UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2013

OR

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

For the transition period from                      to                     

Commission File No. 000-51579

NCI, INC.

(Exact name of registrant as specified in its charter)

Delaware	20-3211574
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
11730 Plaza America Drive Reston, Virginia	20190-4764
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (703) 707-6900

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

Title of Each Class	Name of Each Exchange On Which Registered
Class A Common Stock, par value $0.019 per share	Nasdaq Stock Market, LLC

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

None

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x    Yes  ¨    No

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 the 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 is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The aggregate market value of NCI, Inc. Class A common stock held by non-affiliates of the registrant as of June 28, 2013 was approximately $31,696,660.

As of February 7, 2014, there were 8,225,601 shares outstanding of the registrant’s Class A common stock. In addition, there are 4,700,000 shares outstanding of the registrant’s Class B common stock, which are convertible on a one-for-one basis into Class A common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the definitive Proxy Statement to be filed with the Securities Exchange Commission pursuant to Regulation 14A in connection with the registrant’s 2013 Annual Meeting of Stockholders, to be filed subsequent to the date hereof, are incorporated by reference into Part III (Items 10, 11, 12, 13, and 14) of this Annual Report on Form 10-K. Such definitive Proxy Statement will be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.

NCI, INC.

FORM 10-K

		PAGE
PART I:			1
Item 1.	Business		1
Item 1A.	Risk Factors		6
Item 1B.	Unresolved Staff Comments		16
Item 2.	Properties		16
Item 3.	Legal Proceedings		16
Item 4.	Mine Safety Disclosures		16
PART II:			16
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities		16
Item 6.	Selected Financial Data		19
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		30
Item 8.	Financial Statements and Supplementary Data		31
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		31
Item 9A.	Controls and Procedures		31
Item 9B.	Other Information		32
PART III:			32
Item 10.	Directors, Executive Officers, and Corporate Governance		32
Item 11.	Executive Compensation		32
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		33
Item 13.	Certain Relationships and Related Transactions and Director Independence		33
Item 14.	Principal Accountant Fees and Services		33
PART IV:			33
Item 15.	Exhibits and Financial Statement Schedules		33
	Signatures		35

PART I

Forward-Looking Statements

This Annual Report on Form 10-K, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding our business, financial condition, results of operations, and prospects. There are statements made herein which may not address historical facts and, therefore, could be interpreted to be forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements are based on assumptions and assessments made by the Company’s management in light of its experience and its perception of historical trends, current conditions, expected future developments, and other factors it believes to be appropriate. You can often identify these statements by the use of words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will,” “would,” “expect,” “plan,” “seek,” “continue,” and other similar words or variations on such words.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-K. Subsequent events and developments may cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. Our actual results may differ materially from those discussed in or implied by any of the forward-looking statements as a result of various factors, including but not limited to those listed in “Risk Factors” and elsewhere in this Form 10-K and those listed in other documents we have filed with the Securities and Exchange Commission (SEC).

In this document, unless the context indicates otherwise, the terms “Company,” “NCI,” “we,” “us,” and “our” refer to NCI, Inc., a Delaware corporation, and, where appropriate, its subsidiaries.

ITEM 1. BUSINESS

COMPANY OVERVIEW

NCI is a worldwide provider of leading-edge enterprise services and solutions to Defense, Intelligence, Healthcare, and Civilian Government agencies. Inspired by our customers’ missions and driven by their challenges, we focus on helping our customers achieve higher levels of performance by utilizing cutting-edge technologies and methodologies in the following capability areas: Cloud Computing and IT Infrastructure Optimization, Cybersecurity and Information Assurance, Engineering and Logistics Support, Enterprise Information Management and Advanced Analytics, Health IT and Medical Support, IT Service Management, Software and Systems Development/Integration, and Modeling, Training and Simulation.

Our team of highly skilled professionals is committed to service excellence and delivers innovative, cost-effective enterprise services and solutions on time and within budget. We are focused on reshaping the way services and solutions are delivered to our customers in order to proactively understand and meet their mission needs and enable them to rapidly adapt to dynamic environments. Headquartered in Reston, Virginia, NCI currently operates in more than 100 locations around the globe.

For additional discussion and analysis related to recent business developments, see “Industry Trends” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II of this Annual Report on Form 10-K.

IT AND PROFESSIONAL SERVICES AND SOLUTIONS

We provide IT and professional services and solutions by leveraging our eight core service offerings: Cloud computing and IT infrastructure optimization; cybersecurity and information assurance; engineering and logistics support; enterprise information management and advanced analytics; health IT and medical support; IT service management; modeling, simulation, and training; software and systems development and integration.

Cloud Computing and IT Infrastructure Optimization

NCI uses an integrated, tailorable engineering and operations methodology for governing how we provide cloud computing and IT infrastructure optimization services that fulfill our customer’s most important mission needs. Our Government-focused, cloud-agnostic approach allows our customers to adapt rapidly to the changing environment.

NCI’s capabilities include helping our clients navigate the range of cloud, Everything-as-a-Service (EaaS), capacity services, and virtualization options available. We enable the benefits of the private cloud to be implemented through enterprise cloud (eCloud) solutions behind our customers’ firewalls for enhanced security/control. We focus on identifying, qualifying, and partnering with leading Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS), and Software-as-a-Service (SaaS) providers.

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As a data center implementor/consolidator, NCI is adept at moving, modernizing, and operating highly secure data center environments for U.S. Intelligence, Military, and Healthcare communities. We drive increasing levels of cost savings and offer opportunities to leverage innovative capacity services and EaaS procurement models.

Cybersecurity and Information Assurance

NCI’s comprehensive approach is designed to align information assurance (IA) and cybersecurity initiatives that support business objectives, compliance requirements, and risk management.

Leveraging our domain expertise and experience, NCI provides our customers the full lifecycle of cybersecurity services, including policy and planning, compliance, identity and access management, training, education, awareness, and enterprise security operations. We design, configure, and deploy security architectures based on assessments of our customers’ current and future information technology (IT) needs, mission requirements, and regulatory requirements, as well as specific threats from unauthorized users.

NCI’s integrated approach to network and security management ensures that cybersecurity is a central component of all our service offerings. Our IA teams research and implement security policies, provide technical support, and develop comprehensive security assessment plans covering the full lifecycle of IA support. We help define and implement IA policies, procedures, and guidelines to ensure effective future IT planning with direct linkage to portfolio management and Information Technology Infrastructure Library (ITIL)–based service catalogs.

Engineering and Logistics Support

NCI supports Department of Defense (DoD) weapon systems lifecycle support efforts in diminishing manufacturing sources and material shortages (DMSMS) analysis and engineering solutions in support of modernization and technology insertion. We provide a turnkey solution to mitigating weapons system obsolescence, which includes DMSMS subject-matter experts and a web-based, state-of-the-art software tool to provide proactive analysis and resolution services that save time, money, and resources for our customers.

Our proactive DMSMS efforts require us to manage a synergistic effort by teams across several disciplines and communities, including acquisition, parts management, standardization, logistics, and sustainment. NCI’s approach combines engineering expertise with in-depth obsolescence analysis, allowing our team to identify potential risks early, as well as alternate sources, components, or engineering designs. Our predictive analysis and service life–extension capabilities ensure increased asset readiness and availability with reduced total cost of ownership.

Enterprise Information Management and Advanced Analytics

NCI directly supports rapid and relevant discovery, anticipatory intelligence, focused analysis, and persistent surveillance across multiple customer domains and operational disciplines as well as significantly enriches the intelligence-to-operations lifecycle by applying scalable technologies and advanced algorithms to help interpret data.

We leverage IA principles to establish data standards/guidelines that enable clients to manage enterprise information through improved metadata management, master data management, data integration, and data quality projects. Our solutions combine the functional expertise and knowledge of domain experts with advanced data mining and statistical algorithms, and our applied techniques include cluster analysis, data fusion and integration, machine learning, natural language processing, neural networks, predictive modeling, time series analysis, and complex visualization (graph analytics).

In our Global Health Group, NCI’s experts in visualization, data modeling, and computational linguistics provide enterprise capabilities to satisfy mission and customer needs. We couple our technical experts with regulation and healthcare subject-matter expertise to identify anomalies indicative of fraudulent, wasteful, or abusive behaviors.

Health IT and Medical Support

NCI provides a broad spectrum of health IT services experience, including cybersecurity/IA, Health Insurance Portability and Accountability Act (HIPPA) and Federal Information Security Management Act (FISMA) compliance, data analysis/management, and case management to support healthcare benefit programs and improve the quality of healthcare services provided by health and medical personnel.

We leverage a deep and diverse skill base encompassing IT services, electronic health records management, healthcare data analysis, logistics, case management, investigations, and fraud detection. Our team of professionals includes public health experts, healthcare administrators, investigators, nurses, physicians, statisticians, network engineers, medical trainers, IT specialists, bioenvironmental engineers, and aerospace physiologists. Our capabilities and infrastructure support all aspects of health IT and medical support, and our solutions offer real-time, high-fidelity interactions among patients and their practitioners.

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IT Service Management

NCI designs, installs, and manages complex mission-critical enterprise systems for our customers, increasing the reliability, security, and efficiency of their IT operations while meeting stringent guidelines and requirements. We provide end-to-end management and IT enterprise network services, and we understand the processes, technology, and Federal/DoD regulations that drive our customers’ needs.

Using our own IT service management (ITSM) technical methodology as the baseline, NCI customizes each implementation based on specific customer requirements to ensure we are supporting their needs and mission. This methodology utilizes network and traffic simulations to identify potential changes in performance or possible security issues within a particular network, allowing our engineers to protect customers’ systems and data. We employ continual service-improvement processes and knowledge-centric service-delivery assurance practices designed to keep customers’ mission-critical systems at peak performance. Our ITSM professionals are trained and certified in the leading commercial enterprise tools and combine that knowledge with our techniques, experience, and processes to deliver innovative solutions to our customers.

Modeling, Simulation, and Training

NCI offers a full range of modeling, simulation, training, and exercise support capabilities to increase performance and identify the most cost-effective strategies to meet our customers’ unique training needs. Our blended training strategy fully integrates our distinction in training analysis and courseware development with our IT expertise to provide a complete, multifaceted training solution. We provide these solutions through a unique blend of systems engineering, agile development, and operation expertise that allow us to tailor our solutions.

NCI develops programs within an adaptive training environment that support individual, collective, distance learning, and constructive modalities. Our tailored training solutions leverage the in-depth operational expertise of our staff and the engineering, software development, and network operation capabilities of the company. Our training programs are developed using a disciplined Capability Maturity Model Integration (CMMI) Level 3 appraised process, thereby ensuring a specific focus on performance and effectiveness.

Software and Systems Development/Integration

NCI has developed a systems engineering methodology that supports quality-managed, performance-based processes within a responsive, modular, and agile framework. We are CMMI appraised and hold certifications in International Organization for Standardization (ISO) 9001:2009, and we fully integrate ISO 20000-1:2005 quality aspects into our corporate engineering methodology to ensure we deliver high-quality products and services on time and within budget.

NCI’s software/systems development approach focuses on frequent customer interaction to ensure our design remains consistent with customer needs. As codified in our agile Hybrid Engineering Lifestyle Methodology^SM (HELM), we provide a full range of software development, systems engineering, and integration services focused primarily on our customers’ high-end mission-oriented programs. NCI’s HELM processes incorporate best practices from ISO 9001:2009, Institute of Electrical and Electronics Engineers (IEEE) 12207, CMMI, ISO 20000-1:2005, and ITIL V3, and we apply this hybrid framework to ensure thorough, robust, full-lifecycle engineering processes are kept in balance with efficiency and rapid, responsive delivery goals.

KEY CUSTOMERS

Our customers include a diverse base of Federal Government defense, intelligence, and civilian agencies. For the year ended December 31, 2013, approximately 75% of our revenue was generated from DoD and Intelligence agency customers, and approximately 25% of our revenue was generated from Federal civilian agency customers. NCI’s PEO Soldier contract is the Company’s largest revenue-generating contract and accounted for approximately 14% and 17% of our revenues in 2013 and 2012, respectively. NCI’s PEO Soldier contract is a cost-plus contract consisting of a base period and two option periods for a total term of three years commencing in September 2012.

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CONTRACT PROCUREMENT

Our business is heavily regulated, and we must work within laws and regulations relating to the formation, administration and performance of U.S. Government contracts. The U.S. Government procurement environment has evolved due to statutory and regulatory procurement reform initiatives. Today, U.S. Government customers employ several procurement contracting methods to purchase services and solutions. Budgetary pressures and reforms in the procurement process have caused many U.S. Government customers to increasingly purchase services and products using contracting processes that give them the ability to select multiple winners or pre-qualify certain contractors to provide various services or products on established general terms and conditions rather than through single-award contracts. The predominant contracting methods through which U.S. Government agencies procure services and products include the following:

Single-Award Contracts. U.S. Government agencies may procure services and products through single-award contracts, which specify the scope of services and products that will be delivered and identify the contractor that will provide the specified services. When an agency has a requirement, interested contractors are solicited, qualified and then provided with a request for a proposal. The process of qualification, request for proposals and evaluation of contractor bids requires the agency to maintain a large, professional procurement staff; the bidding and selection process can take a year or more to complete. For the contractor, this method of contracting may provide greater certainty of the timing and amounts to be received at the time of contract award because it generally results in the customer contracting for a specific scope of services or products from the single successful awardee.

Indefinite Delivery/Indefinite Quantity (IDIQ) Contracts. The U.S. Government uses IDIQ contracts to obtain commitments from contractors to provide certain services or products on pre-established terms and conditions. The U.S. Government then issues task orders under the IDIQ contracts to purchase the specific services or products it needs. IDIQ contracts are awarded to one or more contractors following a competitive procurement process. Under a single-award IDIQ contract, all task orders under that contract are awarded to one pre-selected contractor. Under a multi-award IDIQ contract, task orders can be awarded to any of the pre-selected contractors, which can result in further limited competition for the award of task orders. Multi-award IDIQ contracts that are open for any government agency to use for the procurement of services are commonly referred to as government-wide acquisition contracts (GWACs). IDIQ contracts often have multi-year terms and unfunded ceiling amounts, therefore enabling –but not committing—the U.S. Government to purchase substantial amounts of services or products from one or more contractors. At the time an IDIQ contract is awarded (prior to the award of any task orders), a contractor may have limited or no visibility as to the ultimate amount of services or products that the U.S. Government will purchase under the contract, and in the case of a multi-award IDIQ, the contractor from which such purchases may be made.

U.S. General Services Administration (GSA) Schedule Contracts. The GSA maintains listings of approved suppliers of services and products with agreed-upon prices for use throughout the U.S. Government. In order for a company to provide services under a GSA Schedule contract, a company must be pre-qualified and awarded a contract by the GSA. When an agency uses a GSA Schedule contract to meet its requirements, the agency, or the GSA on behalf of the agency, conducts the procurement. The user agency, or the GSA on its behalf, evaluates the user agency’s requirements and initiates a competition limited to GSA Schedule-qualified contractors. GSA Schedule contracts are designed to provide the user agency with reduced procurement time and lower procurement costs. Similar to IDIQ contracts, at the time a GSA Schedule contract is awarded, a contractor may have limited or no visibility as to the ultimate amount of services or products that the U.S. Government will purchase under the contract.

We often team with other parties, including our competitors, to submit bids for large U.S Government procurements or other opportunities where we believe that the combination of services and products that we can provide as a team will help us win and best perform the contract. Our relationships with our teammates, including whether we serve as the prime contractor or as a subcontractor, vary with each contract opportunity and typically depend on the program, contract or customer requirements, as well as the relative size, qualifications, capabilities, customer relationships and experience of our company and our teammates.

Contracting with the U.S. Government also subjects us to substantial regulation and unique risks, including the U.S. Government’s ability to cancel any contract at any time without reason. Most of our contracts have cancellation terms that would permit us to recover all or a portion of our incurred costs and fees for work performed. These regulations and risks are described in more detail below under Item 1A, Risk Factors in this Annual Report on Form 10-K.

CONTRACT TYPES

Generally, the type of contract for our services and products is determined by or negotiated with the U.S. Government and may depend on certain factors, including the type and complexity of the work to be performed, degree and timing of the responsibility to be assumed by the contractor for the costs of performance, the extent of price competition and the amount and nature of the profit incentive offered to the contractor for achieving or exceeding specified standards or goals. We generate revenues under several types of contracts, including the following:

Cost-reimbursement contracts provide for reimbursement of our direct contract costs and allocable indirect costs, plus a fee. This type of contract is generally used when uncertainties involved in contract performance do not permit costs to be estimated with sufficient accuracy to use a fixed-price contract. Cost-reimbursement contracts generally subject us to lower risk, but generally require us to use our best efforts to accomplish the scope of the work within a specified time and amount of costs.

Time-and-materials (T&M) contracts typically provide for negotiated fixed hourly rates for specified categories of direct labor plus reimbursement of other direct costs. This type of contract is generally used when there is uncertainty of the extent or duration of the work to be performed by the contractor at the time of contract award or it is not possible to anticipate costs with any reasonable degree of confidence. On T&M contracts, we assume the risk of providing appropriately qualified staff to perform these contracts at the hourly rates set forth in the contracts over the period of performance of the contracts.

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Firm-fixed-price (FFP) contracts provide for a fixed price for specified products, systems and/or services. This type of contract is generally used when the government acquires products and services on the basis of reasonably definitive specifications and which have a determinable fair and reasonable price. These contracts offer us potential increased profits if we can complete the work at lower costs than planned. While FFP contracts allow us to benefit from cost savings, these contracts also increase our exposure to the risk of cost overruns.

Our earnings and profitability may vary materially depending on changes in the proportionate amount of revenues derived from each type of contract, the nature of services or products provided, as well as the achievement of performance objectives and the stage of performance at which the right to receive fees, particularly under incentive and award fee contracts, is finally determined. Cost reimbursement and T&M contracts generally have lower profitability than FFP contracts. For the proportionate amount of revenues derived from each type of contract for fiscal 2013, 2012 and 2011, see Contract Types in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II of this Annual Report on Form 10-K.

CONTRACT BACKLOG

Backlog represents the estimated amount of future revenues to be recognized under awarded contracts as work is performed. Our backlog consists of funded backlog and negotiated unfunded backlog, each of which are described in “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II of this Annual Report on Form 10-K.

GOVERNMENT REGULATION

We are subject to various laws and regulations that may affect our business. U.S. Federal Government contracts are subject to a number of Federal laws and regulations, including the Federal Acquisition Regulation (FAR), which limits our ability to compete for, or perform on, certain other contracts due to conflicts of interest, the Cost Accounting Standards and Cost Principles, which impose accounting requirements that govern our right to reimbursement under certain cost-based U.S. Federal Government contracts, and the Truth in Negotiations Act, which requires certification and disclosure of all cost and pricing data in connection with contract negotiations. We and our subcontractors must also comply with the Foreign Corrupt Practices Act or U.S. export control regulations and laws, regulations, and executive orders restricting the use and dissemination of information classified for national security purposes and the export of certain products and technical data. We may also become subject to other U.S. Federal Governmental regulations, including those pertaining to environmental laws and potential climate change legislation that could impose additional restrictions or costs in order to comply with such regulations.

