offer invasive diagnostic and, in some cases, therapeutic procedures. The remaining fourteen facilities are not located at hospitals and offer only diagnostic procedures. Effective January 1, 2007 we renamed our diagnostic and therapeutic division to MedCath Partners.
Basis of Consolidation. We have included in our consolidated financial statements hospitals and cardiac diagnostic and therapeutic facilities over which we exercise substantive control, including all entities in which we own more than a 50% interest, as well as variable interest entities in which we are the primary beneficiary. We have used the equity method of accounting for entities, including variable interest entities, in which we hold less than a 50% interest and over which we do not exercise substantive control, and are not the primary beneficiary. Accordingly, the one hospital in which we hold a minority interest, Avera Heart Hospital of South Dakota, is excluded from the net revenue and operating results of our consolidated company and our consolidated hospital division. Similarly, a number of our diagnostic and therapeutic facilities are excluded from the net revenue and operating results of our consolidated company and our consolidated MedCath Partners division. Our minority interest in the results of operations for the periods discussed for these entities is recognized as part of the equity in net earnings of unconsolidated affiliates in our statements of operations in accordance with the equity method of accounting.
During the fourth quarter of fiscal 2006, we sold our equity interest in Tucson Heart Hospital and we decided to seek to dispose of our interest in Heart Hospital of Lafayette and entered into a confidentiality and exclusivity agreement with a potential buyer. Accordingly, for all periods presented, the results of operations for these two hospitals have been excluded from continuing operations and are reported in loss from discontinued operations, net of taxes.
Revenue Sources by Division. The largest percentage of our net revenue is attributable to our hospital division. The following table sets forth the percentage contribution of each of our consolidating divisions to consolidated net revenue in the periods indicated below.

                                       Three Months Ended December 31,
            Division                     2006                   2005
            Hospital                         92.4 %                  91.8 %
            MedCath Partners                  7.3 %                   7.7 %
            Corporate and other               0.3 %                   0.5 %

Revenue Sources by Payor. We receive payments for our services rendered to patients from the Medicare and Medicaid programs, commercial insurers, health maintenance organizations and our patients directly. Generally, our net revenue is determined by a number of factors, including the payor mix, the number and nature of procedures performed and the rate of payment for the procedures. Since cardiovascular disease disproportionately affects those age 55 and older, the proportion of net revenue we derive from the Medicare program is higher than that of most general acute care hospitals. The following table sets forth the percentage of consolidated net revenue we earned by category of payor in the periods indicated.

                                                  Three Months Ended December 31,
  Payor                                             2006                   2005
  Medicare                                              42.7 %                  45.6 %
  Medicaid                                               4.8 %                   5.3 %
  Commercial and other, including self-pay              52.5 %                  49.1 %

Total consolidated net revenue 100.0 % 100.0 %

A significant portion of our net revenue is derived from federal and state governmental healthcare programs, including Medicare and Medicaid and we expect the net revenue that we receive from the Medicare program as a percentage of total consolidated net revenue will remain significant in future periods. Our payor mix may fluctuate in future periods due to changes in reimbursement, market and industry trends with self-pay patients and other similar factors.
The Medicare and Medicaid programs are subject to statutory and regulatory changes, retroactive and prospective rate adjustments, administrative rulings, court decisions, executive orders and freezes and funding reductions, all of which may significantly affect our business. In addition, reimbursement is generally subject to adjustment following audit by third party payors, including the fiscal intermediaries who administer the Medicare program for Centers for Medicare and Medicaid Services (CMS). Final determination of amounts due providers under the Medicare program often takes several years because of such audits, as well as resulting provider appeals and the application of technical reimbursement provisions. We believe that adequate provision has been made for any adjustments that might result from these programs; however, due to the complexity of laws and regulations governing the Medicare and Medicaid programs, the manner in which they are interpreted and the other complexities involved in estimating our net revenue, there is a possibility that recorded estimates will change by a material amount in the near term. Results of Operations
Three Months Ended December 31, 2006 Compared to Three Months Ended December 31, 2005

