,827	)
Personal lines			(138	)		(169	)		(426	)
Other			137			1,135			156

	Total Segment Operating Profit		(16,339	)		(3,306	)		(218	)

Other Reconciling Items:
Investment and other income not attributable to segments			220			703			1,415
General corporate expenses			(21	)		(855	)		(580	)
Interest and other expenses, net			(29	)		(39	)		(1,659	)

Total Adjustments			170			(191	)		(824	)

	Total Operating Profit	$	(16,169	)	$	(3,497	)	$	(1,042	)

Asset information by reportable segment is not reported since the Company does not produce such information internally. Segment Operating Profit is net of depreciation expense of $451,000, $346,000 and $346,000 for the years 2001, 2000 and 1999, respectively.

15. SUBSEQUENT EVENTS.

On February 27, 2002, KFS Acquisition Corp. (the "Purchaser" or "KFS"), a Delaware corporation and wholly owned subsidiary of Kingsway Financial Services Inc., an Ontario corporation ("Kingsway") filed Schedule 13D with the Securities and Exchange Commission, in which it commenced a tender offer (the "Tender Offer") for all of the outstanding shares of the Company's Common Stock and Series A Convertible Preferred Stock and all of the Company's outstanding Class A Common Stock Purchase Warrants. The tender offer does not include an offer to purchase the Company's outstanding Common Stock Purchase Warrants expiring August 31, 2002 which trade on NASDAQ under the symbol ACHIW.

The tender offer expires on April 1, 2002. There are conditions to the Tender Offer, any or all of which may be waived by the Purchaser in its sole discretion. The conditions include:

•: That the Company's stockholders validly tender and do not withdraw prior to April 1, 2002, the number of shares representing, together with the shares owned by Kingsway and its subsidiaries, at least a majority of the total voting stock of the Company on a fully diluted basis;
•: That Kingsway and the Purchaser shall be satisfied, in their sole discretion, that the restrictions on business combinations contained in Section 203 of the Delaware General Corporation Law (the "Delaware Takeover Statute") would not apply to Kingsway or the Purchaser in connection with the Offer or the proposed merger described in the Tender Offer;
•: That Kingsway and the Purchaser obtain all insurance regulatory approvals, including the approval of the Illinois Director of Insurance, necessary for their acquisition of control over the Company

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and its insurance subsidiaries on terms and conditions satisfactory to Kingsway and the Purchaser, in their sole discretion;

•: That the Company has not entered into or effectuated any agreement or transaction with any person or entity having the effect of impairing the Purchaser's ability to acquire the Company or otherwise diminishing the expected economic value to Kingsway of the acquisition of the Company.

On March 11, 2002, the Company's Board of Directors filed Schedule 14D-9 Solicitation/Recommendation Statement with the Securities and Exchange Commission, in which it recommended that holders of the Company's Common Stock, accept KFS' Tender Offer.

The Board of Directors of the Company determined that the Tender Offer is advisable, fair to and in the best interests of the Company and the holders of its common stock, and unanimously voted to recommend that holders of its common stock that wish to receive cash for their stock accept the Tender Offer. The Board, however, did not express an opinion with respect to the Tender Offer for the Series A convertible preferred stock or the Class A warrants.

On March 5, 2002, the Company's debt agreement with Northern Trust was amended to reschedule the term loan payments, reduce the minimum shareholders' equity requirement, reduce the line of credit available balance and waive any prior breach of loan covenants. Refer to Footnote 8 for a complete discussion.

On March 1, 2002, the Company signed a new lease for its principal office space. The lease is non-cancelable until December 31, 2007 and expires on December 31, 2012. Refer to Footnote 11 for a complete discussion.

On March 27, 2002, KFS announced that the Illinois Director of Insurance approved its acquisition of control of the Company.

16. RELATED PARTY TRANSACTIONS

The following related party transactions occurred in the year ended December 31, 2001:

On January 26, 2001, ACHI repaid a $250,000 loan to Financial Services.

On January 26, 2001, Professional Services made a $350,000 loan payment to ACHI. On May 31, 2001, Professional Services made a $550,000 loan payment to ACHI.

On January 31, 2001, ACHI made a $4.5 million capital contribution to American Country. On March 30, 2001, ACHI made a $500,000 capital contribution to American Country.

On May 31, 2001, American Country purchased $1.7 million of collateralized loans from Professional Services. On May 31, 2001, Professional Services repaid a $1.5 million loan to American Country.

In 2001, ACHI recorded a receivable of $103,000 from American Country for shares purchased under the Employee Stock Purchase Plan, of which $83,000 was received.