COMPETITION

We believe that major competitive factors in our market include strong customer relationships, a record of successful contract performance, a reputation for quality, an experienced management team, and employees with a wide range of technical expertise and security clearances. With the Government’s expanding adoption of low-price, technically acceptable (LPTA) acquisition approaches, competitive pricing has taken on even more importance than existed in past years, especially in labor-intensive, services-based contracts. We often compete against or team with divisions of large Defense and IT services contractors, including Lockheed Martin Corporation, Northrop Grumman Corporation, General Dynamics Corporation, Computer Sciences Corporation, Raytheon, Harris, BAE Systems, Booz Allen Hamilton, and Science Applications International Corporation (SAIC). We also compete against or team with mid-tier Federal contractors, such as CACI International and ManTech International that have specialized capabilities, as well as numerous non-public companies within the sector. In the immediate future, we are anticipating competition from new organizations that have been divested by major Defense contractors due to organizational conflicts of interest (OCI) or for competitiveness reasons. Two examples are the spin-off of Engility Holdings Inc. by L-3 Communications and SAIC’s split into two separate publicly traded companies. Some of our competitors have significantly longer operating histories and more substantial resources. We expect competition in the U.S. Federal Government IT and professional services sector to increase in the future.

EMPLOYEES

As of December 31, 2013, we had approximately 1,900 employees, more than 58% of whom held at least one U.S. Federal Government security clearance. Our employees are located at more than 100 sites worldwide. More than 62% of our staff is located on-site with our customers, allowing us to build and cultivate long-term relationships.

CORPORATE INFORMATION

We were incorporated as NCI, Inc. in Delaware in July 2005. In September 2005, we completed a merger and share exchange as a result of which NCI Information Systems, Inc., a Virginia corporation, which was incorporated in 1989, became a wholly-owned subsidiary. We primarily contract with the U.S. Federal Government through NCI Information Systems, Inc.

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COMPANY WEBSITE AND INFORMATION

Our Internet address is www.nciinc.com. Information contained on our website is not part of this report. We make available free of charge on our Internet site our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Alternatively, you may access these reports at the SEC’s Internet website: www.sec.gov.

You may request a copy of the materials identified in the preceding paragraph, at no cost, by writing or telephoning us at our corporate headquarters:

NCI, Inc.

11730 Plaza America Drive, Suite 700

Reston, Virginia 20190-4764

Attention: Investor Relations

Telephone: (703) 707-6900

ITEM 1A. RISK FACTORS

You should carefully consider the risks and uncertainties described below, together with information included elsewhere in this Annual Report on Form 10-K and other documents we file with the SEC, in your evaluation of our business. The risks and uncertainties described below are those that we have identified as material, but are not the only risks and uncertainties facing us. If any of these risks or uncertainties actually occurs, our business, financial condition, or operating results could be materially harmed and the price of our stock could decline. Our business is also subject to general risks and uncertainties that affect many other companies, such as overall U.S. and non-U.S. economic and industry conditions, including a global economic slowdown, geopolitical events, changes in laws or accounting rules, fluctuations in interest and exchange rates, terrorism, international conflicts, major health concerns, natural disasters, or other disruptions of expected economic and business conditions. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may impair our business operations and liquidity.

Risks Related to Our Business

We depend on contracts with the U.S. Federal Government for substantially all of our revenue. If our relationships with U.S. Federal Government Agencies are harmed, our future revenue and operating profits would decline.

For the years ended December 31, 2013 and 2012, we derived substantially all our revenue from U.S. Federal Government contracts, either as a prime contractor or a subcontractor, including approximately 75% and 76% of our revenue from contracts with the DoD and Intelligence Agencies in 2013 and 2012, respectively. We believe that U.S. Federal Government contracts will continue to be the source of substantially all of our revenue for the foreseeable future. For this reason, any issue that compromises our relationship with U.S. Federal Government Agencies in general, or with the DoD and Intelligence Agencies in particular, would cause our revenue to decline. Among the key factors in maintaining our relationships with U.S. Federal Government Agencies are our performance on individual contracts and task orders, the strength of our professional reputation, and the relationships of our key executives with customer personnel. To the extent that our performance does not meet customer expectations, or our reputation or relationships with one or more key customers are impaired, our revenue and operating results could decline materially.

We face intense competition from many competitors that have greater resources than we do, which could result in price reductions, reduced profitability, or loss of market share.

We operate in highly competitive markets and generally encounter intense competition to win contracts from many other firms, including mid-tier Federal contractors with specialized capabilities and large Defense and IT services providers. Competition in our markets may increase as a result of a number of factors, such as the entrance of new or larger competitors, including those formed through alliances or consolidation. These competitors may have greater financial, technical, marketing and public relations resources; larger customer bases; and greater brand or name recognition than we do. These competitors could, among other things:

• divert sales from us by winning very large-scale Government contracts;

• force us to charge lower prices; or

• adversely affect our relationships with current customers, including our ability to continue to win competitively awarded engagements where we are the incumbent.

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If we lose business to our competitors or are forced to lower our prices, our revenue and our operating profits could decline. In addition, we may face competition from our subcontractors who, from time to time, seek to obtain prime contractor status on contracts for which they currently serve as a subcontractor to us. If one or more of our current subcontractors are awarded prime contractor status on such contracts in the future, it could divert sales from us or could force us to charge lower prices, which could cause our margins to suffer.

We cannot guarantee that our estimated contract backlog will result in actual revenue.

As of December 31, 2013, our estimated contract backlog totaled approximately $488 million, of which approximately $195 million was funded. There can be no assurance that our backlog will result in actual revenue in any particular period, or at all, or that any contract included in backlog will be profitable. There is a higher degree of risk in this regard with respect to unfunded backlog. The actual receipt and timing of any revenue is subject to various contingencies, many of which are beyond our control. The actual receipt of revenue on contracts included in backlog may never occur or may change because a program schedule could change; the program could be canceled; a contract could be reduced, modified, or terminated early; or an option that we had assumed could not be exercised. In 2013, we experienced significant reductions in contract backlog as a result of reductions in scope of work and decreased contract ceilings on certain programs, among other factors. Further, while many of our U.S. Federal Government contracts require performance over a period of years, Congress often appropriates funds for these contracts for only one year at a time. Consequently, our contracts typically are only partially funded at any point during their term, and all or some of the work intended to be performed under the contracts will remain unfunded pending subsequent Congressional appropriations and the obligation of additional funds to the contract by the procuring agency. Our estimates are based on our experience under such contracts and similar contracts. However, there can be no assurances that all, or any, of such estimated contract backlog will be recognized as revenue.

Our revenue and operating profits could be adversely affected by significant changes in the contracting or fiscal policies of the U.S. Federal Government.

We depend on continued U.S. Federal Government expenditures on Defense, Intelligence, and other programs that we support.

Future levels of expenditures and authorizations for those programs may decrease, remain constant, or shift to programs in areas where we do not currently provide services. Among the factors that could materially adversely affect us are the following:

• budgetary constraints affecting U.S. Federal Government spending generally or specific departments or agencies in particular, and changes in fiscal policies or available funding;

• Our dependence on our contracts with U.S. Federal Government agencies, particularly within the U.S. Department of Defense, for the majority of our revenue; a change in funding of our contracts due to bid protests; changes in U.S. Federal Government spending priorities; changes in contract type, particularly changes from cost-plus fee or time-and-material type contracts to firm fixed-price type contracts;

• changes in U.S. Federal Government programs or requirements, including the increased use of small business providers;

• U.S. Federal Government Agencies are more frequently awarding contracts on an LPTA basis in order to reduce expenditures;

• U.S. Federal Governmental shutdowns (such as that which occurred during the U.S. Federal Government’s 1996 and 2013 fiscal years) and other potential delays in the U.S. Federal Government appropriations process;

• the use of a Continuing Resolution to fund agencies instead of a budget appropriation, which may cause our customers within those Agencies to defer or reduce work under our current contracts;

• a failure of Congress to pass adequate supplemental appropriations to pay for an international conflict or related reconstruction efforts;

• the FAR and certain of our U.S. Federal Government contracts contain OCI clauses that may limit our ability to compete for, or perform on certain other contracts. OCIs arise when we engage in activities that may make us unable to render impartial assistance or advice to the U.S. Federal Government, impair our objectivity in performing contract work, or provide us with an unfair competitive advantage. An OCI issue that precludes our competition for, or performance on a significant program or contract could harm our prospects and negative publicity about an OCI issue could damage our reputation;

• curtailment of the U.S. Federal Government’s use of professional services providers, realignment of funds with changed Government priorities including “insourcing” of previously contracted support services, and the realignment of funds to other non-defense related programs, which may reduce the amount of funds available to defense-related and other programs in our core service areas;

• adoption of new laws or regulations;

• competition and consolidation in the IT industry;

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• our ability to achieve the objectives of near-term or long-range business plans, particularly revenue growth, and the ability to realize future deferred tax assets benefits;

• general economic conditions; and

• these or other factors could cause U.S. Federal Governmental Agencies, or prime contractors for which we are acting as a subcontractor, to reduce their purchases under contracts, to exercise their right to terminate contracts, or elect not to exercise options to renew contracts, any of which could cause our revenue and operating profits to decline.

If we fail to attract and retain skilled employees or employees with the necessary security clearances, we might not be able to perform under our contracts or win new business.

The growth of our business and revenue depends in large part upon our ability to attract and retain sufficient numbers of highly qualified individuals who have advanced information technology and technical services skills. These employees are in great demand and are likely to remain a limited resource in the foreseeable future. Further, obtaining and maintaining security clearances for employees involves a lengthy process, and it is difficult to identify, recruit, and retain employees who already hold security clearances. If we are unable to recruit and retain a sufficient number of these employees, our ability to maintain and grow our business could be limited. In a tight labor market, our direct labor costs could increase or we may be required to engage large numbers of subcontractor personnel, which could cause our profit margins to suffer. In addition, some of our contracts contain provisions requiring us to staff an engagement with personnel that the customer considers key to our successful performance under the contract. In the event we are unable to provide these key personnel or acceptable substitutions, the customer may terminate the contract and we may lose revenue.

In addition, certain U.S. Federal Government contracts require us, and some of our employees, to maintain security clearances. If our employees lose or are unable to obtain security clearances, or if we are unable to hire employees with the appropriate security clearances, the customer may terminate the contract or decide not to renew it upon its expiration. As a result, we may not derive the revenue anticipated from the contract, which if not replaced with revenue from other contracts, could seriously harm our operating results.

If our subcontractors fail to perform their contractual obligations, our performance and reputation as a prime contractor and our ability to obtain future business could suffer.

As a prime contractor, we often rely significantly upon other companies as subcontractors to perform work we are obligated to perform for our customers. As we secure more work under our GWAC and agency-specific IDIQ vehicles, we expect to require an increasing level of support from subcontractors that provide complementary and supplementary services to our offerings. Depending on labor market conditions, we may not be able to identify, hire, and retain sufficient numbers of qualified employees to perform the task orders we expect to win. In such cases, we will need to rely on subcontracts with unrelated companies. We are responsible for the work performed by our subcontractors, even though in some cases we have limited involvement in that work. If one or more of our subcontractors fail to satisfactorily perform the agreed-upon services on a timely basis, or violate U.S. Federal Government contracting policies, laws, or regulations, our ability to perform our obligations as a prime contractor or meet our customers’ expectations may be compromised.

We may have disputes with our subcontractors arising from, among other things, the quality and timeliness of work performed by the subcontractor, customer concerns about the subcontractor, our decision not to extend existing task orders or issue new task orders under a subcontract, our hiring of a subcontractor’s personnel or the subcontractor’s failure to comply with applicable law. The current adverse economic conditions heighten the risk of financial stress of our subcontractors, which could adversely impact their ability to meet their contractual requirements to us. If any of our subcontractors fail to timely meet their contractual obligations or have regulatory compliance or other problems, our ability to fulfill our obligations as a prime contractor may be jeopardized. Significant losses could arise in future periods and subcontractor performance deficiencies could result in a customer terminating a contract for default. A termination for default could expose us to liability, including liability for the agency’s costs of recompetition, damage our reputation, and hurt our ability to compete for future contracts and could have a material adverse impact on our earnings, cash flow, and financial position.

We are a subcontractor to other businesses on a portion of our business. If these businesses were to encounter financial difficulty, they may fail to perform their contractual obligation. Consequently, our contractual performance and reputation, as well as our financial results could be affected.

We are a subcontractor to other businesses on some of our contracts or task orders (approximately 13% of our revenue in 2013 was derived from contracts where we were a subcontractor). We are not in a position to control overall contract performance, and our payments are subject to the financial capabilities of the prime, not the U.S. Federal Government. If our prime contractor experiences difficulties, it may not have the financial resources to perform its contractual obligations. This failure to perform could harm our reputation and affect our earnings and financial position.

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Failure to maintain strong relationships with other contractors could result in a decline in our revenue.

In our role as a subcontractor, we often lack control over fulfillment of a contract, and poor performance on the contract could impact our customer relationship, even when we perform as required. We expect to continue to depend on relationships with other contractors for a portion of our revenue in the foreseeable future. Moreover, our revenue and operating results could differ materially and adversely from those anticipated if any prime contractor or subcontractor chose to offer, directly to the client, services of the type that we provide or if they team with other companies to provide those services.

If we experience systems or service failure, our reputation could be harmed and our customers could assert claims against us for damages or refunds.

We create, implement, and maintain IT solutions that are often critical to our customers’ operations. We may experience some systems and service failures, schedule or delivery delays, and other problems in connection with our work. If we experience these problems, we may:

• lose revenue due to adverse customer reaction;

• be required to provide additional services to a customer at no charge;

• receive negative publicity, which could damage our reputation and adversely affect our ability to attract or retain customers; and

• suffer claims for substantial damages.

In addition to any costs resulting from product or service warranties, contract performance, or required corrective action, these failures may result in increased costs or loss of revenue if customers postpone subsequently scheduled work, or cancel or fail to renew contracts.

While many of our contracts limit our liability for consequential damages that may arise from negligence in rendering services to our customers, we cannot assure you that these contractual provisions will be legally sufficient to protect us if we are sued.

In addition, our errors and omissions and product liability insurance coverage may not continue to be available on reasonable terms or in sufficient amounts to cover one or more large claims, or the insurer may disclaim coverage as to some types of future claims. As we continue to grow and expand our business into new areas, our insurance coverage may not be adequate. The successful assertion of any large claim against us could seriously harm our business. Even if not successful, these claims could result in significant legal and other costs, may be a distraction to our management, and may harm our reputation.

Internal system or service failures could disrupt our business and impair our ability to effectively provide our products and services to our customers, which could damage our reputation and adversely affect our revenues and profitability.

We are also subject to systems failures, including network, software or hardware failures, whether caused by us, third-party service providers, intruders or hackers, computer viruses, natural disasters, power shortages, or terrorist attacks. Any such failures could cause loss of data and interruptions or delays in our business, cause us to incur remediation costs, subject us to claims, and damage our reputation. In addition, the failure or disruption of our communications or utilities could cause us to interrupt or suspend our operations or otherwise adversely affect our business. Our property and business interruption insurance may be inadequate to compensate us for all losses that may occur as a result of any system or operational failure or disruption and, as a result, our future results could be adversely affected.

Security breaches in sensitive U.S. Federal Government systems could result in the loss of customers and negative publicity.

Many of the systems we develop, install, and maintain involve managing and protecting information involved in Intelligence, national security, and other sensitive or classified U.S. Federal Government functions. A security breach in one of these systems could cause serious harm to our business, damage our reputation, and prevent us from being eligible for further work on sensitive or classified systems for U.S. Federal Government customers. We could incur losses from such a security breach that could exceed the policy limits under our errors and omissions and product liability insurance. Some of our contracts give us access to Private Health Information (PHI) which is subject to HIPAA and other laws. Damage to our reputation or limitations on our eligibility for additional work resulting from a security breach in one of the systems we develop, install, and maintain could materially impact our earnings, cash flows, and financial position.

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Our business could be negatively impacted by security threats and other disruptions.

As experienced by numerous organizations across the globe, companies in the IT industry are challenged with responding to and mitigating advanced persistent threats (APTs) to their customers’ systems and networking infrastructures. Though unpatched and “zero-day” exploits are common issues, the most effective APTs begin with sophisticated socially-engineered communications (so called “phishing” emails) to trick users into visiting websites that can inject malicious software (malware) onto the users’ local computing devices. Once a company is infected with malware, the APTs work to embed themselves further into the organization, gather information, and then slowly and stealthily extract company data to parties outside of the compromised environment (potentially for long periods of time). We combat APTs by leveraging a combination of management, operational and technical controls. These controls include our risk management, continuous monitoring methodology (and associated solution), ISO 20000 based IT processes, and our corporate Computer, Network, and Internet Security Management policies. Failures to implement and operate these controls may result in contract terminations, adverse legal actions (including potentially the payment of damages to affected parties), additional investments in security management and network/system monitoring tools, and damage to our reputation among our customers and the market at large (leading to potential loss of competitive momentum). In aggregate, failure to focus on APTs may result in a material increase in our costs, reduction in our revenues, and lessened competitive positioning (or some combination thereof).

Our employees or subcontractors may engage in misconduct or other improper activities, which could cause us to lose contracts.

We are exposed to the risk that employee or subcontractor fraud or other misconduct could occur. Misconduct by employees or subcontractors could include intentionally failing to comply with U.S. Federal Government procurement regulations, engaging in unauthorized activities, or falsifying time records. Employee or subcontractor misconduct could also involve the improper use of our customers’ sensitive or classified information, which could result in regulatory sanctions against us, liability to third parties, and serious harm to our reputation and could result in a loss of contracts and a reduction in revenue. It is not always possible to deter employee or subcontractor misconduct, and the precautions we take to prevent and detect this activity may not be effective in controlling unknown or unmanaged risks or losses, which could cause us to lose contracts or cause a reduction in revenue.

Our estimates, forward-looking statements, and projections may prove to be inaccurate.

Our earnings and profitability may vary based on the type of contracts we perform and may be adversely affected if we do not accurately estimate and manage the costs, time, and resources necessary to satisfy our contractual obligations. Revenue from some of our firm fixed-price contracts is recognized using the percentage-of-completion method with progress toward completion of a particular contract based on actual costs incurred relative to total estimated costs to be incurred over the life of the contract. Estimating costs at completion and award fees on our contracts is complex and involves significant judgment. Adjustments to original estimates are often required as work progresses, experience is gained and additional information becomes known, even though the scope of the work required under the contract may not change. Any adjustment as a result of a change in estimate is recognized as events become known. Adjustments in the underlying assumptions, circumstances or estimates could result in changes that could have a material adverse effect on our future results of operations.

If we fail to manage acquisitions, divestitures, and other transactions, our financial results, business, and future prospects could be harmed.

One of our strategies is to pursue growth through acquisitions. We may not be able to identify suitable acquisition candidates at prices that we consider appropriate. If we do identify an appropriate acquisition candidate, we may not be able to successfully negotiate the terms of the acquisition or finance the acquisition on terms that are satisfactory to us. Negotiations with potential acquisitions and the integration of acquired business operations could disrupt our business by diverting management’s attention from day-to-day operations. Acquisitions of businesses or other material operations may require additional debt or equity financing, resulting in additional leverage or dilution of ownership. We may encounter increased competition for acquisitions, which may increase the price of our acquisitions.