Statement of Operations Data. The following table presents our results of operations in dollars and as a percentage of net revenue for the periods indicated:

                                                                  Three Months Ended December 31,
                                                                            Increase / Decrease                  % of Net Revenue
                                2006                 2005                  $                  %               2006             2005
                                                (in thousands)
Net revenue                  $ 175,549          $     163,613          $ 11,936                7.3 %          100.0 %          100.0 %
Operating expenses:
Personnel expense               57,175                 52,493             4,682                8.9 %           32.6 %           32.1 %
Medical supplies
expense                         48,170                 46,194             1,976                4.3 %           27.4 %           28.2 %
Bad debt expense                13,831                 13,055               776                5.9 %            7.9 %            8.0 %
Other operating
expenses                        36,465                 35,789               676                1.9 %           20.8 %           21.9 %
Depreciation                     8,869                  8,557               312                3.6 %            5.1 %            5.2 %
Amortization                       252                    252                 -                  -              0.1 %            0.1 %
Loss on disposal of
property, equipment
and other assets                    57                     97               (40 )            (41.2 )%             -              0.1 %

Total operating
expenses                       164,819                156,437             8,382                5.4 %           93.9 %           95.6 %

Income from operations          10,730                  7,176             3,554               49.5 %            6.1 %            4.4 %
Other income
(expenses):
Interest expense                (7,458 )               (7,921 )             463                5.8 %           (4.2 )%          (4.9 )%
Loss on early
extinguishment of debt          (4,480 )               (1,006 )          (3,474 )           (345.3 )%          (2.6 )%          (0.6 )%
Interest and other
income, net                      2,725                  1,397             1,328               95.1 %            1.6 %            0.9 %
Equity in net earnings
of unconsolidated
affiliates                       1,438                  1,065               373               35.0 %            0.8 %            0.7 %

Total other expenses,
net                             (7,775 )               (6,465 )          (1,310 )            (20.3 )%          (4.4 )%          (3.9 )%

Income from continuing
operations before
minority interest,
income taxes and
discontinued
operations                       2,955                    711             2,244              315.6 %            1.7 %            0.5 %
Minority interest
share of earnings of
consolidated
subsidiaries                    (2,480 )               (2,818 )             338               12.0 %           (1.4 )%          (1.7 )%

Income (loss) from
continuing operations
before income taxes
and discontinued
operations                         475                 (2,107 )           2,582              122.5 %            0.3 %           (1.2 )%
Income tax expense
(benefit)                          221                   (842 )           1,063              126.2 %            0.1 %           (0.5 )%

Income (loss) from
continuing operations              254                 (1,265 )           1,519              120.1 %            0.2 %           (0.7 )%
Loss from discontinued
operations, net of
taxes                           (5,150 )                  (68 )          (5,082 )          (7473.5 )%          (2.9 )%             -

Net loss                     $  (4,896 )        $      (1,333 )        $ (3,563 )            267.3 %           (2.7 )%          (0.7 )%

The following table presents selected operating data on a consolidated basis for the periods indicated:

                                                 Three Months Ended December 31,
                                                 2006            2005        % Change
     Selected Operating Data (a):
     Number of hospitals                               9              9
     Licensed beds (b)                               580            580
     Staffed and available beds (c)                  563            578
     Admissions (d)                                9,730          9,905        (1.8 )%
     Adjusted admissions (e)                      13,345         12,899         3.5 %
     Patient days (f)                             34,089         33,282         2.4 %
     Adjusted patient days (g)                    46,520         43,215         7.6 %
     Average length of stay (days) (h)              3.50           3.36         4.2 %
     Occupancy (i)                                  65.8 %         62.6 %
     Inpatient catheterization procedures          4,858          4,935        (1.6 )%
     Inpatient surgical procedures                 2,516          2,517        (0.0 )%
     Hospital net revenue                    $   161,058      $ 149,414         7.8 %

(a) Selected operating data includes consolidated hospitals in operation as of the end of the period reported in continuing operations but does not include hospitals which are accounted for using the equity method or as discontinued operations in our consolidated financial statements.