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At December 31, 2001, the components of Payable to Affiliates are:

Payable to American Country	$	752
Payable to (receivable from) Financial Services.		(3	)
Payable to Professional Services.		3

Payable to Professional Services—$3

Receivable from Financial Services—$3

At December 31, 2001, Investment in subsidiaries is as follows:

American Country Insurance Company	$	40,976
American Country Financial Services Corp.		886
American Country Professional Services Corp.		27

William J. Barrett, who serves on the board of directors of the Company, is a Senior Vice President of Janney Montgomery Scott.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		AMERICAN COUNTRY HOLDINGS INC.
		By:		/s/ JOHN A. DORE John A. Dore Chairman of the Board, President and Chief Executive Officer

Date: March 29, 2002

Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date

/s/ JOHN A. DORE John A. Dore	Chairman Of The Board, President, Chief Executive Officer And Director (Principal Executive Officer)	March 29, 2002
/s/ KARLA M. VIOLETTO Karla M. Violetto	Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	March 29, 2002
/s/ WILLIAM J. BARRETT William J. Barrett	Director	March 29, 2002
/s/ EDWIN W. ELDER Edwin W. Elder	Director	March 29, 2002
/s/ RICHARD H. KONRAD Richard H. Konrad	Director	March 29, 2002
/s/ MARTIN L. SOLOMON Martin L. Solomon	Director	March 29, 2002
/s/ WILMER J. THOMAS, JR. Wilmer J. Thomas, Jr.	Director	March 29, 2002

EXHIBIT INDEX

	Exhibit No.		Description

	3		ARTICLES OF INCORPORATION AND BY-LAWS
	3.1		Amended and Restated Articles of Incorporation of the Company were filed with the Commission as Exhibit 3.1 to the Company's Report on Form 10-Q for the period ended March 31, 2000 and are incorporated herein by reference.
	3.2		Amended and Restated By-Laws of the Company were filed with the Commission as Exhibit 3.2 to the Company's Report on Form 10-Q for the period ended March 31, 2000 and are incorporated herein by reference.
	4		INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
	4.1		The Second Amendment dated March 5, 2002 to the Amended and Restated Credit Agreement dated March 24, 2000 between the Company and the Northern Trust Company.
	4.2		The Pledge Agreement dated March 5, 2002 between the Company and the Northern Trust Company.
	4.3		Form of Warrant Certificate was filed with the Commission as Exhibit 4(b) to The Western Systems Corp.'s Registration Statement on Form S-1 (File No. 33-84234) and is incorporated herein by reference.
	4.4		Warrant Agreement, dated as of June 25, 1993, between the Company and American Stock Transfer & Trust Company, as Warrant Agent, was filed with the Commission as Exhibit 4(c) to The Western Systems Corp.'s Registration Statement on Form S- 1 (File No. 33-84234) and is incorporated herein by reference.
	4.5		Warrant Agreement Amendment No. 4, dated as of July 31, 1998 between the Company and American Stock Transfer & Trust Company, as Warrant Agent, was filed with the Commission as Exhibit 4 to the Company's Report on Form 10-K for the year ended December 31, 1998 and is incorporated herein by reference.
	4.6		Warrant Agreement Amendment No. 5, dated as of July 30, 1999 between the Company and American Stock Transfer & Trust Company, as Warrant Agent, was filed with the Commission as Exhibit 4.5 to the Company's Report on Form 10-Q for the quarter ended September 30, 1999 and is incorporated herein by reference.
	4.7		Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock, was filed with the Commission as Exhibit 4.1 to the Company's Report of Form 8-K dated January 12, 2001 and is incorporated herein by reference.
	4.8		Certificate of Amendment of Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock was filed with the Commission as Exhibit 4.5 to the Company's Registration Statement on Form S-3 (File No. 333-54396) an is incorporated herein by reference.
	4.9		Class A Warrant Agreement dated December 29, 2000 between the Company and American Stock Transfer & Trust Company was filed with the Commission as Exhibit 4.2 to the Company's Registration Statement on Form S-3 (File No. 333-54396) and is incorporated by reference.

	4.10		Form of Warrant Certificate was filed with the Commission as Exhibit 4.3 to the Company's Registration Statement on Form S-3 (File No. 333-54396) and is incorporated by reference.
	21		SUBSIDIARIES OF THE REGISTRANT
	21		Subsidiaries of American Country Holdings Inc.
	23		CONSENTS OF EXPERTS AND COUNSEL
	23.1		Consent of PricewaterhouseCoopers LLP
	99		ADDITIONAL EXHIBITS
	99.1		American Country Holdings Inc. Safe Harbor Statement
	99.2		Audit Committee Charter was filed with the Commission as exhibit 99.2 to the Company's Report on Form 10-K for the year ended December 31, 2000 and is incorporated herein by reference.

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