If we are unable to successfully integrate companies we may acquire, our revenue and operating results could suffer. Integrating such businesses into our operations may result in unforeseen operating difficulties (including incompatible accounting and information management systems), may absorb significant management attention, and may require significant financial resources that would otherwise be available for the ongoing development or expansion of our business. These difficulties of integration may require us to coordinate geographically dispersed organizations, integrate personnel with disparate business backgrounds, and reconcile different corporate cultures. In certain acquisitions, the FAR may require us to enter into Government novation agreements, a potentially time-consuming process. In addition, we may not be successful in achieving the anticipated synergies from these acquisitions, including our strategy of offering our services to customers of acquired companies to increase our revenue. We may experience increased attrition, including, but not limited to, key employees of the acquired companies during and following the integration of acquired companies that could reduce our future revenue. In addition, we may need to record write-downs from future impairments of identified intangible

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assets and goodwill, which could reduce our future reported earnings. Acquired companies may have liabilities or adverse operating issues that we fail to discover through due diligence before the acquisition. In particular, to the extent that prior owners of any acquired businesses or properties failed to comply with or otherwise violated applicable laws or regulations, or failed to fulfill their contractual obligations to the U.S. Federal Government or other customers, we, as the successor owner, may be financially responsible for these violations and failures and may suffer reputational harm or otherwise be adversely affected. The discovery of any material liabilities associated with our acquisitions could cause us to incur additional expenses and cause a reduction in our operating profits.

Our acquisitions could cause unforeseen OCIs, which could preclude us from bidding on related projects, thereby making the acquisition not as profitable as originally forecast. Additionally, the Small Business Administration requires small businesses to re-certify their size standard within 30 days of any sale or merger. It is likely that any small business we acquire will have some component of small business contracts. These regulations may affect our ability to retain some or all the contracts after the acquisition, which, in turn, may affect the value of the acquisition.

To the extent that we do not generate sufficient cash from existing business to provide the capital we require to fund our growth strategy and future operations, we will require additional debt or equity financing. A substantial acquisition could cause us to expand or renegotiate our current credit facility. We cannot be certain that additional funds will be available if needed and, if available, that such funds will be available on acceptable terms. Any such funding could require us to incur a significantly higher interest expense. If we cannot raise additional funds on acceptable terms, we may not be able to make future acquisitions.

Our operating results could cause us to violate one or more of our loan covenants, limiting our access to working capital and our ability to make substantial acquisitions.

Our credit facility contains financial and operating covenants that, among other things, require us to maintain or satisfy specified financial ratios, limit our ability to incur indebtedness, pay dividends or engage in certain significant business transactions, and require us to comply with a number of other affirmative and negative operating covenants. Failure to meet these financial and operating covenants could result from, among other things, changes in our results of operations, our incurrence of debt, or changes in general economic conditions. Violations of one or more of these covenants, depending on the severity, could cause us to renegotiate our senior debt facility, possibly incurring significant bank fees and additional interest expense. Each of these could have a material adverse impact to our earnings, cash flow, and financial position.

Our business commitments require our employees to travel to potentially dangerous places, which may result in injury to our employees.

Our business involves providing services that require some of our employees to operate in countries that may be experiencing political unrest, war, or terrorism, including Afghanistan and Iraq. Certain senior-level employees or executives may, on occasion, be part of the teams deployed to provide services in these countries. As a result, it is possible that certain of our employees or executives will suffer injury, bodily harm, or death in the course of these deployments. It is also possible that we will encounter unexpected costs in connection with additional risks inherent in sending our employees to dangerous locations, such as increased insurance costs and the repatriation of our employees or executives for reasons beyond our control. We maintain insurance policies that mitigate risk and potential liabilities related to our operations. Our insurance coverage may not be adequate to cover those claims or liabilities, and we may be forced to bear substantial costs from an accident or incident. These problems could cause our actual results to differ materially and adversely from those anticipated.

If we are unable to maintain our current financial position and improve our growth prospects, our business could be adversely affected.

For us to continue to sustain our current financial position and position ourselves for growth, we must continue to improve our operational, financial, and management information systems, as well as to expand, motivate, and manage our workforce. If we are unable to maintain our current financial position and position ourselves for growth while maintaining our quality of service and profit margins, or if new systems that we implement to assist us in maintaining our current financial position and positioning ourselves for growth, do not produce the expected benefits, our business, prospects, financial condition, or operating results could be adversely affected.

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We could have substantial investments in recorded goodwill as a result of a future acquisitions, and changes in future business conditions could cause those investments to become impaired, requiring substantial write-downs that could reduce our operating income

If we make any future acquisitions and record goodwill, under U.S. generally accepted accounting principles (GAAP), we will have to review our goodwill for impairment at least annually, or when events or changes in circumstances indicate the carrying value may not be recoverable. If any future goodwill were to become impaired, we would record a charge to earnings in our financial statements during the period in which any impairment of our goodwill is determined, which may significantly reduce or eliminate our profits.

Our future taxable income may not be sufficient to realize our future tax benefits which could cause our deferred tax asset to become impaired, requiring substantial write-downs that could reduce our operating income

As of December 31, 2013, we had approximately $43.2 million in net deferred tax assets. Deferred tax assets represent temporary differences in the tax basis of an asset or liability and its reported amount in the financial statements that will result in future tax deductions. Deferred tax assets are evaluated to determine if the future tax deductions will be realizable. Future realization of tax benefits ultimately depends on the existence of sufficient taxable income within the appropriate period that is available under the tax law. All available evidence is considered to determine if a valuation allowance for deferred tax assets is needed. If our future taxable income is insufficient to realize the future tax benefits and our deferred tax asset were to become impaired, we would record a charge to earnings in our financial statements during the period in which any impairment of our deferred tax asset is determined, which may significantly reduce or eliminate our profits.

Risks Related to Our Industry

Our U.S. Federal Government contracts may be terminated by the U.S. Federal Government at any time, and if we do not replace them, our revenue and operating profits may be adversely affected.

We derive substantially all of our revenue from U.S. Federal Government contracts that typically span one or more base years and one or more option years. U.S. Federal Government Agencies have the right to decline to exercise these option periods. In addition, our contracts also contain provisions permitting a U.S. Federal Government customer to terminate the contract on short notice and for its convenience, as well as for default. A decision by a U.S. Federal Government Agency not to exercise option periods or to terminate contracts could result in a reduction of our profitability on these contracts and significant revenue shortfalls.

If the U.S. Federal Government terminates a contract for convenience, we may recover only our incurred or committed allowable costs, settlement expenses, and profit on work completed before the termination. We cannot recover anticipated profit on terminated work. If the U.S. Federal Government terminates a contract for default, we may not recover even incurred amounts, and instead may be liable for excess costs incurred by the U.S. Federal Government in procuring undelivered items and services from another source.

U.S. Federal Government contracts contain other provisions that may be unfavorable to us.

U.S. Federal Government contracts contain provisions and are subject to laws and regulations that give the U.S. Federal Government rights and remedies not typically found in commercial contracts. These provisions allow the U.S. Federal Government to terminate a contract for convenience or decline to exercise an option to renew. They also permit the U.S. Federal Government to do the following:

• reduce or modify contracts or subcontracts;

• cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable;

• limit our ability to compete for or perform certain other contracts as a result of OCI clauses;

• claim rights in products and systems produced by us; and

• suspend or debar us from doing business with the U.S. Federal Government.

If the U.S. Federal Government exercises its rights under any of these provisions, our revenue and operating profits could decline.

Many of our U.S. Federal Government customers spend their procurement budgets through MACs under which we are required to compete for post-award orders or for which we may not be eligible to compete and could limit our ability to win new contracts and grow revenue.

Budgetary pressures and reforms in the procurement process have caused many U.S. Federal Government customers to increasingly purchase goods and services through agency-specific IDIQ contracts, the GSA Schedule 70 task orders, and other multiple-award and/or GWAC vehicles. These contract vehicles have resulted in increased competition and pricing pressure, requiring us to make sustained post-award efforts to realize revenue under the relevant contract vehicle. The U.S. Federal Government’s ability to select multiple winners under multiple-award schedule contracts, GWACs, blanket purchase agreements, and other agency-specific IDIQ contracts, as well as its right to award subsequent task orders among such multiple winners, means that there is no assurance that these multiple-award contracts will result in the actual orders equal to the ceiling value, or result in any actual orders. We are only eligible to compete for work (task orders and delivery orders) as a prime contractor pursuant to GWACs already awarded to us. Our failure to compete effectively in this procurement environment could reduce our revenue. If the U.S. Federal Government elects to use a contract vehicle that we do not hold a position on, we will not be able to compete as a prime contractor.

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Our business could be adversely affected by delays caused by our competitors protesting major contract awards received by us, resulting in the delay of the initiation of work.

In addition, most U.S. Federal Government contract awards are subject to protest by competitors. If specified legal requirements are satisfied, these protests require the U.S. Federal Government Agency to suspend the contractor’s performance of the newly awarded contract pending the outcome of the protest. These protests could also result in a requirement to resubmit bids for the contract or in the termination, reduction, or modification of the awarded contract. If we are subject to delays in the startup of work on awarded contracts due to protests, our actual results could differ materially and adversely from those anticipated.

Each of our contract types involves the risk that we could underestimate our costs and incur losses.

We enter into three types of U.S. Federal Government contracts for our services: time-and-materials, cost-plus fee, and firm fixed-price. For the year ended December 31, 2013, we derived approximately 19%, 52%, and 29% of our revenue from time-and-materials, cost-plus fee, and firm fixed-price contracts, respectively. If we acquire other businesses, our contract mix could change significantly, depending on the size and contract mix of the acquired businesses.

Each of these types of contracts, to differing degrees, involves the risk that we could underestimate our cost of performance, which may result in a reduced profit or a loss on the contract for us. Under time-and-materials contracts, we are reimbursed for labor at negotiated hourly billing rates and for certain expenses. We assume minimal financial risk on delivery of time-and-materials contracts because we only assume the risk of performing those contracts at negotiated hourly rates. However, to perform profitably under time-and-material contracts, we must be able to staff the contract with appropriately priced individuals. If we cannot find individuals whose fully-burdened cost is less than the contract value, we will incur a loss on the contract. Under cost-plus fee contracts, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance based. To the extent that actual costs incurred in performing a cost-plus fee contract are within the contract ceiling and allowable under the terms of the contract and applicable regulations, we are entitled to reimbursement of our costs, plus a profit. However, if our costs exceed the ceiling or are not allowable under the terms of the contract or applicable regulations, we may not be able to recover those costs. Under firm fixed-price contracts, we perform specific tasks for a fixed-price. Compared to time-and-materials and cost-plus fee contracts, firm fixed-price contracts generally offer higher margin opportunities but involve greater financial risk because we bear the impact of cost overruns. Because we assume the most risk for cost overruns and contingent losses on firm fixed-price contracts, an increase in the percentage of firm fixed-price contracts in our contract mix would increase our risk of suffering losses. Failure to properly estimate our costs for firm fixed-price contracts could have a material adverse impact on our financial results.

Our failure to comply with complex procurement laws and regulations could cause us to lose business and subject us to a variety of penalties.

We must comply with and are affected by laws and regulations relating to the formation, administration, and performance of U.S. Federal Government contracts, which affect how we do business with our customers and may impose added costs on us. Among the most significant laws and regulations are:

• the FAR and agency regulations supplemental to the FAR, which comprehensively regulate the formation, administration, and performance of U.S. Federal Government contracts;

• the Truth in Negotiations Act, which requires certification and disclosure of all cost and pricing data in connection with contract negotiations;

• compliance with the Foreign Corrupt Practices Act or U.S. export control regulations by us or our subcontractors;

• the Cost Accounting Standards and Cost Principles, which impose accounting requirements that govern our right to reimbursement under certain cost-based U.S. Federal Government contracts; and

• laws, regulations, and executive orders restricting the use and dissemination of information classified for national security purposes and the export of certain products and technical data.

Moreover, we are subject to security regulations of the DoD and other Federal Agencies that are designed to safeguard against foreigners’ access to classified information. If we were to come under foreign ownership, control, or influence, our U.S. Federal Government customers could terminate or decide not to renew our contracts, and our ability to obtain new contracts could be impaired.

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The U.S. Federal Government may revise its procurement or other practices in a manner adverse to us.

The U.S. Federal Government may revise its procurement practices or adopt new contracting rules and regulations, such as cost accounting standards. It could also adopt new contracting methods relating to GSA contracts, GWACs or other multi-award contracts, or adopt new standards for contract awards intended to achieve certain social or other policy objectives. In addition, the U.S. Federal Government may face restrictions from new legislation or regulations, as well as pressure from U.S. Federal Government employees and their unions, on the nature and amount of services the U.S. Federal Government may obtain from private contractors. These changes could impair our ability to obtain new contracts or contracts under which we currently perform when those contracts are up for recompetition bids. Any new contracting methods could be costly or administratively difficult for us to implement, and as a result, could harm our operating results. A realignment of funds with changed U.S. Federal Government priorities, including “insourcing” of previously contracted support services, and the realignment of funds to other non-Defense-related programs may reduce the amount of funds available to defense-related and other programs in our core service areas.

As a result of the Small Business Administration (SBA) set aside program, the U.S. Federal Government may decide to restrict certain procurements only to bidders that qualify under minority-owned, small, small-disadvantaged businesses, or other such programs. As a result, we would not be eligible to perform work as a prime. In such circumstances, we compete as a subcontractor with small businesses.

We derive significant revenue from contracts awarded through a competitive procurement process, which may require significant upfront bid and proposal costs that could negatively affect our operating results.

We derive significant revenue from U.S. Federal Government contracts that are awarded through a competitive procurement process. We expect that most of the U.S. Federal Government business we seek in the foreseeable future will be awarded through competitive processes. Competitive procurements impose substantial costs and present a number of risks, including the substantial cost, managerial time, and effort that we spend to prepare bids and proposals for contracts that may not be awarded to us and could reduce our profitability.

Unfavorable U.S. Federal Government audit results could subject us to a variety of penalties and sanctions and could harm our reputation and relationships with our customers and impair our ability to win new contracts.

The U.S. Federal Government, including the Defense Contract Audit Agency (DCAA), audits and reviews our performance on contracts, pricing practices, cost structure, and compliance with applicable laws, regulations and standards. The DCAA reviews a contractor’s internal control system and policies, including the contractor’s purchasing, property, estimating, compensation, and management information systems, and the contractor’s compliance with such policies. Any costs found to be improperly allocated to a specific contract will not be reimbursed, while such costs already reimbursed may be required to be refunded. Adverse findings in a DCAA audit could materially affect our competitive position and result in a substantial adjustment to our revenue and profit.

If a U.S. Federal Government audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or debarment from doing business with U.S. Federal Government Agencies. In addition, we could suffer serious harm to our reputation and competitive position if allegations of impropriety were made against us, whether or not true. If our reputation or relationship with U.S. Federal Government Agencies were impaired, or if the U.S. Federal Government otherwise ceased doing business with us or significantly decreased the amount of business it does with us, our revenue and operating profit could decline.

Other Risks Related to Our Stock

Our stock price is subject to volatility and could decline.

The stock market in general has been highly volatile. As a result, the market price of our Class A common stock is likely to be similarly volatile, and investors in our Class A common stock may experience a decrease in the value of their stock, including decreases unrelated to our operating performance or prospects. The price of our Class A common stock could be subject to wide fluctuations in response to a number of factors, including those listed in this “Risk Factors” section.

In the past, securities class action litigation has, at times, been instituted against companies following periods of volatility in their stock price. This type of litigation against us could result in substantial costs and divert our management’s attention and resources.

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Our quarterly operating results may fluctuate significantly as a result of factors outside of our control, which could cause the market price of our common stock to decline.

We expect our revenue and operating results to vary from quarter to quarter. As a result, our operating results may fall below the expectations of securities analysts and investors, which could cause the price of our common stock to decline. Factors that may affect our operating results include those listed in this “Risk Factors” section and others such as:

• changes in contract type and profitability;

• fluctuations in revenue recognized on contracts;

• variability in demand for our services and solutions;

• commencement, completion, or termination of contracts during any particular quarter;

• timing of award or performance incentive-fee notices;

• timing of significant bid and proposal costs;

• timing of acquisition activities and the expensing of acquisition-related costs;

• variable purchasing patterns under the GSA Schedule 70 task orders, GWACs, blanket purchase agreements, and other agency-specific IDIQ contracts;

• strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, and joint ventures;

• strategic investments or changes in business strategy;

• changes in the extent to which we use subcontractors;

• fluctuations in staff utilization rates; and

• U.S. Federal Government shutdowns or temporary facility closings.

Reductions in revenue in a particular quarter could lead to lower profitability during that quarter because a relatively large amount of our expenses are fixed in the short-term. We may incur significant operating expenses during the startup and early stages of large contracts and may not be able to recognize corresponding revenue during that same quarter. We also may incur additional expenses when contracts expire, are terminated, or are not renewed.

In addition, payments due to us from U.S. Federal Government Agencies may be delayed due to billing cycles or as a result of failures of Government budgets to gain Congressional and administration approval in a timely manner. The U.S. Federal Government’s fiscal year ends September 30. If a Federal budget for the next Federal fiscal year has not been approved by that date in each year, our customers may have to suspend engagements that we are working on until a budget has been approved. Any such suspensions may reduce our revenue during the fourth quarter of that calendar year or the first quarter of the subsequent year. The U.S. Federal Government’s fiscal year-end can also trigger increased purchase requests from customers for equipment and materials. Any increased purchase requests we receive as a result of the U.S. Federal Government’s fiscal year-end would serve to increase our third- or fourth-quarter revenue but will generally decrease profit margins for that quarter, as these activities generally are not as profitable as our typical offerings.

Mr. Narang, our founder, Chairman, and CEO, controls the Company, and his interests may not be aligned with yours.

As of December 31, 2013, Mr. Narang, our founder, Chairman and CEO, through his beneficial ownership of 4,700,000 shares of our Class B common stock and 378,946 shares of our Class A common stock, owned or controlled 89% of the combined voting power and 40% of the outstanding shares of the common stock. Accordingly, Mr. Narang controls the vote on all matters submitted to a vote of our stockholders. As long as Mr. Narang beneficially owns the majority of the voting power of our common stock, he will have the ability – without the consent of our public stockholders – to elect all members of our board of directors and to control our management and affairs. Mr. Narang’s voting control may have the effect of preventing or discouraging transactions involving a change in control, including proxy contests, tender offers, mergers, or other purchases of the capital stock of the Company, regardless of whether a premium is offered over then-current market prices.

A substantial number of shares of our common stock are eligible for sale by Mr. Narang, which could cause our common stock price to decline significantly.

As of December 31, 2013, Mr. Narang beneficially owned 4,700,000 outstanding shares of Class B common stock and 378,946 shares of Class A common stock of the Company. Mr. Narang may, at his discretion, sell these shares in the public market, subject to applicable volume restriction and manner of sale requirements imposed on affiliates under Rule 144 of the Securities Act. The market price of our common stock could drop significantly if Mr. Narang sells his interests in the Company or is perceived by the market as intending to sell them.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We lease office facilities used in our business. Our executive offices and principal operations are located at 11730 Plaza America Drive, Reston, Virginia, where we occupy space under a lease that expires in 2018. We also lease space located in Alabama, Arizona, California, Illinois, Maryland, Nebraska, Ohio, Tennessee, Texas, Virginia, and Washington. We have multiple high-level Sensitive Compartmented Information Facilities (SCIFs). The majority of our employees are located in facilities provided by the U.S. Federal Government. We do not currently own any real estate used in the performance of ongoing contracts and maintain flexibility in facility occupancy through termination and subleasing options concurrent with contract terms in many of our leases. We believe our facilities meet our current needs and that additional facilities will be available as needed.

