Updated from 10:50 a.m. EDT

Struggling drug retailer

Rite Aid

(RAD) - Get Report

said Wednesday that it had agreed to sell its

PCS Health Systems

unit to

Advance Paradigm

(ADVP)

for $1 billion in cash and stock.

The announcement comes after Rite Aid reported late Tuesday sharply wider losses for both the first quarter of its current fiscal year and the whole of the previous year as well as revised results for the prior two years after an accounting investigation of the company that was initiated earlier this year.

The company said it overstated its profits in 1998 and 1999 by more than $1 billion and also reported a loss for fiscal year 2000, which ended in February, of $1.1 billion. Rite Aid, the No. 3 drug retailer in the nation, unveiled in

April a huge financial restructuring plan designed to restore the company to health, following a series of earnings shortfalls resulting in part from the company's aggressive expansion starting in the mid-1990s.

Rite Aid shares tumbled immediately at the market's open and were down 7/16, or 7%, to 6 1/4 in morning trading. Rite Aid finished regular trading down 5/8, or 9% at 6. Since January 1999 when Rite Aid bought the unit, Rite Aid's stock has dropped 87%.

Under the terms of the deal to sell PCS, which provides drug benefit management services to employers and health plans, Rite Aid will get from Irving, Texas-based Advance Paradigm $675 million in cash, $200 million in senior subordinated debt and $125 million in new equity.

Advance Paradigm will change its name to

Advance PCS

and will become the country's largest pharmacy benefit manager with nearly 75 million customers. The company will annually manage about 450 million drug claims costing $18 billion and have about $3.2 billion in revenues. Its headquarters will be split between Irving, Texas, and Scottsdale, Ariz. The deal, which requires regulatory approval as well as approval by some of Rite Aid's lenders, is expected to close by the end of September, the companies said.

"By combining our organizations, we achieve critical mass, yielding enhanced operating efficiencies, a broader array of complementary clinical services and new services," said Advance Paradigm Chairman David D. Halbert in a statement.

Advance Paradigm finished down 1 1/2, or 6.7%, at 21 1/16.

Camp Hill, Pa.-based Rite Aid put the subsidiary on the block in October, and in April, Rite Aid Chairman Robert Miller said he expected PCS to sell for between $1.3 billion and $1.6 billion but that the best offer at the time wasn't high enough to justify selling the unit. Miller will get a seat on Advance PCS' board.

Rite Aid bought PCS in January 1999 for $1.5 billion from

Eli Lilly & Co.

(LLY) - Get Report

, which in turn had purchased the business in 1993 for $4 billion from

McKesson

(MCK) - Get Report

. Lilly and Rite Aid each had acquired PCS in part because they thought that the PBM business would boost sales of their products.

Joseph Littlejohn & Levy

, a New York-based private equity firm, said it invested $150 million in the deal, which will give it an 18% stake in Advance PCS and two seats on the board.