(b) Licensed beds represent the number of beds for which the appropriate state agency licenses a facility regardless of whether the beds are actually available for patient use.

(c) Staffed and available beds represent the number of beds that are readily available for patient use at the end of the period.

(d) Admissions represent the number of patients admitted for inpatient treatment.

(e) Adjusted admissions is a general measure of combined inpatient and outpatient volume. We computed adjusted admissions by dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by admissions.

(f) Patient days represent the total number of days of care provided to inpatients.

(g) Adjusted patient days is a general measure of combined inpatient and outpatient volume. We computed adjusted patient days by dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by patient days.

(h) Average length of stay (days) represents the average number of days inpatients stay in our hospitals.

(i) We computed occupancy by dividing patient days by the number of days in the period and then dividing the quotient by the number of staffed and available beds.

Net Revenue. Net revenue increased 7.3% or $11.9 million to $175.5 million for the first quarter of fiscal 2007, from $163.6 million for the first quarter of fiscal 2006. Our same facility hospitals accounted for $11.6 million of the net revenue increase. Adjusted admissions increased 3.5% and revenue per adjusted admission increased 4.2% in the first quarter of fiscal 2007 compared to the first quarter of fiscal 2006. Furthermore, net revenue was positively impacted by a higher case mix index (CMI) for the first quarter of fiscal 2007 compared to the prior period. The increase in CMI was due in part to the higher number of open heart surgeries, which were up 7.1% during the first quarter of fiscal 2007 compared to the first quarter of fiscal 2006 and in part due to the companywide focus on improving the revenue cycle process at our facilities. This increase in net revenue was partially offset by a reduction in overall drug eluting stent inpatient revenue due to a decrease in the number of inpatient drug eluting stent procedures performed during the first quarter of fiscal 2007. During the first quarter of fiscal 2007, we also experienced an increase in the number of drug eluting procedures performed on an outpatient basis as well as a shift from drug eluting procedures to bare metal procedures. Both outpatient reimbursement and bare metal stent reimbursement are less than inpatient drug eluting stent reimbursement.
We have also seen a shift of revenue from Medicare to commercial and other payors, which is favorable to us in certain of our markets. Net revenue was negatively impacted during the first quarter of fiscal 2006 due to the temporary suspension of procedures and admissions at Arizona Heart Hospital as a result of water damage incurred from a fire at the facility during the period. As discussed in Note 8 - Contingencies and Commitments, we have recorded a $2.7 million reduction in net revenue for a portion of certain federal healthcare billings reimbursed in prior years.
Personnel expense. Personnel expense increased 8.9% to $57.2 million for the first quarter of fiscal 2007 from $52.5 million for the first quarter of fiscal 2006. As a percentage of net revenue, personnel expense increased slightly to 32.6% from 32.1% for the prior comparable period. The $4.7 million increase in personnel expense was principally incurred in the hospital division. The growth in personnel expense was primarily attributable to cost of living adjustments given to employees during the first quarter of fiscal 2007. Further, the temporary suspension of procedures and admissions at Arizona Heart Hospital as a result of water damage incurred from a fire at the facility had a direct impact in the reduction of personnel expenses for the first quarter of fiscal 2006.
The remaining increase in personnel expense can be mainly attributed to the increase in share-based compensation expense recognized as a result of our adoption on October 1, 2005, of Statement of Financial Accounting Standards (SFAS) No. 123-R (revised 2004), Share-Based Payment(SFAS No. 123-R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. Using this methodology, $1.0 million was recognized during the first quarter of fiscal 2007 and $0.4 million was recognized during the first quarter of fiscal 2006.
Medical supplies expense. Medical supplies expense increased 4.3% to $48.2 million for the first quarter of fiscal 2007 from $46.2 million for the first quarter of fiscal 2006. Although the number of surgical and catheterization procedures was consistent with that of the prior comparable period, during the first quarter of fiscal 2007, procedures were disproportionately comprised of cardiac procedures that use high-cost medical devices and supplies such as pacemaker implants. During the first quarter of fiscal 2007, we experienced a 24.8% increase in the number of implanted pacemakers compared to the first quarter of fiscal 2006.
Bad debt expense. Our hospitals have been impacted by changes in commercial health insurance benefits which have contributed to an increase in both the number of uninsured and, as co-pay and co-insurance amounts have increased, the number of underinsured patients seeking health care. In addition, we have experienced an increase in the number of self-pay patients in several of our markets in the first quarter of fiscal 2007. Self-pay patients represented 9.1% of hospital division net revenue in the first quarter of fiscal 2007 compared to 7.3% for the first quarter of fiscal 2006. As a result, bad debt expense increased 5.9% to $13.8 million for the first quarter of fiscal 2007 from $13.1 million for the first quarter of fiscal 2006. As a percentage of net revenue, bad debt expense was 7.9% for the first quarter of fiscal 2007 as compared to 8.0% for the first quarter of fiscal 2006. We continue to focus on initiatives that have contributed to the reduction in bad debt as a percentage of net revenue. These initiatives include the improvement of our registration process to more timely and accurately identify patients eligible for third party benefits.
Other operating expenses. Other operating expenses increased 1.9% to $36.5 million for the three months ended December 31, 2006 from $35.8 million for the three months ended December 31, 2005. This increase is primarily due to the temporary suspension of procedures and admissions at Arizona Heart Hospital as a result of water damage incurred from a fire at the facility for the first quarter of fiscal 2006. In addition, the increase can be attributed to increased maintenance costs in our hospital division as machinery warranties have expired at several of our facilities. As a percentage of net revenue, other operating expenses decreased to 20.8% for the first quarter of fiscal 2007 from 21.9% for the same period in fiscal 2006.