ITEM 3. LEGAL PROCEEDINGS

From time to time, we are involved in legal proceedings arising in the ordinary course of business. At this time, the probability is remote that the outcome of any litigation pending will have a material adverse effect on our financial condition and results of operations.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Since October 24, 2005, our Class A common stock has been listed on The NASDAQ Global Select Market under the symbol “NCIT.” The following table sets forth, for the periods indicated, the high and low prices of our shares of common stock, as reported on the NASDAQ Global Select Market.

	2013				2012
Quarters	High		Low		High		Low
First	$	5.67	$	4.58	$	12.33	$	6.18
Second		4.91		4.14		6.86		3.21
Third		6.00		4.20		8.00		3.80
Fourth		6.62		5.13		7.26		4.02

There is no established public market for our Class B common stock.

As of February 7, 2014, there were 59 holders of record of our Class A common stock and one holder of record of our Class B common stock. The number of holders of record of our Class A common stock is not representative of the number of beneficial holders because many of the shares are held by depositories, brokers, or nominees. As of February 7, 2014, the closing price of our Class A common stock was $7.07.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Our Board of Directors authorized management to repurchase up to $25.0 million of our Class A common stock pursuant to a stock repurchase program. If shares are repurchased, the shares will be repurchased pursuant to open market purchases, privately negotiated transactions, or block transactions. We have no obligation to repurchase shares under the authorization, and the timing, actual number and value of the shares which are repurchased (and the manner of any such repurchase) will be at the discretion of management and will depend on a number of factors, including the price of our common stock, our Company’s cash needs, borrowing capacity under our credit facility, interest rates, and our financial performance and position. We may suspend or discontinue repurchases at any time. During 2013 no shares were repurchased. At December 31, 2013, $16.7 million was remaining under the Board of Directors’ authorization for shares repurchases.

Dividend Policy

Historically, we retained all future earnings, if any, for use in the operation, development, and expansion of our business. As a result, we have not paid any cash dividends. Any future determination as to the declaration and payment of cash dividends will be at the discretion of our Board of Directors and will depend on then-existing conditions, business prospects, and any other factors our Board of Directors deems relevant. Our existing credit facility allows us to pay a divided up to $4 million in any calendar year if, after it is paid

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we meet certain financial criteria, otherwise we will be in default under our credit agreement. In addition, the terms of any future credit agreement may prevent us from paying any dividends or making any distributions or payments with respect to our capital stock.

Recent Sales of Unregistered Securities

There were no sales of unregistered securities in 2013.

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Performance Graph

The following graph compares the cumulative total stockholder return on our common stock from December 31, 2008 through December 31, 2013, with the cumulative total return on (i) the NASDAQ Composite — Total Returns, (ii) the Russell 2000 stock index, and (iii) a peer group composed of NCI and the following other U.S. Federal Government service providers with whom we compete: CACI International Inc., Dynamics Research Corporation (acquired by Engility Holdings Inc. on January 31, 2014), ICF International, Inc., and ManTech International Corporation. The comparison also assumes that all dividends are reinvested and all returns are market-cap weighted. The historical information set forth below is not necessarily indicative of future performance.

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURNS

AMONG NCI, INC., THE NASDAQ COMPOSITE — TOTAL RETURNS, THE RUSSELL 2000 INDEX, AND U.S. FEDERAL GOVERNMENT SERVICES PEER GROUP

Comparison of 5 Year Total Cumulative Return Assumes Initial Investment of $100 on December 31, 2008

	December 31, 2013
NCI, Inc.	$	19.18
NASDAQ Composite—Total Returns		237.48
Russell 2000 Index		239.60
U.S. Federal Government services peer group		119.44

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ITEM 6. SELECTED FINANCIAL DATA

The following tables set forth the selected consolidated financial data for each of the years in the five-year period ended December 31, 2013. We derived the selected consolidated financial data from our audited consolidated financial statements. Prospective investors should read this selected financial data in conjunction with “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this report.

	Year ended December 31,
	2013			2012 (a)			2011(b)		2010		2009 (c)
	(in thousands except per share data)
Statements of Operations Data:
Revenue	$	332,325		$	368,387		$	558,261	$	581,341	$	468,910
Operating costs and expenses:
Cost of revenue		289,388			322,281			499,398		512,779		407,322
General and administrative expenses		23,393			26,148			24,150		23,730		21,848
Depreciation and amortization		6,298			6,926			6,732		5,054		4,228
Stock option tender offer		—			2,311			—		—		—
Acquisition and integration related expenses		—			—			1,012		—		199
Restructuring charge		—			—			3,139		—		—
Gain on extinguishment of contingent consideration liability		—			—			—		—		(2,285	)
Purchase contingency gain		(864	)		—			—		—		—
Impairment of goodwill and intangible assets		—			150,752			—		—		—
Total operating costs and expenses		318,215			508,418			534,431		541,563		431,312
Operating income (loss)		14,110			(140,031	)		23,830		39,778		37,598
Interest expense, net		784			1,325			1,698		598		657
Income (loss) before income taxes		13,326			(141,356	)		22,132		39,180		36,941
Provision (benefit) for income taxes		5,588			(54,532	)		8,974		15,309		14,784
Net income (loss)	$	7,738		$	(86,824	)	$	13,158	$	23,871	$	22,157
Earnings (loss) per share:
Basic	$	0.60		$	(6.51	)	$	0.96	$	1.75	$	1.65
Diluted	$	0.60		$	(6.51	)	$	0.95	$	1.72	$	1.61
Weighted average shares:
Basic		12,829			13,335			13,675		13,621		13,452
Diluted		12,829			13,335			13,830		13,878		13,633
	As of December 31,
	2013			2012			2011		2010		2009
	(in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	50		$	763		$	2,819	$	2,791	$	1,193
Net working capital		29,011			28,420			48,786		55,684		48,073
Total assets		127,394			141,776			282,614		269,478		241,651
Total long-term debt		1,000			17,500			54,000		20,023		42,094
Total stockholders’ equity		81,807			72,890			163,801		153,047		124,227

Notes to Five-Year Summary

(a) During the third quarter 2013, we recognized a gain on a purchase contingency that consisted of fees the Company received for the collection of past due receivables as part of the AdvanceMed acquisition in April 2011.

(b) During the third quarter 2012, we recognized a goodwill impairment of $92.8 million. During the third quarter 2012, we completed a cash tender offer for certain vested and unvested out-of-the-money stock options held by current and former employees, officers, and directors of NCI that were granted prior to January 1, 2012 and repurchased 963,579 options, incurring a charge of approximately $2.3 million. During the fourth quarter 2012, we recognized a goodwill impairment of $57.5 million and an impairment of intangible assets of $0.4 million.

(c) Effective April 1, 2011, we acquired AdvanceMed Corporation (AdvanceMed).

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(d) During the third quarter of 2009, we recognized a contingent liability of $5.3 million as part of the TRS acquisition associated with future earnout payments. During the fourth quarter of 2009, we and the previous majority shareholder of TRS entered into negotiations to terminate the contingent consideration earnout for an immediate cash payment. Both parties determined it was in the best interest of the combined entity to eliminate the earnout, and the parties mutually agreed to the $3 million settlement. Consequently, we recognized a $2.3 million gain on the extinguishment of contingent consideration liability in 2009.

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 our financial statements and the related notes included elsewhere in this Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions, such as statements of our plans, objectives, expectations, and intentions. Our actual results could differ materially from those anticipated in the forward-looking statements. Factors that could cause or contribute to our actual results differing materially from those anticipated include, but are not limited to, those discussed in Item 1A. “Risk Factors” and elsewhere in this Form 10-K.

OVERVIEW

We are a provider of information technology (IT) and professional engineering services and solutions to U.S. Federal Government Agencies. Our technology and industry expertise enables us to provide a wide spectrum of services and solutions that assist our customers in achieving their program goals. We deliver these complex services and solutions by leveraging our skills across eight core competencies.

• Cloud computing and IT infrastructure optimization

• Cybersecurity and information assurance

• Engineering and logistics support

• Enterprise information management and advanced analytics

• Health IT and medical support

• IT service management

• Modeling, simulation, and training

• Software and systems development and integration

Our significant long-term strategic initiatives include:

• achieving annual revenue growth by deploying internal resources and forming tactical and strategic relationships while better leveraging key differentiators across NCI;

• deploying resources and investments, particularly in the area of business development, toward larger, more technically challenging opportunities in higher-growth segments of federal procurement;

• improving our operating income margin through solid contract execution and growth in higher-margin business areas and continued improvement in our infrastructure and related business processes for greater efficiency across all our business functions;

• disciplined deployment of our cash resources and use of our capital structure to enhance growth and shareholder value through acquisitions, internal growth initiatives, stock repurchases, dividends and other uses as conditions warrant; and

• investing in our people, including employee training and development programs, with a focus on retention and recruiting.

Industry Trends

In fiscal 2013, essentially all of our total revenues were from contracts with the U.S. Government, either as a prime contractor or a subcontractor to other contractors engaged in work for the U.S. Government. Revenues under contracts with the DoD, including subcontracts under which the DoD is the ultimate purchaser, represented approximately 75% of our total revenues in fiscal 2013. Accordingly, our business performance is subject to changes in the overall level of U.S. Government spending, especially national security, including defense, homeland security, and intelligence spending, and the alignment of our service and product offerings and capabilities with current and future budget priorities of the U.S. Government.

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We believe that the following trends and developments in the U.S. government IT services industry and our markets may influence our future results of operations:

• Annual budget deficits and the increasing U.S. national debt will create added pressure on the U.S. Federal government to reduce federal spending across all Federal agencies increase uncertainty about the size and timing of those reductions;

• We expect to experience lower Federal spending on homeland security, intelligence and defense-related programs as overseas operations end and continued increased spending on cyber-security, advanced analytics, technology integration and healthcare;

• We project that cost cutting and efficiency initiatives, current and future budget reductions, continued implementation of Congressionally mandated automatic spending cuts, and other efforts to reduce U.S. government spending, could cause Federal customers to reduce or delay funding for contracts and task orders;

• We will operate in a climate of current and continued uncertainty around the timing, extent, nature and effect of Congressional and other U.S. government action to address budgetary constraints;

• We expect that the Federal focus on refining the definition of “inherently governmental” work, including proposals to limit contractor access to sensitive or classified information and work assignments, will continue to drive insourcing in various agencies, particularly in the intelligence market;

• We are projecting that cost cutting and efficiency and effectiveness efforts by U.S. civilian agencies will result in a focus on increased use of performance measurement, “program integrity” efforts to reduce waste, fraud and abuse in entitlement programs, and renewed focus on improving procurement practices for and interagency use of IT services, including through the use of cloud-based options and data center consolidation;

• We are working under increasingly complex requirements of the Department of Defense and the U.S. Intelligence Community, including cyber-security, managing federal health care cost growth and focus on reforming existing government regulation of various sectors of the economy, such as financial regulation and healthcare; and

• We are assessing the impact of recent legislative and regulatory changes to limitations on the amount of allowable executive compensation permitted under flexibly priced contracts following implementation of relevant rules expected in or after June 2014, which substantially further reduce the amount of allowable executive compensation under these contracts and extend these limitations to a larger segment of our executive corps and our entire contract base.

For more information on these risks and uncertainties, see “Risk Factors” in Part I of this Annual Report on Form 10-K.

Key Financial Metrics

Prime Contractor Revenue

The following table shows our revenue derived from contracts on which we serve as a prime contractor.

	Year ended December 31,
	2013			2012			2011
Revenue derived from prime contracts		90	%		87	%		90	%

Customer Group Revenue

We generate substantially all of our revenue from U.S. Federal Government contracts. We report operating results and financial data as one operating segment. Revenue from our contracts and task orders is generally linked to trends in U.S. Federal Government spending by Defense, Intelligence, and Federal Civilian Agencies. The following table shows our revenue from the customer groups listed as a percentage of total revenue for the period shown.

	Year ended December 31,
	2013			2012			2011
Defense and Intelligence Agencies		75	%		76	%		86	%
Federal Civilian Agencies		25	%		24	%		14	%

The increase in our percentage of total revenue earned on work for Federal Civilian Agencies was primarily due to the reduction of revenue associated with work for Defense and Intelligence Agencies, including the completion of Base Realignment and Closure (BRAC) and other non-core business, the reduction in revenue associated with our U.S. Army Program Executive Office (PEO) Soldier contract, and from our acquisition of AdvanceMed, and certain lost recompetes and the expiration of other core work.

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Contract Type Revenue

Our services and solutions are provided under three basic types of contracts: time-and-materials; cost-plus fee; and firm fixed-price. Our contract mix varies from year to year due to numerous factors including our business strategies and U.S. Federal Government procurement objectives.

For a discussion of the types of contracts under which we generate revenue, see “Business Contract Types” in Part I of this Annual Report on Form 10-K. The following table summarizes revenues by contract type as a percentage of total revenues for the last three fiscal years:

	Year ended December 31,
	2013			2012			2011
Time-and-materials		19	%		25	%		41	%
Cost-plus fee		52	%		49	%		32	%
Firm fixed-price		29	%		26	%		27	%

The increase in our revenue under cost-plus fee type contracts primarily resulted from our acquisition of AdvanceMed and the transition of our U.S. Army Program Executive Office (PEO) Soldier contract from time-and-materials type contract to cost-plus fee type contract in the second quarter of 2011 and more recently from new cost-plus fee awards.

Contract Backlog

As of	Funded backlog		Total backlog
	(in millions)
December 31, 2013	$	195	$	488
December 31, 2012	$	212	$	706

We define backlog as our estimate of the remaining future revenue from existing signed contracts over the remaining base contract performance period and from the option periods of those contracts that we believe have a more likely than not probability of being exercised. Our backlog does not include any estimate of future potential delivery orders that might be awarded under our GWAC, agency-specific IDIQ, or other multiple-award contract vehicles. We define funded backlog as the portion of backlog for which funding currently is appropriated and obligated to us under a contract or other authorization for payment signed by an authorized purchasing agency, less the amount of revenue we have previously recognized. Our funded backlog does not represent the full potential value of our contracts, as Congress often appropriates funds for a particular program or agency on a quarterly or yearly basis, even though the contract may provide for the provision of services over a number of years. We define unfunded backlog as the total backlog less the funded backlog. Unfunded backlog includes values for contract options that have been priced but not yet funded.

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Operating Expenses

Cost of Revenue

Cost of revenue primarily includes direct costs incurred to provide our services and solutions to customers. The most significant portion of these costs is salaries and wages, plus associated fringe benefits, including stock compensation, of our employees directly serving customers, in addition to the related management, facilities, and infrastructure costs. Cost of revenue also includes the costs of subcontractors and outside consultants, third-party materials, such as hardware or software that we purchase and provide to the customer as part of an integrated solution, and any other related direct costs, such as travel expenses. Because we earn higher profits on our own labor services, we expect the ratio of cost of revenue as a percentage of revenue to decline when our labor services mix increases relative to subcontracted labor or third-party material. Conversely, as subcontracted labor or third-party material purchases for customers increase relative to our own labor services, we expect the ratio of cost of revenue as a percentage of revenue to increase. Changes in the mix of services and equipment provided under our contracts can result in variability in our contract margins. In addition, as we continue to bid and win larger contracts, our own labor services component could decrease. This is because the larger contracts typically are broader in scope and require more diverse capabilities, resulting in more subcontracted labor and the potential for more third-party hardware and software purchases. While these factors could lead to a higher ratio of cost of revenue as a percentage of revenue, the economics of these larger jobs are nonetheless generally favorable because they increase revenue, broaden our customer base, and have a favorable return on invested capital.

General and Administrative Expenses

General and administrative expenses include costs related to corporate business development, bid and proposal, contracts administration, finance and accounting, legal, corporate governance, and executive and senior management. The primary items of general and administrative expenses are the salaries and wages, plus associated fringe benefits, including stock compensation, of our employees performing these functions, as well as the related facilities and information technology support costs.

Depreciation and Amortization

Depreciation includes the depreciation of computers, furniture and other equipment, the amortization of third-party software we use internally, and leasehold improvements. Amortization of acquired intangible assets includes the amortization of identifiable, acquired intangible assets over their estimated useful lives. Non-compete agreements are generally amortized straight line over the term of the agreement, while contracts and related customer relationships are amortized proportionately against the acquired backlog.

Stock Option Tender Offer

Stock compensation charges related to the stock option tender offer in September 2012. These expenses include the remaining unamortized stock based compensation expense associated with the unvested portion of the repurchased options and a small amount paid in excess of the estimated fair value of the options on the date of purchase, plus amounts related to associated payroll taxes, professional fees and other costs.

Acquisition and Integration Related Expenses

Acquisition and integration related expenses include costs related to our acquisitions or potential acquisitions. These expenses include external professional fees such as accounting, legal, investment banking, as well as other fees.

Restructuring Charge

Restructuring charges related to our corporate restructuring in December 2011. These expenses include severance costs and lease costs for space no longer being utilized by us.

Purchase contingency gain

The gain on a purchase contingency for the quarter ended September 30, 2013 consisted of fees the Company received for the collection of past due receivables as part of the AdvanceMed acquisition in April 2011.

Impairment of Goodwill and Intangible Assets

Non-cash charges related to our impairment of book goodwill and intangible assets in September 2012 and December 2012. A two-step impairment test is used to identify potential goodwill impairment and measure the amount of a goodwill impairment loss to be recognized. The first step is used to identify any potential impairment by comparing the fair value of the Company with its carrying amount. The second step is used to measure the amount of impairment loss, if any, by comparing the implied fair value of goodwill with the carry amount of goodwill.

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Interest Expense, net

Interest income is primarily related to earnings on short-term, highly liquid investments of our excess cash. Interest expense is primarily related to interest expense incurred or accrued under our outstanding borrowings and amortization of deferred financing fees.

Results of Operations

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

The following table sets forth certain items from our consolidated statements of operations for the years ended December 31:

	2013			2012			2013			2012
	(in thousands)						(as a Percentage of Revenue)
Revenue	$	332,325		$	368,387			100.0	%		100.0	%
Operating expenses:
Cost of revenue		289,388			322,281			87.1			87.5
General and administrative expenses		23,393			26,148			7.0			7.1
Depreciation and amortization		6,298			6,926			1.9			1.9
Stock option tender offer		—			2,311			—			0.6
Purchase contingency gain		(864	)		—			(0.3	)		—
Impairment of goodwill and intangible assets		—			150,752			—			40.9
Total operating expenses		318,215			508,418			95.7			138.0
Operating income (loss)		14,110			(140,031	)		4.3			(38.0	)
Interest expense, net		784			1,325			0.3			0.4
Income (loss) before income taxes		13,326			(141,356	)		4.0			(38.4	)
Provision (benefit) for income taxes		5,588			(54,532	)		1.7			(14.8	)
Net income (loss)	$	7,738		$	(86,824	)		2.3	%		(23.6	)%

Revenue

Revenue for the year ended December 31, 2013 was $332.3 million, compared to $368.4 million for the year ended December 31, 2012, representing a decrease of $36.1 million, or 9.8%. This decrease in revenue is principally due to the expiration of task orders and contracts, reductions in scope of work, certain lost contract re-competes and a decrease in revenue from our PEO Soldier program, which accounted for approximately $16.4 million of the year-over-year decline in revenue. The decrease was partially offset by revenue from new contract awards.

