So I just tried adding my iCloud email to Apple Mail on my Mac and kept the 'contacts' checkbox ticked when Mail asked me to create the account setup. My iCloud account worked fine in Mail.
Then I went to Address Book and noticed that 'All on My Mac' contacts had been replaced with 'iCloud' on the first page of the address book (click on the red bookmarky thing on contacts to see it). Where had my 'All on My Mac' contacts gone??!! Well they had been copied over to iCloud with asking me.... So I thought I'd go and disable the iCloud account in Address Book - and 'All on My Mac' contact returned but they were completely EMPTY?! I don't necessarily want all my stuff synced to some [US] server farm - especially when I'm not even asked about it.
I sat back for a moment and thought about it... I then tried deleting the iCloud account and then it asked me if I wanted to delete all my contacts... or Keep them. I kept them and low and behold my contacts returned to 'All on My Mac'!