Interest expense. Interest expense decreased 5.8% to $7.5 million for the first quarter of fiscal 2007 compared to $7.9 million for the first quarter of fiscal 2006. This $0.4 million decrease is primarily due to the overall reduction in our outstanding debt as we repurchased approximately $36.2 million of our senior notes and repaid $21.2 million of our REIT loan at one of our facilities during the three months ended December 31, 2006.
Loss on early extinguishment of debt. Loss on early extinguishment of debt increased to $4.5 million for the three months ended December 31, 2006 from $1.0 million for the three months ended December 31, 2005. During the first quarter of fiscal 2007, this loss was comprised of a $3.5 million repurchase premium related to the prepayment of a portion of our senior notes in December 2006. Further, we expensed approximately $1.0 million of deferred loan acquisition costs related to this prepayment. During the first quarter of fiscal 2006, we expensed approximately $1.0 million of deferred loan acquisition costs related to the prepayment of $58.0 million of the outstanding balance of our term loan.
Interest and other income, net. Interest and other income, net increased to $2.7 million for the first quarter of fiscal 2007 from $1.4 million for the first quarter of fiscal 2006. This $1.3 million increase is mainly attributable to interest earned on available cash and cash equivalents as our cash position increased by approximately $40.1 million from the prior comparable period. The increase in the Company's cash position resulted from positive operating cash flow, proceeds from the divestiture of Tucson Heart Hospital, and retention of net proceeds from our secondary public offering prior to the repurchase of our senior notes.
Equity in net earnings of unconsolidated affiliates. Equity in net earnings of unconsolidated affiliates increased to $1.4 million in the first quarter of fiscal 2007 from $1.1 million in the first quarter of 2006. The majority of the increase is attributable to growth in earnings at the one hospital in which we hold less than a 50% interest, with the remainder being attributable to growth in earnings in various MedCath Partners diagnostic entities in which we hold less than a 50% interest.
Minority interest share of earnings of consolidated subsidiaries. Minority interest share of earnings of consolidated subsidiaries was $2.5 million for the first quarter of fiscal 2007 as compared to $2.8 million for the first quarter of fiscal 2006. This $0.3 million decrease was primarily due to the net decrease in earnings of certain of our established hospitals and MedCath Partners ventures which were allocated to our minority partners on a pro rata basis. We expect our earnings allocated to minority interests to fluctuate in future periods as we either recognize disproportionate losses and/or recoveries thereof through disproportionate profit recognition. As of December 31, 2006, we had remaining cumulative disproportionate loss allocations of approximately $25.8 million that we may recover in future periods. However, we may be required to recognize additional disproportionate losses depending on the results of operations of facilities with minority ownership interests. We could also be required to recognize disproportionate losses at our other facilities not currently in a disproportionate allocation position depending on their results of operations in future periods. For a more complete discussion of our accounting for minority interests, including the basis for disproportionate allocation accounting, see "Critical Accounting Policies " in our Annual Report on Form 10-K for the fiscal year ended September 30, 2006.