Our PEO Soldier contract accounted for $46.0 million and $62.4 million of our revenue in 2013 and 2012, respectively. This represented 13.9% and 16.9% of our revenue in 2013 and 2012, respectively.

Cost of revenue

Cost of revenue for the year ended December 31, 2013 was $289.4 million, or 87.1% of revenue, compared to $322.3 million, or 87.5% of revenue, for the year ended December 31, 2012. The decrease was primarily the result of lower costs attributable to revenues associated with the reduced contract base described above. The decrease of cost of revenue as a percentage of revenue was primarily due to improved contract performance.

General and administrative expenses

General and administrative expenses for the year ended December 31, 2013 were $23.4 million, or 7.0% of revenue, compared to $26.1 million, or 7.1% of revenue, for the year ended December 31, 2012. The decrease was attributable to lower compensation expense from reduced headcount and the associated indirect costs, and lower stock compensation costs, partially offset by an increase in business development costs.

Depreciation and amortization

Depreciation and amortization for the years ended December 31, 2013 and 2012 was $6.3 million and $6.9 million, respectively. The year-over-year decrease was due to reduced capital expenditures during the year, and certain fixed and intangible assets reaching the end of their useful lives.

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Stock option tender offer

During 2012, we completed a cash tender offer for certain out-of-the-money stock options that were granted prior to January 1, 2012 and held by current and former employees, officers, and directors of NCI, provided that such stock options had not expired or terminated prior to the expiration of the offering period. Costs associated with the stock option tender offer were approximately $2.3 million, principally consisting of $2.2 million related to the remaining unamortized stock-based compensation expense associated with the unvested portion of the options tendered in the offer, plus $0.1 million related to associated payroll taxes, professional fees and other costs.

Purchase contingency gain

The gain on a purchase contingency for the quarter ended September 30, 2013, consisted of $0.9 million received in fees the Company received for the collection of past due receivables as part of the AdvanceMed acquisition in April 2011.

Impairment of goodwill and intangible assets

During 2012, we determined that all of our goodwill was impaired and recorded goodwill impairment charges totaling $150.3 million. The goodwill impairment was identified based on a number of factors, including the continued decline in the market price of our stock, delayed award activity, federal budget issues and the resulting expectations on our future performance. The impairment of intangible assets totaled $0.4 million for the year ended December 31, 2012. There was no impairment of goodwill or intangible assets in 2013.

Interest expense, net

For the year ended December 31, 2013, net interest expense was $0.8 million compared to $1.3 million for the year ended December 31, 2012. Net interest expense decreased primarily as a result of lower outstanding borrowings on our senior credit facility, offset by a slightly higher weighted average borrowing rate during the period. During 2013, we had a weighted average outstanding loan balance of $12.5 million and a weighted average borrowing rate of approximately 2.7%. During 2012, we had a weighted average outstanding loan balance of $36.3 million and a weighted average borrowing rate of approximately 2.5%.

Provision for Income taxes

For the year ended December 31, 2013, our provision for income taxes was 41.92% of our income before tax. This is represents an increase from 38.6% of our loss before tax for the year ended December 31, 2012. The increase was principally attributable to a change in the consolidated state tax rate and the federal tax rate determined for our future tax benefits.

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Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

The following table sets forth certain items from our consolidated statements of operations for the years ended December 31:

	2012			2011		2012			2011
	(in thousands)					(as a Percentage of Revenue)
Revenue	$	368,387		$	558,261		100.0	%		100.0	%
Operating expenses:
Cost of revenue		322,281			499,398		87.5			89.5
General and administrative expenses		26,148			24,150		7.1			4.3
Depreciation and amortization		6,926			6,732		1.9			1.2
Stock option tender offer		2,311			—		0.6			—
Acquisition and integration related expenses		—			1,012		—			0.2
Restructuring charge		—			3,139		—			0.5
Impairment of goodwill and intangible assets		150,752			—		40.9			—
Total operating expenses		508,418			534,431		138.0			95.7
Operating (loss) income		(140,031	)		23,8300		(38.0	)		4.3
Interest expense, net		1,325			1,698		0.4			0.3
(Loss) income before income taxes		(141,356	)		22,132		(38.4	)		4.0
(Benefit) provision for income taxes		(54,532	)		8,974		(14.8	)		1.6
Net (loss) income	$	(86,824	)	$	13,158		(23.6	)%		2.4	%

Revenue

Revenue for the year ended December 31, 2012 was $368.4 million, compared to $558.3 million for the year ended December 31, 2011, representing a decrease of $189.9 million, or 34.0%. This decrease in revenue is principally due to the ending of base realignment and closure, or BRAC-related, and other non-core programs, which collectively totaled approximately $87 million; a net decrease in revenue as a result of reductions of scope, the expiration of task orders and contracts, and certain lost contract re-competes, which totaled approximately $79 million; and a decrease in revenue from our PEO Soldier program, which accounted for approximately $24 million of the year-over-year decline in revenue.

Our PEO Soldier contract accounted for $62.4 million and $86.0 million of our revenue in 2012 and 2011, respectively. This represented 16.9% and 15.4% of our revenue in 2012 and 2011, respectively.

Cost of revenue

Cost of revenue for the year ended December 31, 2012 was $322.3 million, or 87.5% of revenue, compared to $499.4 million, or 89.5% of revenue, for the year ended December 31, 2011. The decrease in cost of revenue was attributable to less direct labor, subcontractor and other direct costs, from a reduced contract base, offset somewhat by higher associated indirect costs. The decrease of cost of revenue as a percentage of revenue was primarily due to higher gross margin on NCI direct labor which increased as a percentage of revenue and a reduction in non-labor costs from the ending of base realignment and closure, or BRAC-related, and other non-core programs that carried a lower margin.

General and administrative expenses

General and administrative expenses for the year ended December 31, 2012 were $26.1 million, or 7.1% of revenue, compared to $24.2 million, or 4.3% of revenue, for the year ended December 31, 2011. The increase was due to higher indirect support expenses such as, higher indirect support salaries and associated benefits, partially offset by a decrease in bid and proposal costs.

Depreciation and amortization

Depreciation and amortization for the years ended December 31, 2012 and 2011 was $6.9 million and $6.7 million, respectively. The year-over-year increase was due to the added depreciation expense associated with the assets acquired through the AdvanceMed acquisition.

Stock option tender offer

During 2012, we completed a cash tender offer for certain out-of-the-money stock options held by current and former employees, officers, and directors of NCI that were granted prior to January 1, 2012, provided that such stock options had not expired or terminated prior to the expiration of the offering period. Costs associated with the stock option tender offer were approximately $2.3 million, principally consisting of $2.2 million related to the remaining unamortized stock-based compensation expense associated with the unvested portion of the options tendered in the offer, plus $0.1 million related to associated payroll taxes, professional fees and other costs.

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Impairment of goodwill and intangible assets

During 2012, we determined that all of our goodwill was impaired and recorded goodwill impairment charges totaling $150.3 million. The goodwill impairment was identified based on a number of factors, including the continued decline in the market price of our stock, delayed award activity, federal budget issues and the resulting expectations on our future performance. No goodwill impairment existed for the year ended December 31, 2011. The impairment of intangible assets totaled $0.4 million for the year ended December 31, 2012.

Acquisition and integration related expenses

During 2011, we incurred $1.0 million in acquisition and integration related expenses to acquire AdvanceMed. NCI did not incur any acquisition and integration related expenses in 2012.

Restructuring charge

During the fourth quarter of 2011, we incurred $3.1 million relating to a reduction in force and leased space costs. The restructuring charge includes estimates for rents relating to leased space which we are no longer using but we are subject to lease obligations in the amount of $2.6 million. Severance costs for the terminated employees were approximately $0.5 million. NCI did not incur any restructuring charges in 2012

Interest expense, net

For the year ended December 31, 2012, net interest expense was $1.3 million compared to $1.7 million for the year ended December 31, 2011. Net interest expense decreased primarily as a result of lower outstanding borrowings on our senior credit facility, offset by a higher weighted average borrowing rate during the period. During 2012, we had a weighted average outstanding loan balance of $36.3 million and a weighted average borrowing rate of approximately 2.5%. During 2011, we had a weighted average outstanding loan balance of $63.1 million and a weighted average borrowing rate of approximately 2.3%.

Provision for Income taxes

For the year ended December 31, 2012, our benefit for income taxes was 38.6% of our loss before tax. This is represents a decrease from 40.5% of our income before tax for the year ended December 31, 2011. The decrease was principally attributable to the large operating loss in 2012 and a decrease in the aggregate state tax rate.

Effects of Inflation

We generally have been able to price our contracts in a manner to accommodate the rates of inflation experienced in recent years. During 2013, approximately 19% of our revenue was generated under time-and-materials contracts, where labor rates are usually adjusted annually by predetermined escalation factors. Also during 2013, approximately 52% of our revenue was generated under cost-plus fee contracts, which automatically adjust for changes in cost. The remaining 29% of our revenue was generated under firm fixed-price contracts, in which we include a predetermined escalation factor and for which we generally have not been adversely affected by inflation.

Trends in Revenue

We expect our revenue to decline in 2014 as compared to 2013, due to the expiration of task orders and contracts within our core contract base, the reduction in scope on certain contracts and lost contract recompetes, among other factors, including shifting budget priorities of the U.S. Federal Government as described more fully under “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Industry Trends” above. We do not expect that revenue derived from new business in 2014 will meaningfully offset the reduction in revenue.

Liquidity and Capital Resources

Our primary liquidity needs are for financing working capital, capital expenditures, stock repurchases, and making selective strategic acquisitions. Historically, we have relied primarily on our cash flow from operations and borrowings under our credit facility to provide the capital for our liquidity needs. As part of our growth strategy, we may pursue acquisitions that could require us to incur additional debt or issue new equity. We expect the combination of our current cash, cash flow from operations, and the available borrowing capacity under our credit facility to continue to meet our normal working capital and capital expenditure requirements.

During 2013, the balance of accounts receivable increased by $1.7 million to $64.0 million at the end of the year. Days sales outstanding of accounts receivable (DSO) increased 10 days to 74 days at December 31, 2013 as compared to 64 days at December 31, 2012. DSO was affected by the timing of payments on certain contracts.

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As of December 31, 2013, $1.0 million was due under the credit facility, as compared to $17.5 million outstanding as of December 31, 2012, reflecting $16.5 million of net repayments during 2013.

Our Board of Directors authorized management to repurchase up to $25.0 million of our Class A common stock pursuant to a stock repurchase program. If shares are repurchased, the shares will be repurchased pursuant to open market purchases, privately negotiated transactions, or block transactions. We have no obligation to repurchase shares under the authorization, and the timing, actual number and value of the shares which are repurchased (and the manner of any such repurchase) will be at the discretion of management and will depend on a number of factors, including the price of our common stock, our Company’s cash needs, borrowing capacity under our credit facility, interest rates, and our financial performance and position. We may suspend or discontinue repurchases at any time. During 2012, we purchased 628,782 shares at an average price of $6.14 per share for a total purchase price of $3.9 million. During 2013, we did not purchase any shares. We have $16.7 million remaining under the Board of Directors’ authorization for share repurchases.

Credit Facility: The Company’s senior credit facility consists of a revolving line of credit with a borrowing capacity of up to an $80.0 million principal amount, and a $45.0 million accordion feature allowing us to increase our borrowing capacity to up to a $125.0 million principal amount, subject to obtaining commitments for the incremental capacity from existing or new lenders. The outstanding borrowings are collateralized by a security interest in substantially all the Company’s assets. The lenders also require a direct assignment of all contracts at the lenders’ discretion. The outstanding balance under the credit facility accrues interest based on one-month LIBOR plus an applicable margin, ranging from 210 to 310 basis points, based on the ratio of our outstanding senior funded debt to Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA) as defined in the credit facility agreement.

During the fourth quarter of 2013, we amended our credit facility which modifies certain terms of our Amended and Restated Loan and Security Agreement, including, among other things, (i) a change in the definition of Commitment Termination Date, amended to January 31, 2017, (ii) a change in the definition of Permitted Acquisitions, amended to increase the size of the permitted Aggregate Acquisition Consideration (as defined therein) from $50 million to $100 million (iii) an increase in the amount of cash dividends authorized in any calendar year from $3.0 million to $4.0 million, and (iv) a reduction in the applicable margins on outstanding balances under the credit facility. The accrued interest is due and payable monthly. The credit facility expires on January 31, 2017. We do not currently hedge our interest rate risk. The credit facility allows us to use borrowings thereunder of up to $17.5 million to repurchase shares of our common stock. Funds borrowed under the credit facility may be used to finance possible future acquisitions, for working capital requirements, for stock repurchases, for cash dividends or for general corporate uses.

The loan interest accrual rate is set monthly at one-month LIBOR plus a set amount (spread). As discussed above, one of the primary factors determining the spread is the ratio of our outstanding senior debt to EBITDA adjusted for acquisitions. The lower our ratio, the lower our spread above LIBOR will be. Our spread above LIBOR is based on the following loan covenant:

Senior Debt to EBITDA Ratio	Spread
Below 1.0 to 1		210 basis points
Between 1.0 and 1.75 to 1		235 basis points
Between 1.75 and 2.5 to 1		260 basis points
Greater than 2.5 to 1		310 basis points

As of December 31, 2013, the spread above LIBOR was 210 basis points and the loan accrued interest at 2.3%.

The credit facility contains various restrictive covenants that, among other things, restrict our ability to incur or guarantee additional debt; make certain distributions, investments and other restricted payments; enter into transactions with certain affiliates; create or permit certain liens; and consolidate, merge, or sell assets. In addition, the credit facility contains certain financial covenants that require us to maintain a minimum tangible net worth; maintain a minimum fixed charge coverage ratio and a minimum funded debt to earnings ratio; and limit capital expenditures below certain thresholds.

As of December 31, 2013, we were in compliance with all our loan covenants.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2013 that require us to make future cash payments.

	Payments due by period
Contractual obligations:	Total		Less than 1 year		1–3 years		3–5 years		More than 5 years
	(in thousands)
Credit facility	$	1,000	$	—	$	1,000	$	—	$	—
Operating lease obligations		21,367		7,093		12,609		1,665		—
Total	$	22,367	$	7,093	$	13,609	$	1,665	$	—

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Critical Accounting Policies

Revenue Recognition

Our revenue recognition policy addresses our three different types of contractual arrangements: time-and-materials contracts; cost-plus fee contracts; and firm fixed-price contracts.

Time-and-Materials Contracts: Revenue for time-and-materials contracts is recognized as services are performed, generally on the basis of contract allowable labor hours worked multiplied by the contract defined billing rates, plus the direct costs and indirect cost burdens associated with materials and other direct expenses used in performance on the contract. Profits on time-and-material contracts result from the difference between the cost of services performed and the contract-defined billing rates for these services.

Cost-plus Fee Contracts: Generally, revenue on cost-plus fee contracts is recognized as services are performed, based on the allowable costs incurred during the period, plus any recognizable earned fee. The Company does not recognize award-fee income until the fees are fixed or determinable. Due to such timing, and to fluctuations in the level of revenue, profit as a percentage of revenue on award-fee contracts will fluctuate period to period.

Firm Fixed-price Contracts: Revenue recognition methods on firm fixed-price contracts will vary depending on the nature of the work and the contract terms. Revenue on firm fixed-price service contracts is recognized as services are performed. Generally, revenue is deferred until all of the following have occurred: (1) there is a contract in place, (2) delivery has occurred, (3) the price is fixed or determinable, and (4) collectability is reasonably assured. Revenue on firm fixed-price contracts that require delivery of specific items is recognized based on a price per unit as units are delivered. Revenue for firm fixed-price contracts in which we are paid a specific amount to provide services for a stated period of time is recognized ratably over the service period. Profits related to contracts accounted for under this method may fluctuate from period to period, particularly in the early phases of the contract. Anticipated losses on contracts accounted for under this method are recognized as incurred.

Revenue on certain firm fixed-price contracts where we are designing, engineering, or manufacturing to the customer’s specifications is recognized on the percentage-of-completion method of accounting, generally using costs incurred in relation to total estimated costs to measure progress toward completion. Profits on firm fixed-price contracts result from the difference between the incurred costs and the revenue earned. Contract accounting requires significant judgment relative to assessing risks, estimating contract revenue and costs, and making assumptions for schedule and technical issues. Due to the size and nature of many of our contracts, the estimation of total revenue and cost at completion requires the use of estimates. Contract costs include material, labor, and subcontracting costs, as well as an allocation of allowable indirect costs. Assumptions have to be made regarding the length of time to complete the contract because costs also include expected increases in wages and prices for materials. For contract change orders, claims or similar items, we apply judgment in estimating the amounts and assessing the potential for realization. These amounts are only included in contract value when they can be reliably estimated and realization is considered probable. Estimates of total contract revenue and costs are continuously monitored during the term of the contract and are subject to revision as the contract progresses. Anticipated losses on contracts accounted for under the percentage-of-completion method of accounting are recognized in the period they are deemed probable and can be reasonably estimated.

Our contracts may include the delivery of a combination of one or more of our service offerings (e.g., a combination of hardware components, related integration or other services). Each deliverable within a multiple-deliverable revenue arrangement is accounted for as a separate unit of accounting if both of the following criteria are met: (1) the delivered item or items have value to the customer on a standalone basis and (2) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. We consider a deliverable to have standalone value if we sell this item separately or if the item is sold by another vendor or could be resold by the customer. Further, our revenue arrangements generally do not include a general right of return relative to delivered products. Deliverables not meeting the criteria for being a separate unit of accounting are combined with a deliverable that does meet that criterion. The appropriate allocation of arrangement consideration and recognition of revenue is then determined for the combined unit of accounting.

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Goodwill and Intangible Assets

Net tangible and identifiable intangible assets acquired and liabilities assumed are recognized at their estimated fair values at the date of acquisition. At the time of the acquisition, all intangibles, including contracts and related customer relationships and non-compete agreements, are reviewed to determine the term of amortization for each intangible asset.

Goodwill is reviewed for impairment no less than annually or when circumstances change that would more likely than not reduce the fair value of goodwill below its carrying amount. Annually on October 1, and when circumstances dictate, we perform a fair value analysis of our reporting unit. If goodwill becomes impaired, we will record a charge to earnings in our financial statements in the period in which any impairment of our goodwill is determined. During 2013, as we did not have any goodwill as of each measurement date, we determined there was no indicator that goodwill was impaired. Intangible assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of the intangible asset many not be fully recoverable. An impairment loss is recognized if the sum of the long-term undiscounted cash flows is less than the carrying amount of the long-lived asset being evaluated. An impairment loss is measured as the amount by which the carrying amount exceeds its fair value. Any write-downs are treated as permanent reductions in the carrying amount of the assets and will result in a reduction of earnings in the period incurred. During 2013, the Company did not record any intangible impairment charge.

Contract rights are amortized proportionately against the acquired backlog. Non-compete agreements are amortized over their estimated useful lives.

Our acquisitions to date have been treated as asset purchases under the Internal Revenue Code. As such, the goodwill generated from those acquisitions is deductible for tax purposes. For the year ended December 31, 2013, the tax deduction was approximately $9.8 million. At our tax rate of 41.9%, this deduction saved us approximately $4.1 million in current income tax expenditures. As of December 31, 2013, we had approximately $93 million in future goodwill tax deductions. As previously noted, while goodwill is not deducted for book purposes, it can be impaired for book purposes. Due to the total impairment of our book goodwill as of December 31, 2012, as we deduct the goodwill for tax purposes, we are decreasing our deferred tax asset.

Deferred Tax Assets

Deferred tax assets represent temporary differences in the tax basis of an asset or liability and its reported amount in the financial statements that will result in future tax deductions. Deferred tax assets are evaluated to determine if the future tax deductions will be realizable. Future realization of tax benefits ultimately depends on the existence of sufficient taxable income within the appropriate period that is available under the tax law. All available evidence is considered to determine if a valuation allowance for deferred tax assets is needed.

As of December 31, 2013, we had approximately $43.2 million in net deferred tax assets. Based primarily on projection of future taxable income, we believe there is sufficient positive evidence to conclude that it is more likely than not that the deferred tax assets are fully realizable and no valuation allowance is necessary.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk relates to changes in interest rates for borrowings under our credit facility. For the year ended December 31, 2013, a 1% change in interest rates would have changed our interest expense and cash flows by approximately $0.1 million. This estimate is based on our average loan balances for the year.

Additionally, we are subject to credit risks associated with our cash, cash equivalents, and accounts receivable. We believe that the concentration of credit risk with respect to cash equivalents is limited due to the high credit quality of these investments. Our investment policy requires that we invest excess cash in high-quality investments, which preserve principal, provide liquidity, and minimize investment risk. We also believe that our credit risk associated with accounts receivable is limited as they are primarily with the U.S. Federal Government.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of NCI, Inc. are included in this report beginning on page F-1.

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

The Company has had no disagreements with its independent accountants on accounting principles, practices, or financial statement disclosure during and through the date of the financial statements included in this Report.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures and Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate disclosure controls and procedures and internal control over financial reporting. Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the Company’s reports filed or submitted under the Securities Exchange Act of 1934, such as this Annual Report on Form 10-K, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed to provide reasonable assurance that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Internal control over financial reporting is a process designed by, or under the supervision of, the Company’s Chief Executive Officer and Chief Financial Officer, and effected by the Company’s management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:

• pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of management and the Company’s Board of Directors; and

• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material adverse effect on the Company’s financial statements.

Limitations on the Effectiveness of Controls

Management, including the Company’s Chief Executive Officer and Chief Financial Officer, do not expect that the Company’s disclosure controls and procedures or the Company’s internal control over financial reporting will prevent all errors or all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We believe we have designed our disclosure controls and procedures to provide a reasonable level of assurance.

Scope of the Assessments

The assessment by the Company’s Chief Executive Officer and the Company’s Chief Financial Officer of the Company’s disclosure controls and procedures and the assessment by our management of our internal control over financial reporting included a review of procedures and discussions with other employees in the Company’s organization. In the course of the assessments, management sought to identify data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. Management used the framework in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to assess the effectiveness of our internal control over financial reporting. The assessments of the Company’s disclosure controls and procedures is done on a periodic basis, so the

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conclusions can be reported each quarter on the Company’s Quarterly Reports on Form 10-Q, including the Company’s Annual Report on Form 10-K with respect to the fourth quarter. Our internal control over financial reporting is also assessed on an ongoing basis by management and other personnel in the Company’s accounting department. We consider the results of these various assessment activities as we monitor our disclosure controls and procedures and internal control over financial reporting and when deciding to make modifications as necessary. Management’s intent in this regard is that the disclosure controls and procedures and the internal control over financial reporting will be maintained and updated (including improvements and corrections) as conditions warrant.

Evaluation of the Effectiveness of Disclosure Controls and Procedures

Based upon the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2013, the Company’s disclosure controls and procedures were effective at a reasonable level of assurance.

Management’s Report on Internal Controls Over Financial Reporting

Management is responsible for establishing and maintaining adequate control over financial reporting. Management used the criteria issued by COSO in Internal Control—Integrated Framework (1992) to assess the effectiveness of our internal control over financial reporting. Based upon the assessments, our management has concluded that as of December 31, 2013, our internal control over financial reporting was effective.

Changes in Internal Control Over Financial Reporting

The Company made no change to its internal control over financial reporting in the three months ended December 31, 2013, that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE

The information concerning our directors and executive officers required by Item 401 of Regulation S-K is included under the captions “Election of Directors” and “Executive Compensation,” respectively, in our definitive Proxy Statement to be filed with the SEC in connection with our 2013 Annual Meeting of Stockholders (the “2013 Proxy Statement”), and that information is incorporated by reference in this Form 10-K.

The information required by Item 405 of Regulation S-K concerning compliance with Section 16(a) of the Exchange Act is included under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our 2013 Proxy Statement, and that information is incorporated by reference in this Form 10-K.

The information required by Item 406 of Regulation S-K concerning the Company’s Code of Ethics is included under the caption “Election of Directors” in our 2013 Proxy Statement, and that information is incorporated by reference in this Form 10-K.

The information required by Item 407(c)(3) of Regulation S-K concerning the procedures by which Company stockholders may recommend nominees to the Company’s Board of Directors is included under the caption “Election of Directors” in our 2013 Proxy Statement, and that information is incorporated by reference in this Form 10-K.

The information required by Item 407(d)(4) of Regulation S-K concerning the Audit Committee is included under the caption “Report of the Audit Committee of the Board of Directors” in our 2013 Proxy Statement, and that information is incorporated by reference in this Form 10-K.

The information required by Item 407(d)(5) of Regulation S-K concerning the designation of an audit committee financial expert is included under the caption “Report of the Audit Committee of the Board of Directors” in our 2013 Proxy Statement, and that information is incorporated by reference in this Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item 11 is included in the text and tables under the caption “Executive Compensation” in our 2013 Proxy Statement, and that information is incorporated by reference in this Form 10-K.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this Item 12 is included under the captions “Beneficial Ownership” and “Equity Compensation Plan Information” in our 2013 Proxy Statement, and that information is incorporated by reference in this Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item 13 is included under the captions “Election of Directors” and “Certain Relationships and Related Transactions” in our 2013 Proxy Statement, and that information is incorporated by reference in this Form 10-K.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item 14 is included under the caption “Ratification of Appointment of Independent Registered Public Accounting Firm” in our 2013 Proxy Statement, and that information is incorporated by reference in this Form 10-K.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed as a part of this annual report on Form 10-K:

(1)

Reports of Independent Registered Public Accounting Firms On The Consolidated Financial Statements

Consolidated Statements of Operations for the years ended December 31, 2013, 2012, and 2011

Consolidated Balance Sheets as of December 31, 2013 and 2012

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2013, 2012, and 2011

Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012, and 2011

Notes to Consolidated Financial Statements

F. Exhibits required by Item 601 of Regulation S-K:

Number	Description
2.1	Stock Purchase Agreement among NCI Information Systems, Inc. (“NCIIS”), a wholly owned subsidiary of NCI, and stockholders of AdvanceMed Corporation dated as of February 24, 2012 (incorporated herein by reference from Exhibit 2.1 to registrant’s Current Report on Form 8-K, as filed with the Commission on April 4, 2012)
3.1	Amended and Restated Certificate of Incorporation of the Registrant (incorporated herein by reference from Exhibit 3.1 to registrant’s Registration Statement on Form S-1 (File No. 333-127006), as filed with the Commission on October 4, 2005, as amended).
3.2	Bylaws of the Registrant (incorporated herein by reference from Exhibit 3.2 to registrant’s Registration Statement on Form S-1 (File No. 333-127006), as filed with the Commission on July 29, 2005).
4.1	Specimen Class A Common Stock Certificate (incorporated herein by reference from Exhibit 4.1 to registrant’s Registration Statement on Form S-1 (File No. 333-127006), as filed with the Commission on October 20, 2005, as amended).
4.2*	NCI, Inc. 2005 Performance Incentive Plan (incorporated herein by reference from Exhibit 4.2 to registrant’s Registration Statement on Form S-1 (File No. 333-127006), as filed with the Commission on July 29, 2005).
4.3*	Form of 2005 Performance Incentive Plan Notice of Stock Option Grant and Stock Option Agreement (incorporated herein by reference from Exhibit 4.4 to registrant’s Registration Statement on Form S-1 (File No. 333-127006), as filed with the Commission on October 20, 2005, as amended).
4.4*	NCI, Inc. Amended and Restated 2005 Performance Incentive Plan (incorporated herein by reference from Appendix A to registrant’s Proxy Statement on Form DEF 14A, as filed with the Commission on April 30, 2010).
4.5*	Form of Amended and Restated 2005 Performance Incentive Plan Notice of Stock Option Grant and Stock Option Agreement (incorporated herein by reference from Exhibit 4.2 to registrant’s Current Report on Form 8-K, as filed with the Commission on June 12, 2010).

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Number	Description
10.1	Amended and Restated Loan and Security Agreement, dated as of December 13, 2011, by and among NCI, Inc., NCI Information Systems Incorporated, Operational Technologies Services, Inc., as Borrowers, the several banks and financial institutions from time to time parties thereto, as Lenders, SunTrust Bank as the Administrative Agent to the Lenders and SunTrust Robinson Humphrey, Inc., as Lead Arranger and Book Manager (incorporated by reference from Exhibit 10.1 to registrant’s Current Report on Form 8-K dated December 13, 2011, and filed with the Commission on December 15, 2011).
10.2*	Executive Change in Control and Severance Agreement, dated March 9, 2013, by and among, NCI, Inc. and Brian J. Clark. (incorporated herein by reference from Exhibit 10.2 to registrant’s Annual Report on Form 10-K (File No. 000-51579), as filed with the Commission on March 12, 2013).
10.3*	Executive Change in Control and Severance Agreement, dated March 9, 2013, by and among, NCI, Inc. and Marco de Vito (incorporated herein by reference from Exhibit 10.3 to registrant’s Annual Report on Form 10-K (File No. 000-51579), as filed with the Commission on March 12, 2013).
10.4*	Executive Change in Control and Severance Agreement, dated March 9, 2013, by and among, NCI, Inc. and Michele R. Cappello (incorporated herein by reference from Exhibit 10.4 to registrant’s Annual Report on Form 10-K (File No. 000-51579), as filed with the Commission on March 12, 2013).
10.5*	Executive Change in Control and Severance Agreement, dated March 9, 2013, by and among, NCI, Inc. and Lucas J. Narel (incorporated herein by reference from Exhibit 10.5 to registrant’s Annual Report on Form 10-K (File No. 000-51579), as filed with the Commission on March 12, 2013).
10.6	Waiver and Amendment to Amended and Restated Loan and Security Agreement, dated as of December 31, 2012, by and among NCI, Inc., and NCI Information Systems Incorporated, as Borrowers, the several banks and financial institutions from time to time parties thereto, as Lenders, SunTrust Bank as the Administrative Agent to the Lenders and SunTrust Robinson Humphrey, Inc., as Lead Arranger and Book Manager (incorporated by reference from Exhibit 10.1 to registrant’s Current Report on Form 8-K dated January 7, 2013, and filed with the Commission on January 8, 2013).
10.7	Second Amendment to Amended and Restated Loan and Security Agreement, dated as of December 19, 2013, by and among NCI, Inc., and PCI Information Systems Incorporated, as Borrowers, the several banks and financial institutions from time to time parties thereto, as Lenders, SunTrust Bank as the Administrative Agent to the Lenders and SunTrust Robinson Humphrey, Inc., as Lead Arranger and Book Manager (incorporated by reference from Exhibit 10.1 to registrant’s Current Report on Form 8-K dated December 23, 2013, and filed with the Commission on December 23, 2013).
21.1‡	Subsidiaries of Registrant
23.1‡	Consent of Ernst & Young LLP., independent registered public accounting firm
23.2‡	Consent of Deloitte & Touche LLP., independent registered public accounting firm
31.1‡	Certification of the Chief Executive Officer pursuant to rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2‡	Certification of the Chief Financial Officer pursuant to rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1‡	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Extension Schema
101.CAL	XBRL Extension Calculation Linkbase
101.DEF	XBRL Extension Definition Linkbase
101.LAB	XBRL Extension Label Linkbase
101.PRE	XBRL Extension Presentation Linkbase

‡ Included with this filing.

* Management Contract or Compensatory Plan or Arrangement.

(b) Exhibits. The exhibits required by this Item are listed under Item 15(a)(3).

34

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.

	NCI, Inc. Registrant
Date: February 14, 2014	By:	/s/ CHARLES K. NARANG
		Charles K. Narang Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Each person whose signature appears below hereby constitutes and appoints each of Charles K. Narang and Lucas J. Narel as his attorney-in-fact and agent, with full power of substitution and resubstitution for him in any and all capacities, to sign, any or all amendments to this report and to file same, with exhibits thereto and other documents in connection therewith, granting unto such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary in connection with such matters and hereby ratifying and confirming all that such attorney-in-fact and agent or his substitutes may do or cause to be done by virtue hereof.

Signature	Title	Date
/s/ BRIAN J. CLARK	President and Director	February 14, 2014
Brian J. Clark
/s/ LUCAS J. NAREL	Executive Vice President, Chief Financial Officer and Treasurer	February 14, 2014
Lucas J. Narel
/s/ JAMES P. ALLEN	Director	February 14, 2014
James P. Allen
/s/ JOHN E. LAWLER	Director	February 14, 2014
John E. Lawler
/s/ PAUL V. LOMBARDI	Director	February 14, 2014
Paul V. Lombardi
/s/ PHILIP O. NOLAN	Director	February 14, 2014
Philip O. Nolan
/s/ AUSTIN J. YERKS	Director	February 14, 2014
Austin J. Yerks
/s/ DANIEL R. YOUNG	Director	February 14, 2014
Daniel R. Young

35

NCI, Inc.

Notes to Consolidated Financial Statements

December 31, 2013

INDEX TO FINANCIAL STATEMENTS

NCI, INC.

Reports of Independent Registered Public Accounting Firms On The Consolidated Financial Statements	F-2
Consolidated Statements of Operations For the years ended December 31, 2013, 2012, and 2011	F-4
Consolidated Balance Sheets As of December 31, 2013 and 2012	F-5
Consolidated Statements of Changes in Stockholders’ Equity For the years ended December  31, 2013, 2012, and 2011	F-6
Consolidated Statements of Cash Flows For the years ended December 31, 2013, 2012, and 2011	F-7
Notes to Consolidated Financial Statements	F-8

F-1

Report of Independent Registered Public Accounting Firm

On The Consolidated Financial Statements

To the Board of Directors and Stockholders of NCI, Inc.

We have audited the accompanying consolidated balance sheet of NCI, Inc. and subsidiaries (the “Company”) as of December 31, 2013, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the year ended December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of NCI, Inc. and subsidiaries as of December 31, 2013, and the results of their operations and their cash flows for the year ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

McLean, Virginia

February 14, 2014

F-2

Report of Ernst & Young LLP, Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of NCI, Inc.

We have audited the accompanying consolidated balance sheet of NCI, Inc. as of December 31, 2012, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2012. 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 in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also 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.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of NCI, Inc. at December 31, 2012, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

McLean, Virginia

February 28, 2013

F-3

NCI, Inc.

Consolidated Statements of Operations

(in thousands, except per share amounts)

	Year ended December 31,
	2013			2012			2011
Revenue	$	332,325		$	368,387		$	558,261
Operating expenses:
Cost of revenue		289,388			322,281			499,398
General and administrative expenses		23,393			26,148			24,150
Depreciation and amortization		6,298			6,926			6,732
Stock option tender offer		—			2,311			—
Acquisition and integration related expenses		—			—			1,012
Restructuring charge		—			—			3,139
Purchase contingency gain		(864	)		—			—
Impairment of goodwill and intangible assets		—			150,752			—
Total operating expenses		318,215			508,418			534,431
Operating income (loss)		14,110			(140,031	)		23,830
Interest expense, net		784			1,325			1,698
Income (loss) before income taxes		13,326			(141,356	)		22,132
Provision (benefit) for income taxes		5,588			(54,532	)		8,974
Net income (loss)	$	7,738		$	(86,824	)	$	13,158
Earnings (loss) per common and common equivalent share:
Basic:
Weighted average shares outstanding		12,829			13,335			13,675
Net income (loss) per share	$	0.60		$	(6.51	)	$	0.96
Diluted:
Weighted average shares outstanding		12,829			13,335			13,830
Net income (loss)per share	$	0.60		$	(6.51	)	$	0.95

The accompanying notes are an integral

part of these consolidated financial statements

F-4

NCI, Inc.

Consolidated Balance Sheets

(in thousands, except par value)

	As of December 31,
	2013			2012
Assets:
Current assets:
Cash and cash equivalents	$	50		$	763
Accounts receivable, net		63,991			62,293
Deferred tax assets, net		3,217			3,269
Income tax receivable		—			5,543
Prepaid expenses and other current assets		2,941			5,215
Total current assets		70,199			77,083
Property and equipment, net		9,752			12,564
Other assets		2,113			1,593
Deferred tax assets, net		39,990			43,463
Intangible assets, net		5,340			7,073
Total assets	$	127,394		$	141,776
Liabilities and stockholders’ equity:
Current liabilities:
Accounts payable	$	17,371		$	24,148
Accrued salaries and benefits		16,645			15,858
Deferred revenue		2,594			1,032
Other accrued expenses		4,578			7,625
Total current liabilities		41,188			48,663
Long-term debt		1,000			17,500
Other long-term liabilities		3,399			2,723
Total liabilities		45,587			68,886
Stockholders’ equity:
Class A common stock, $0.019 par value—37,500 shares authorized; 9,142 shares issued and 8,226 shares outstanding as of December 31, 2013, and 9,149 shares issued and 8,232 shares outstanding as of December 31, 2012		174			174
Class B common stock, $0.019 par value—12,500 shares authorized; 4,700 shares issued and outstanding as of December 31, 2013 and 2012		89			89
Additional paid-in capital		70,905			69,726
Treasury stock at cost—917 shares of Class A common stock as of December 31, 2013 and 2012		(8,331	)		(8,331	)
Retained earnings		18,970			11,232
Total stockholders’ equity		81,807			72,890
Total liabilities and stockholders’ equity	$	127,394		$	141,776

The accompanying notes are an integral

part of these consolidated financial statements

F-5

NCI, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

(in thousands)

	Class A common stock					Class B common stock						Additional Paid-in Capital			Retained Earnings			Class A Treasury Stock					Total Stockholders’ Equity
	Shares			Amount		Shares			Amount									Shares		Amount
Balance at January 1, 2011		8,469		$	161		5,200		$	99		$	67,889		$	84,898			—	$	—		$	153,047
Net income		—			—		—			—			—			13,158			—		—			13,158
Conversion of Class B common stock to Class A common stock		500			10		(500	)		(10	)		—			—			—		—			—
Restricted stock grants, net of forfeitures		165			3		—			—			(3	)		—			—		—			—
Stock compensation expense		—			—		—			—			1,800			—			—		—			1,800
Exercise of stock options		29			—		—			—			261			—			—		—			261
Net tax deficiency from stock transactions		—			—		—			—			(10	)		—			—		—			(10	)
Purchase of Class A common stock for Treasury		(288	)		—		—			—			—			—			288		(4,455	)		(4,455	)
Balance at December 31, 2011		8,875		$	174		4,700		$	89		$	69,937		$	98,056			288	$	(4,455	)	$	163,801
Net (loss)		—			—		—			—			—			(86,824	)		—		—			(86,824	)
Restricted stock grants, net of forfeitures		(19	)		—		—			—			—			—			—		—			—
Stock compensation expense		—			—		—			—			4,204			—			—		—			4,204
Exercise of stock options		5			—		—			—			10			—			—		—			10
Repurchase of stock options		—			—		—			—			(1,320	)		—			—		—			(1,320	)
Net tax deficiency from stock transactions		—			—		—			—			(3,105	)		—			—		—			(3,105	)
Purchase of Class A common stock for Treasury		(629	)		—		—			—			—			—			629		(3,876	)		(3,876	)
Balance at December 31, 2012		8,232		$	174		4,700		$	89		$	69,726		$	11,232			917	$	(8,331	)	$	72,890
Net income		—			—		—			—			—			7,738			—		—			7,738
Stock compensation expense		—			—		—			—			1,399			—			—		—			1,399
Repurchase and cancellation of stock awards		(6	)		—		—			—			(33	)		—			—		—			(33	)
Net tax deficiency from stock transactions		—			—		—			—			(187	)		—			—		—			(187	)
Balance at December 31, 2013		8,226		$	174		4,700		$	89		$	70,905		$	18,970			917	$	(8,331	)	$	81,807

The accompanying notes are an integral

part of these consolidated financial statements

F-6

NCI, Inc.