Income tax expense. Income tax expense was $0.2 million for the first quarter of fiscal 2007 compared to an income tax benefit of $0.8 million for the first quarter of fiscal 2006, which represents an effective tax rate of approximately 46.5% and 40.0%, respectively. The overall change in the income tax rate is a result of the grant of incentive stock options during the quarter .
Loss from discontinued operations. During the fourth quarter of fiscal 2006, we sold our equity interest in Tucson Heart Hospital, and we decided to seek to dispose of our interest in Heart Hospital of Lafayette and we entered into a confidentiality and exclusivity agreement with a potential buyer. Accordingly, these hospitals are accounted for as discontinued operations.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, (SFAS No. 144), the Company evaluated the carrying value of the long-lived assets related to Heart Hospital of Lafayette and determined that the carrying value was in excess of the fair value. Accordingly, an impairment charge of $4.1 million was recorded in accordance with SFAS No. 144. Liquidity and Capital Resources
Working Capital and Cash Flow Activities. Our consolidated working capital was $205.8 million at December 31, 2006 and $197.3 million at September 30, 2006. The increase of $8.5 million in working capital primarily resulted from a decrease in the current portion of long-term debt and obligations under capital leases of $22.2 million combined with a decrease in accounts payable and accrued liabilities, both of which were partially offset by a decrease in cash and cash equivalents. The changes in accounts payable and accrued liabilities were driven by overall operations, as further described below. The decrease in the current portion of long-term debt and obligations under capital leases is primarily the result of the payment of $21.2 million to pay off the REIT loan at one of our facilities. This REIT loan matured in December 2006; therefore, the entire balance was considered current at September 30, 2006.
The cash provided by operating activities of continuing operations was $9.9 million and $12.2 million for the first three months of

fiscal 2007 and 2006, respectively. While our cash provided by operating activities from continuing operations was relatively unchanged period to period, our overall days of net revenue in receivables declined to 48 days in the first three months of fiscal 2007 from 46 days in the first three months of fiscal 2006, which reduced our cash flow from operations and is reflective of the overall shift in payor mix to a higher percentage of self-pay and commercial payors during the current period.
Our investing activities from continuing operations used net cash of $3.1 million for the first three months of fiscal 2007 compared to net cash used of $8.9 million for the first three months of fiscal 2006. The cash used by investing activities in the first three months of fiscal 2007 and 2006 was primarily for capital expenditures for the comparable periods.
Our financing activities used net cash of $25.2 million for the first three months of fiscal 2007 compared to net cash used of $8.4 million for the first three months of fiscal 2006. The $25.2 million of net cash used for financing activities for the first three months of fiscal 2007 is primarily a result of distributions to minority partners and the scheduled repayments of long-term debt and obligations under capital leases, including a payment of $21.2 million to pay off one of our facility's REIT loans, which matured in December 2006. Further, during the three months ended December 31, 2006, we completed a secondary public offering in which we sold an additional 1.7 million shares of . . .