Consolidated Statements of Cash Flows

(in thousands)

	Year ended December 31,
	2013			2012			2011
Cash flows from operating activities:
Net income (loss)	$	7,738		$	(86,824	)	$	13,158
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Impairment of goodwill and intangible assets		—			150,752			—
Depreciation and amortization		6,298			6,926			6,732
Loss (gain) on sale or disposal of property and equipment		—			5			84
Stock compensation expense		1,399			4,204			1,800
Deferred income taxes		3,338			(51,851	)		(982	)
Changes in operating assets and liabilities:
Accounts receivable, net		(1,698	)		32,782			50,353
Prepaid expenses and other assets		7,477			(7,197	)		324
Accounts payable		(6,777	)		(5,870	)		(32,314	)
Accrued expenses and other liabilities		(515	)		(1,392	)		(2,908	)
Net cash provided by operating activities		17,260			41,535			36,247
Cash flows from investing activities:
Purchases of property and equipment		(1,260	)		(1,785	)		(2,775	)
Proceeds from sale of property and equipment		—			—			19
Cash paid for acquisitions, net of cash acquired		—			—			(63,327	)
Net cash used in investing activities		(1,260	)		(1,785	)		(66,083	)
Cash flows from financing activities:
Borrowings under credit facility		123,922			130,304			201,152
Repayments on credit facility		(140,422	)		(166,804	)		(167,152	)
Financing costs paid		(180	)		(120	)		—
Principal payments under capital lease obligations		—			—			(23	)
Proceeds from exercise of stock options		—			10			261
Excess tax benefit from cancellation of stock options		—			—			81
Repurchase of stock awards		(33	)		(1,320	)		—
Purchase of Class A common stock for Treasury		—			(3,876	)		(4,455	)
Net cash (used in) provided by financing activities		(16,713	)		(41,806	)		29,864
Net change in cash and cash equivalents		(713	)		(2,056	)		28
Cash and cash equivalents, beginning of year		763			2,819			2,791
Cash and cash equivalents, end of year	$	50		$	763		$	2,819
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest	$	596		$	1,216		$	1,798
Income taxes	$	975		$	2,657		$	11,589
Supplemental disclosure of non cash activities:
Leasehold improvements acquired with tenant improvement funds	$	496			—			—

The accompanying notes are an integral

part of these consolidated financial statements

F-7

NCI, Inc.

Notes to Consolidated Financial Statements

December 31, 2013

1. Business Overview

NCI provides enterprise services and solutions by utilizing technologies and methodologies in the following capability areas: Cloud Computing and IT Infrastructure Optimization, Cybersecurity and Information Assurance, Engineering and Logistics Support, Enterprise Information Management and Advanced Analytics, Health IT and Clinical Support, IT Service Management, Software and Systems Development/Integration, and Training and Simulation. The Company provides these services to U.S. Defense, Intelligence, and Healthcare, and Civilian Government Agencies. Substantially all of the Company’s revenue was derived from contracts with the U.S. Federal Government, directly as a prime contractor or as a subcontractor. The Company primarily conducts business throughout the United States.

2. Summary of Significant Accounting Policies

Basis of Consolidation

The consolidated financial statements include the accounts of the Company’s wholly-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

Substantially all of the Company’s revenue is derived from services and solutions provided to the U.S. Federal Government, primarily by Company employees and, to a lesser extent, subcontractors. The Company generates its revenue from three different types of contractual arrangements: time-and-materials contracts; cost-plus fee contracts; and firm fixed-price contracts.

Revenue for time-and-materials contracts is recognized as services are performed, generally on the basis of contract allowable labor hours worked multiplied by the contract defined billing rates, plus the direct costs and indirect cost burdens associated with materials and other direct expenses used in performance on the contract. Profits on time-and-materials contracts result from the difference between the cost of services performed and the contract-defined billing rates for these services.

Generally, revenue on cost-plus fee contracts is recognized as services are performed, based on the allowable costs incurred in the period, plus any recognizable earned fee. The Company does not recognize award-fee income until the fees are fixed or determinable. Due to such timing, and to fluctuations in the level of revenue, profit as a percentage of revenue on award-fee contracts will fluctuate period to period.

Revenue recognition methods on firm fixed-price contracts will vary depending on the nature of the work and the contract terms. Revenue on firm fixed-price service contracts is recognized as services are performed. Generally, revenue is deferred until all the following have occurred: (1) there is a contract in place, (2) delivery has occurred, (3) the price is fixed or determinable, and (4) collectability is reasonably assured. Revenue on firm fixed-price contracts that require delivery of specific items is recognized based on a price per unit as units are delivered. Revenue for firm fixed-price contracts in which the Company is paid a specific amount to provide services for a stated period of time is recognized ratably over the service period. Profits related to contracts accounted for under this method may fluctuate from period to period, particularly in the early phases of the contract. Anticipated losses on contracts accounted for under this method are recognized as incurred.

Revenue on certain firm fixed-price contracts where the Company is designing, engineering, or manufacturing to the customer’s specifications is recognized on the percentage-of-completion method of accounting, generally using costs incurred in relation to total estimated costs to measure progress toward completion. Profits on firm fixed-price contracts result from the difference between the incurred costs and the revenue earned. Contract accounting requires significant judgment relative to assessing risks, estimating contract revenue and costs, and making assumptions for schedule and technical issues. Due to the size and nature of many of the Company’s contracts, the estimation of total revenue and cost at completion requires the use of estimates. Contract costs include

F-8

material, labor, and subcontracting costs, as well as an allocation of allowable indirect costs. Assumptions have to be made regarding the length of time to complete the contract because costs also include expected increases in wages and prices for materials. For contract change orders, claims or similar items, the Company applies judgment in estimating the amounts and assessing the potential for realization. These amounts are only included in contract value when they can be reliably estimated and realization is considered probable. Estimates of total contract revenue and costs are continuously monitored during the term of the contract and are subject to revision as the contract progresses. Anticipated losses on contracts accounted for under the percentage-of-completion method are recognized in the period they are deemed probable and can be reasonably estimated.

Cash and Cash Equivalents

The Company considers cash on deposit and all highly liquid investments with original maturities of three months or less to be cash and cash equivalents.

Fair Value Measurements

The Company’s financial assets and liabilities are measured at fair value which is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. Valuation techniques are based on observable or unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions.

These two types of inputs have created the following fair value hierarchy:

• Level 1 — Quoted prices for identical instruments in active markets.

• Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant value drivers are observable.

• Level 3 — Valuations derived from valuation techniques in which significant value drivers are unobservable

The carrying values of cash and cash equivalents, contract receivables and accounts payable approximate fair value because of the short-term nature of these instruments. The Company’s nonfinancial assets measured at fair value on a nonrecurring basis include intangible assets and long-lived tangible assets including property and equipment. The valuation methods used to determine fair value require a significant degree of management judgment to determine the key assumptions. As such, the Company classifies nonfinancial assets subject to nonrecurring fair value adjustments at Level 3 measurements. The carrying value of the long-term debt approximates fair value because the interest rate is variable and therefore deemed to reflect a market rate of interest.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at face amount, less an allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts at an amount that it estimates to be sufficient to cover the risk of collecting less than full payment on receivables. On a quarterly basis, the Company reevaluates its receivables, especially receivables that are past due, and reassesses the allowance for doubtful accounts primarily based on specific customer collection issues.

Property and Equipment

Property, equipment, and leasehold improvements are recorded at cost and are depreciated on a straight-line basis over their estimated useful lives, which range from three to seven years for furniture and equipment, over the shorter of the lease term or the useful lives for leasehold improvements, and 30 years for real property.

Long-Lived Assets (Excluding Goodwill and Intangible Assets)

A review of long-lived assets for impairment is performed annually or when events or changes in circumstances indicate the carrying value of such assets may not be recoverable. If an indicator of impairment is present, the Company compares the estimated undiscounted future cash flows to be generated by the asset to its carrying amount. If the undiscounted future cash flows are less than the carrying amount of the asset, the Company records an impairment loss equal to the excess of the asset’s carrying amount over its fair value. Any write-downs are treated as permanent reductions in the carrying amount of the assets. Based on the analysis performed, the Company determined that there were no such impairments, nor indicators of impairments, for such assets during 2013 or 2012.

Goodwill and Intangible Assets

Goodwill represents the excess of cost over fair value of net tangible and identifiable intangible assets of acquired companies. Goodwill is reviewed for impairment annually or when events or changes in circumstances indicate the carrying value exceeds the implied fair value. NCI performs its annual goodwill impairment analysis on October 1 of each year. A two-step impairment test is used to identify potential goodwill impairment and measure the amount of a goodwill impairment loss to be recognized. The first step is used to identify any potential impairment by comparing the fair value of the Company with its carrying amount. The second step is used to measure the amount of impairment loss, if any, by comparing the implied fair value of goodwill with the carrying amount of goodwill. If goodwill becomes impaired, the Company would record a charge to earnings in the financial statements during the period in which any impairment of goodwill is determined.

During the third quarter of 2012, due to a continued decline in the market price of the Company’s stock, the market capitalization of the Company remained below the carrying value. In addition, federal budget issues, delayed award activity and the resulting expectations for the Company’s future performance all factored into the determination that a potential triggering event had occurred during the third quarter ended September 30, 2012. As a result, the Company performed an interim goodwill impairment analysis. Management, with the assistance of a third party valuation specialist, completed the analysis for the first step and determined that the Company’s implied fair value was below its carrying value as of September 30, 2012. As a result, the Company commenced the second step to determine the implied fair value of goodwill. The estimated fair value of the Company was calculated using a combination of discounted cash flow projections, market values for comparable businesses, and terms, prices and conditions found in sales of comparable businesses.

Based on the analysis, management concluded that a loss as of September 30, 2012 was probable and could be reasonably estimated. Accordingly, the Company recorded an impairment charge of $92.8 million during the three months ended September 30, 2012. A tax benefit totaling $35.8 million was recorded related to the goodwill impairment charge for the period ending September 30, 2012.

During the fourth quarter of 2012, in accordance with the Company’s annual testing and due to its further depressed market value, the continued uncertainty in funding levels of various Federal Government agencies and the ongoing delays of expected contract procurement opportunities, the Company performed a goodwill impairment analysis with the assistance of a third party valuation specialist. The results of this analysis indicated that the remaining balance of the Company’s goodwill was impaired, and therefore the Company recorded an impairment charge totaling $57.5 million and a tax benefit totaling $22.2 million in the period ending December 31, 2012.

F-9

Intangible assets consist of acquisition-related contracts and customer relationships and non-compete agreements. Contract and customer relationships are amortized over the expected backlog life based on projected cash flows, which are proportionate to acquired backlog, or generally between three to 11 years. Non-compete agreements are amortized over their contractual life, which is between three to five years.

Intangible assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of the intangible asset many not be fully recoverable. An impairment loss is recognized if the sum of the long-term undiscounted cash flows is less than the carrying amount of the long-lived asset being evaluated. An impairment loss is measured as the amount by which the carrying amount exceeds its fair value. Any write-downs are treated as permanent reductions in the carrying amount of the assets and will result in a reduction of earnings in the period incurred. During 2013, the Company did not record any intangible impairment charge.

Common Stock

Holders of Class A common stock are entitled to one vote for each share held of record, and holders of Class B common stock are entitled to 10 votes for each share held of record, except with respect to any “going private transaction,” as to which each share of Class A common stock and Class B common stock are both entitled to one vote per share. The Class A common stock and the Class B common stock vote together as a single class on all matters submitted to a vote of stockholders, including the election of directors, except as required by law. Holders of the Company’s common stock do not have cumulative voting rights in the election of directors. Each share of Class B common stock is convertible into one share of Class A common stock at any time at the option of the Class B stockholder, and in certain other circumstances. During 2012, the Class B common stock holder transferred ownership of 500,000 shares of Class B common stock to the control of an unrelated party for estate planning purposes. This transfer resulted in the conversion of the Class B common stock to Class A common stock.

Holders of common stock are entitled to receive, when and if declared by the Board of Directors from time to time, such dividends and other distributions in cash, stock or property from the Company’s assets or funds legally available for such purposes. Each share of Class A common stock and Class B common stock is equal with respect to dividends and other distributions in cash, stock or property, except that in the case of stock dividends, only shares of Class A common stock will be distributed with respect to the Class A common stock and only shares of Class B common stock will be distributed with respect to Class B common stock.

Segment Information

Management has concluded that the Company operates in one segment based upon the information used by management in evaluating the performance of its business and allocating resources and capital.

Income Taxes

We periodically assess our tax filing exposures related to periods that are open to examination. Based on the latest available information, we evaluate tax positions to determine whether the position will more likely than not be sustained upon examination by the applicable tax authorities. The Company recognizes liabilities for uncertain tax positions on open tax years when it is more likely than not that a tax position will not be sustained upon examination and settlement with various taxing authorities. Liabilities for uncertain tax positions are measured at the Company’s best estimate of the taxes ultimately expected to be paid. If we determine that the tax position is more likely than not to be sustained, we record the largest amount of benefit that is more likely than not to be realized when the tax position is settled. If we cannot reach that determination, no benefit is recorded. We record interest and penalties related to income taxes as Interest Expense and General and Administrative Expenses in the Consolidated Statement of Operations, respectively.

3. Earnings Per Share

Basic earnings per share excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted earnings per share includes the incremental effect of stock options calculated using the treasury stock method. Shares that are anti-dilutive are not included in the computation of diluted earnings per share. NCI has both Class A and Class B shares and both share the same rights and preferences and thus the two class method does not result in a different outcome and is therefore not presented. For the years ended December 31, 2013, 2012 and 2011, approximately 1,258,000, 1,243,000 and 241,000 shares,

F-10

respectively, were not included in the computation of diluted earnings per share, because to do so would have been anti-dilutive. The following details the historical computation of basic and diluted earnings per common share (Class A and Class B) for the years ended December 31, 2013, 2012 and 2011:

	Year ended December 31,
	2013		2012			2011
	(in thousands, except per share data)
Net income (loss)	$	7,738	$	(86,824	)	$	13,158
Weighted average number of basic shares outstanding during the year		12,829		13,335			13,675
Dilutive effect of stock options after application of treasury stock method		—		—			155
Weighted average number of diluted shares outstanding during the year		12,829		13,335			13,830
Basic earnings (loss) per share	$	0.60	$	(6.51	)	$	0.96
Diluted earnings (loss) per share	$	0.60	$	(6.51	)	$	0.95

4. Major Customers

The Company earned substantially all of its revenue from the U.S. Federal Government for each of the years ended December 31, 2013, 2012 and 2011. During 2013, 2012 and 2011, the Company’s PEO Soldier contract accounted for revenue in the amounts of $46.0 million, $62.4 million and $86.0 million, respectively. NCI’s PEO Soldier contract is a cost-plus contract consisting of a base period and two option periods for a total term of three years commencing in September 2012. Revenue by customer for each of the three years ended December 31 was as follows:

	Year ended December 31,
	2013				2012				2011
	(in thousands)
Defense and Intelligence Agencies	$	249,463	75	%	$	280,795	76	%	$	478,299	86	%
Federal Civilian Agencies	$	82,862	25	%	$	87,592	24	%	$	79,962	14	%

F-11

5. Accounts Receivable (in thousands)

Accounts receivable consist of billed and unbilled amounts at the end of each year:

	As of December 31,
	2013		2012
Billed receivables	$	31,398	$	13,637
Unbilled receivables:
Amounts billable at end of year		19,215		35,938
Other		14,166		13,520
Total unbilled receivables		33,381		49,458
Total accounts receivable		64,779		63,095
Less: allowance for doubtful accounts		788		802
Total accounts receivable, net	$	63,991	$	62,293

Other unbilled receivables primarily consist of amounts that will be billed upon milestone completions and other accrued amounts that cannot be billed as of the end of the period. All unbilled receivables are expected to be billed and collected within the next year.

The following table details the Allowance for Doubtful Accounts for the years ended December 31, 2013, 2012 and 2011:

	Year ended December 31,
	2013			2012			2011
Balance at beginning of year	$	802		$	590		$	698
Charged to expense		62			647			200
Deductions		(76	)		(435	)		(308	)
Balance at end of year	$	788		$	802		$	590

6. Property and Equipment (in thousands)

The following table details property and equipment at the end of each year:

	As of December 31,
	2013		2012
Property and equipment
Furniture and equipment	$	23,054	$	22,092
Leasehold improvements		8,488		7,697
Real property		549		549
		32,091		30,338
Less: Accumulated depreciation and amortization		22,339		17,774
Property and equipment, net	$	9,752	$	12,564

Depreciation expense for the years ended December 31, 2013, 2012 and 2011 was $4.6 million, $4.7 million and $4.2 million, respectively.

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7. Intangible Assets (in thousands)

The following table details intangible assets at the end of each year:

	As of December 31,
	2013		2012
Contract and customer relationships	$	20,987	$	20,987
Less: Accumulated amortization		15,647		13,510
Less: Impairment		—		429
		5,340		7,048
Non-compete agreements		2,038		2,038
Less: Accumulated amortization		2,038		2,013
		—		25
Intangible assets, net	$	5,340	$	7,073

Amortization expense of intangible assets for the years ended December 31, 2013, 2012 and 2011 was $1.7 million, $2.6 million and $2.5 million, respectively. Future amortization expense related to intangible assets is expected to be as follows:

For the year ending December 31,
2014	$	1,622
2015		1,178
2016		616
2017		603
2018		492
Thereafter		829
		5,340

8. Goodwill (in thousands)

The following table details the changes in the balances of goodwill for each year:

Balance as of December 31, 2011	$	150,322
Goodwill impairment		(150,322	)
Balance as of December 31, 2012		—
Balance as of December 31, 2013	$	—

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9. Restructuring Charge (in thousands)

During December 2012, management committed to, implemented, and completed a restructuring plan. The restructuring was done to reduce costs through downsizing our existing work force and physical locations.

The activity and balance of the restructuring liability accounts for the years ended December 31, 2013 and 2012 are as follows:

	Severance and Related Costs			Lease and Facilities Exit Costs			Total
Balance as of January 1, 2012	$	364		$	2,577		$	2,941
Adjustments		—			(4	)		(4	)
Cash payments		(364	)		(1,000	)		(1,364	)
Balance as of December 31, 2012		—			1,573			1,573
Cash payments		—			(645	)		(645	)
Balance as of December 31, 2013	$	—		$	928		$	928
Amounts contained in balance sheet as of December 31, 2013
Other accrued expenses		—			366			366
Other long-term liabilities		—			562			562
Total	$	—		$	928		$	928

The accrued amounts related to the lease and facilities exit costs will be reduced over the respective lease terms, the longest of which extends through 2017.

10. Other Accrued Expenses (in thousands)

Other accrued expenses consist of the following at the end of each year:

	As of December 31,
	2013		2012
Accrued health claims	$	1,881	$	1,987
Deferred rent, current		573		161
Restructuring charge, current		366		685
Customer overpayment		—		1,829
Other accrued expenses		1,758		2,963
Total other accrued expenses	$	4,578	$	7,625

F-14

11. Leases

The Company leases office space and equipment under operating leases that expire on various dates through August 31, 2019. Several of the leases contain escalation clauses ranging from 2.5% to 5.0% per year, which are reflected in the amounts below.

Minimum lease payments under the Company’s non-cancelable operating leases are as follows:

	Operating leases
	(in thousands)
For the year ending December 31,
2014	$	7,093
2015		5,295
2016		4,270
2017		3,044
2018		1,572
Thereafter		93
Total minimum lease payments	$	21,367

The Company incurred rent expense including amortization of deferred rent expense, under operating leases of $6.7 million, $8.1 million, and $7.9 million for the years ended December 31, 2013, 2012, and 2011, respectively.

12. Debt

The Company’s senior credit facility consists of a revolving line of credit with a borrowing capacity of up an $80.0 million principal amount, and a $45.0 million accordion feature allowing us to increase our borrowing capacity to up to a $125.0 million principal amount, subject to obtaining commitments for the incremental capacity from existing or new lenders. The outstanding borrowings are collateralized by a security interest in substantially all the Company’s assets. The lenders also require a direct assignment of all contracts at the lenders’ discretion. The outstanding balance under the credit facility accrues interest based on one-month LIBOR plus an applicable margin, ranging from 210 to 310 basis points, based on the ratio of our outstanding senior funded debt to Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA) as defined in the credit facility agreement.

During the fourth quarter of 2013, the Company amended its credit facility which modified certain terms of its Amended and Restated Loan and Security Agreement, including, among other things, (i) a change in the definition of Commitment Termination Date, amended to January 31, 2017, (ii) a change in the definition of Permitted Acquisitions, amended to increase the size of the permitted Aggregate Acquisition Consideration (as defined therein) from $50 million to $100 million, and (iii) an increase in the amount of cash dividends authorized in any calendar year from $3.0 million to $4.0 million, and (iv) a reduction in the applicable margins on outstanding balances under the credit facility. The accrued interest is due and payable monthly. The credit facility expires on January 31, 2017. We do not currently hedge our interest rate risk.

The credit facility contains various restrictive covenants that, among other things, restrict our ability to incur or guarantee additional debt; make certain distributions, investments and other restricted payments; enter into transactions with certain affiliates; create or permit certain liens; and consolidate, merge, or sell assets. In addition, the credit facility contains certain financial covenants that require us to maintain a minimum tangible net worth; maintain a minimum fixed charge coverage ratio and a minimum funded debt to earnings ratio; and limit capital expenditures below certain thresholds. Funds borrowed under the credit facility will be used to finance possible future acquisitions, for working capital requirements, for stock repurchases, and for general corporate uses. The amendment to the credit facility allows us to use borrowings thereunder of up to $17.5 million to repurchase shares of our common stock. For a discussion of share repurchases, see Note 13. - Stock Repurchase.

As of December 31, 2013, the Company was were in compliance with all our loan covenants.

For the years ending December 31, 2013, 2012, and 2011, NCI had a weighted average outstanding loan balance of $12.5 million, $36.3 million, and $63.1 million, respectively, and a weighted average borrowing rate of 2.7%, 2.5%, and 2.3%, respectively.

As of December 31, 2013, the outstanding balance under the credit facility was $1.0 million and interest accrued at a rate of LIBOR plus 210 basis points, or 2.3%. As of December 31, 2012, the outstanding balance under the credit facility was $17.5 million and interest accrued at a rate of LIBOR plus 250 basis points, or 2.7%. As of December 31, 2013 and 2012, the Company was in compliance with all of its loan covenants.

F-15

13. Stock Repurchase

NCI’s Board of Directors authorized management to repurchase up to $25.0 million of our Class A common stock pursuant to a stock repurchase program. Shares may be repurchased pursuant to open market purchases, privately negotiated transactions, or block transactions. NCI has no obligation to repurchase shares under the authorization, and the timing, actual number and value of the shares which are repurchased (and the manner of any such repurchase) will be at the discretion of management and will depend on a number of factors, including the price of our common stock, the Company’s cash needs, borrowing capacity under our credit facility, interest rates, and the Company’s financial performance and position, among other factors. NCI may suspend or discontinue repurchases at any time.

During 2012, the Company purchased 628,782 shares at an average price of $6.14 per share for a total purchase price of $3.9 million. During 2013, we did not purchase any shares We have $16.7 million remaining under the Board of Directors’ authorization for share repurchases.

14. Stock Option Tender Offer

In September 2012, the Company completed a cash tender offer for certain vested and unvested out-of-the-money stock options held by current and former employees, officers, and directors of NCI that were granted prior to January 1, 2012, provided that such stock options had not expired or terminated prior to the expiration of the offering period. The Company repurchased a total of 963,579 options for an aggregate cash purchase price of $1.3 million, which was paid in exchange for the cancellation of the eligible options. As a result of these repurchases, the Company incurred a charge of $2.3 million consisting of a non-cash charge of $2.2 million that included the remaining unamortized stock based compensation expense associated with the unvested portion of the repurchased options and a small amount paid in excess of the estimated fair value of the options on the date of purchase, plus $0.1 million related to associated payroll taxes, professional fees and other costs.

F-16

The aggregate amount of the payments made in exchange for eligible options was charged to stockholder’s equity for stock options purchased at or below the estimated fair value of the options on the date of repurchase, which was the $1.3 million cash purchase price.

15. Performance Incentive Plan

The Board of Directors of the Company has adopted The Amended and Restated 2005 Performance Incentive Plan (the Plan), which has been approved by the Company’s stockholders. As of December 31, 2013, the Plan has reserved 4,000,000 shares of Class A common stock for issuance, which increases annually by 100,000 shares. The Plan provides for the grant of incentive stock options and non-qualified stock options, and the grant or sale of restricted shares of common stock to the Company’s directors, employees, and consultants. The Compensation Committee of the Company administers the Plan.

	As of December 31, 2013
	(in thousands)
Shares reserved under the plan		4,000
Shares vested and options exercised		1,453
Restricted shares and options outstanding		1,869
Shares available for future grants		678

Share-Based Payments

Compensation expense for all stock-based awards is measured at fair value on the date of grant and recognition of compensation expense is recorded over the service period for awards expected to vest. The Company determines the fair value of our stock options using the Black-Scholes-Merton valuation model. The application of the Black-Scholes-Merton model to the valuation of options requires the use of input assumptions, including expected volatility, expected term, expected dividend yield, and expected risk-free interest rate.

Assumptions Used in Fair Value determination

The following weighted-average assumptions were used for option grants made during the years ended December 31, 2013, 2012, and 2011:

	Year ended December 31,
	2013			2012			2011
Expected Volatility		56.0	%		53.5	%		47.2	%
Expected Term (in years)		5.0			4.7			4.7
Risk-free Interest Rate		1.2	%		0.9	%		1.5	%
Dividend Yield		0.0	%		0.0	%		0.0	%

• Expected Volatility. The expected volatility of the Company’s shares was estimated based upon the historical volatility of the Company’s share price.

• Expected Term. Because the Company does not have significant historical data on employee exercise behavior, it uses the “Simplified Method” as defined under SEC Staff Accounting Bulletin No. 110 to calculate the expected term. The simplified method is calculated by averaging the vesting period and contractual term of the option.

• Risk-free Interest Rate. The Company bases the risk-free interest rate used in the Black-Scholes-Merton valuation method on the implied yield available on a U.S. Treasury note with a term equal to the expected term of the underlying grants.

• Dividend Yield. The Black-Scholes-Merton valuation model calls for a single expected dividend yield as an input. The Company has not paid dividends in the past nor does it expect to pay dividends in the future.

F-17

Stock Options Activity

The following table summarizes stock option and restricted stock activity for the period January 1, 2011 through December 31, 2013:

	Options					Restricted Stock
	Number of Options (in thousands)			Weighted- Average Exercise Price per Share		Number of Restricted Shares (in thousands)			Weighted- Average Fair Value
Outstanding at January 1, 2011		1,098		$	18.18		—		$	—
Granted		373			18.87		175			18.03
Forfeited/cancelled		(78	)		25.63		(10	)		14.50
Exercised		(29	)		9.00		—			—
Outstanding at December 31, 2011		1,364		$	18.14		165		$	18.25
Granted		679			6.70		25			7.28
Forfeited/cancelled		(1,362	)		18.00		(44	)		15.62
Exercised		(5	)		1.90		(23	)		19.01
Outstanding at December 31, 2012		676		$	7.07		123		$	16.81
Granted		1,230			4.59		—			—
Forfeited/cancelled		(121	)		5.96		—			—
Exercised/vested		—			—		(39	)		16.73
Outstanding at December 31, 2013		1,785		$	5.43		84		$	16.58
Vested or expected to vest at December 31, 2013		1,563		$	5.82		71		$	16.58
Exercisable at December 31, 2013		194		$	7.33		—		$	—

The following table summarizes stock option vesting and nonvested options for the period January 1, 2011 through December 31, 2013:

	Options					Restricted Stock
	Number of Options (in thousands)			Weighted- Average Fair Value		Number of Restricted Shares (in thousands)			Weighted- Average Fair Value
Nonvested January 1, 2011		457		$	11.17		—		$	—
Granted		373			7.79		175			18.03
Vested		(171	)		9.55		—			—
Forfeited		(66	)		10.80		(10	)		14.50
Nonvested December 31, 2011		593		$	9.07		165		$	18.25
Vested December 31, 2011		771		$	5.89
Granted		679			3.01		25			7.28
Vested		(164	)		9.36		(23	)		19.01
Forfeited		(459	)		8.66		(44	)		15.62
Nonvested December 31, 2012		649		$	3.05		123		$	16.81
Vested December 31, 2012		27		$	4.60
Granted		1,230			2.21		—			—
Vested		(174	)		2.92		(32	)		16.73
Forfeited		(121	)		2.64		(7	)		20.01
Nonvested December 31, 2013		1,591		$	2.45		84		$	16.58
Vested December 31, 2013		194		$	3.09

F-18

The following table summarizes stock options outstanding at December 31, 2013:

Range of exercise prices	Number of Options		Weighted- Average Exercise Price		Intrinsic Value Outstanding Options		Weighted-Average Remaining Contractual Life		Options exercisable		Intrinsic Value Vested Options
	(in thousands)				(in thousands)		(in years)		(in thousands)		(in thousands)
$1.00 – $6.99		1,259	$	4.56	$	2,607		6.39		41	$	106
$7.00 – $12.99		516		7.34		—		5.16		143		—
$13.00 – $20.00		10		18.11		—		0.47		10		—
		1,785	$	5.43	$	2,607		6.00		194	$	106

Stock options and restricted stock granted vest over a period of three to four years from the date of grant in accordance with the individual stock option agreement.

The following table summarizes stock compensation for the three years ended December 31, 2013, 2012 and 2011:

	Year Ended December 31,
	2013		2012		2011
Cost of revenue	$	283	$	637	$	638
General and administrative		1,116		1,323		1,162
Stock option tender offer		—		2,244		—
	$	1,399	$	4,204	$	1,800

As of December 31, 2013, there was $3.6 million of total unrecognized compensation cost of unvested stock compensation arrangements. This cost is expected to be fully amortized over the next five years, with $1.4 million, $1.1 million, $0.5 million, $0.4 million and $0.2 million amortized during 2014, 2015, 2016, 2017 and 2018, respectively. These future costs include an estimated forfeiture rate. Our stock compensation costs may differ based on actual experience. The cost of stock compensation is included in the Company’s Consolidated Statements of Operations before, or in conjunction with, the vesting of options.

The following table summarizes cash proceeds received, intrinsic value realized, and income tax benefits realized for the three years ending December 31, 2013, 2012 and 2011:

	Year Ended December 31,
	2013		2012		2011
Cash proceeds received	$	—	$	10	$	261
Intrinsic value realized		106		11		288
Income tax benefits realized		45		4		115

16. Provision for Income Taxes

Significant components of the provision for income taxes for the three years ended December 31, 2013, 2012, and 2011 are as follows:

	Year Ended December 31,
	2013		2012			2011
	(in thousands)
Current
Federal	$	1,651	$	(2,566	)	$	8,029
State and Local		599		(100	)		1,763
Total Current		2,250		(2,666	)		9,792
Deferred
Federal		2,491		(43,577	)		(617	)
State and Local		847		(8,289	)		(201	)
Total Deferred		3,338		(51,866	)		(818	)
Total Income Tax Provision	$	5,588	$	(54,532	)	$	8,974

F-19

The differences between the expense (benefit) from income taxes at the statutory U.S. Federal income tax rate of 34% and those reported in the Statements of Operations are as follows:

	Year ended December 31,
	2013			2012			2011
Federal income tax at statutory rates		34.0	%		35.0	%		35.0	%
State income taxes, net of Federal benefit		7.2			4.1			4.6
Other		0.7			(0.5	)		0.9
Total income tax expense		41.9	%		38.6	%		40.5	%

Other differences include, among other things, the nondeductible portion of meals and entertainment and a small portion of the goodwill impairment that is not deductible for tax purposes.

Deferred income taxes arise from temporary differences in the recognition of income and expense for income tax purposes and were computed using the liability method reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes.

Components of the Company’s deferred tax assets and liabilities are as follows for the years ended December 31:

	2013			2012
	(in thousands)
Deferred tax assets
Accrued vacation and compensation	$	1,871		$	2,321
Intangible assets excluding goodwill		3,753			3,732
Stock compensation		592			314
Restructuring charge and other accrued liabilities		1,603			1,196
Accounts receivable		59			191
Allowance for doubtful accounts		302			313
Deferred rent		1,045			792
Goodwill		35,868			40,218
Total deferred tax assets		45,093			49,077
Deferred tax liabilities
Property and equipment		(1,886	)		(2,344	)
Total deferred tax liabilities		(1,886	)		(2,344	)
Net deferred tax asset	$	43,207		$	46,733

Deferred tax assets are evaluated to determine if the future tax deductions will be realizable. Future realization of tax benefits ultimately depends on the existence of sufficient taxable income within the appropriate period that is available under the tax law. All available evidence is considered to determine if a valuation allowance for deferred tax assets is needed. Based primarily on projection of future taxable income, management believes there is sufficient positive evidence to conclude that it is more likely than not that the deferred tax assets are fully realizable and no valuation allowance is necessary.

The Company’s analysis of uncertain tax positions determined that the Company had no material uncertain tax positions and as such, no liability has been recorded as of December 31, 2013 and 2012.

The Company is subject to income taxes in the U.S. and various state jurisdictions. Tax statutes and regulations within each jurisdiction are subject to interpretation and require significant judgment to apply. Tax years related to U.S. Federal and various state jurisdictions remain subject to examination for tax periods ended on or after December 31, 2010.

F-20

17. Profit Sharing

The Company has a 401(k) profit sharing plan that covers substantially all NCI employees meeting certain criteria. The plan is a “defined contribution plan” whereby participants have the option of contributing to the plan. The plan provides for the Company to contribute 50 cents for each dollar contributed by the employee, up to the first 6% of their contribution. The participants are vested 100% in their employee contributions immediately. The participants become fully vested in the employer contributions ratably over four years of service.

The Company’s contributions for the years ended December 31, 2013, 2012 and 2011 were approximately $2.3 million, $2.9 million and $3.9 million, respectively.

18. Related Party Transactions

The Company purchased services under a subcontract from Net Commerce Corporation, which is a Government contractor wholly-owned by Rajiv Narang, the son of Charles K. Narang, the Chairman and Chief Executive Officer of the Company. The Company purchased services from Net Commerce Corporation of approximately $0.7 million, $0.9 million and $0.8 million for the years ended December 31, 2013, 2012 and 2011, respectively. As of December 31, 2013 and 2012, there were amounts due to Net Commerce Corporation of approximately $0.0 million and $0.2 million, respectively.

19. Contingencies

Government Audits

Payments to the Company on U.S. Federal Government contracts are subject to adjustment upon audit by various agencies of the U.S. Federal Government. Audits of costs and the related payments have been performed by the various agencies through 2007 for NCI Information Systems, Inc., our primary corporate vehicle for Government contracting. In the opinion of management, the final determination of costs and related payments for unaudited years will not have a material effect on the Company’s financial position, results of operations, or liquidity.

Litigation

The Company is party to various legal actions, claims, government inquiries, and audits resulting from the normal course of business. The Company believes that the probability is remote that any resulting liability will have a material effect on the Company’s financial position, results of operations, or liquidity.

F-21

20. Supplemental Quarterly Information (unaudited, in thousands)

This data is unaudited, but in the opinion of management, includes and reflects all adjustments that are normal and recurring in nature, and necessary, for a fair presentation of the selected data for these interim periods. Quarterly financial operating results of the Company for the years ended December 31, 2013 and 2012 are presented below.

	For the quarter ended
	Dec. 31, 2013		Sept. 30, 2013			June 30, 2013		Mar. 31, 2013		Dec. 31, 2012			Sept. 30, 2012			June 30, 2012		Mar. 31, 2012
Statement of Operations Data:
Revenue	$	79,895	$	77,918		$	82,971	$	91,541	$	89,658		$	88,467		$	91,186	$	99,076
Operating costs and expenses:
Cost of revenue		69,087		67,832			71,991		80,477		77,427			77,147			80,303		87,445
General and administrative expenses		5,583		5,819			6,129		5,861		6,771			6,251			6,342		6,744
Depreciation and amortization		1,475		1,679			1,527		1,618		1,781			1,681			1,690		1,773
Stock option purchase		—		—			—		—		—			2,311			—		—
Purchase contingency gain		—		(864	)		—		—		—			—			—		—
Impairment of goodwill and intangible assets		—		—			—		—		57,958			92,793			—		—
Total operating costs and expenses		76,145		74,466			79,647		87,956		143,937			180,184			88,335		95,962
Operating income (loss)		3,750		3,452			3,324		3,585		(54,279	)		(91,717	)		2,851		3,114
Interest expense, net		128		157			248		251		249			266			360		450
Income (loss) before income taxes		3,622		3,295			3,076		3,334		(54,528	)		(91,983	)		2,491		2,664
Provision (benefit) for income taxes		1,621		1,344			1,265		1,359		(19,835	)		(36,788	)		1,012		1,079
Net income (loss)	$	2,001	$	1,951		$	1,811	$	1,975	$	(34,693	)	$	(55,195	)	$	1,479	$	1,585
Earnings (loss) per share
Basic	$	0.16	$	0.15		$	0.14	$	0.15	$	(2.68	)	$	(4.17	)	$	0.11	$	0.12
Diluted	$	0.16	$	0.15		$	0.14	$	0.15	$	(2.68	)	$	(4.17	)	$	0.11	$	0.12

F-22