SUPPLEMENT TO THE PROSPECTUSES AND
                     STATEMENTS OF ADDITIONAL INFORMATION OF


     KEYSTONE QUALITY BOND FUND (B-1), KEYSTONE DIVERSIFIED BOND FUND (B-2),
  KEYSTONE HIGH INCOME BOND FUND (B-4), KEYSTONE BALANCED FUND (K-1), KEYSTONE
  STRATEGIC GROWTH FUND (K-2), KEYSTONE GROWTH AND INCOME FUND (S-1), KEYSTONE
 MID-CAP GROWTH FUND (S-3), KEYSTONE SMALL COMPANY GROWTH FUND (S-4), KEYSTONE
    INTERNATIONAL FUND INC., KEYSTONE LIQUID TRUST, KEYSTONE PRECIOUS METALS
                   HOLDINGS, INC., AND KEYSTONE TAX FREE FUND
                   (EACH A "FUND"; COLLECTIVELY, THE "FUNDS")

         First Union  Corporation  has  entered  into an  Agreement  and Plan of
Acquisition and Merger with Keystone Investments, Inc. ("Keystone"), pursuant to
which Keystone will be merged with and into a subsidiary of First Union National
Bank of North Carolina (the "Merger").  The surviving  corporation will be known
as Keystone  Investments,  Inc.  Keystone  Investment  Management  Company  (the
"Adviser"),  a  wholly-owned  subsidiary  of  Keystone  Investments,   Inc.,  is
investment  adviser  to  each  of the  Funds.  Keystone  Management,  Inc.  (the
"Manager"),  a wholly-owned  subsidiary of the Adviser, is investment manager to
some of the Funds.

         The proposed  transaction may be deemed to cause an assignment,  within
the  meaning of the  Investment  Company  Act of 1940 (the "1940  Act"),  of the
following  agreements:  (i) with respect to Keystone Liquid Trust,  the Advisory
Agreement  between the Adviser  and the  Manager  and the  Management  Agreement
between the Manager and the Funds; (ii) with respect to Keystone Precious Metals
Holdings,  Inc., the Investment  Advisory  Agreement between the Adviser and the
Fund; and (iii) with respect to each of the other Funds, the Investment Advisory
Agreement  between the Adviser  and the  Manager and the  Investment  Management
Agreement between the Manager and the Funds. Accordingly,  the completion of the
transaction is contingent upon,  among other things,  the approval of the Funds'
shareholders of a new investment  advisory  agreement  between the Funds and the
Adviser.  The  Funds'   Trustees/Directors  have  approved  the  terms  of  such
agreements,  subject to the approval of  shareholders  and the completion of the
Merger,  and have  called a special  meeting  of  shareholders  to obtain  their
approval  of such  agreements.  The  meeting is  expected to be held in December
1996.  The proposed new investment  advisory  agreements  have terms,  including
investment advisory fees payable thereunder, that are substantially identical to
those in the current agreements.

         The proposed transaction may also be deemed to cause an assignment,  as
defined by the 1940 Act, of the Principal  Underwriting  Agreements  between the
Funds  and  Keystone  Investment  Distributors,  Inc.  ("KID"),  a  wholly-owned
subsidiary  of the  Adviser.  As a result,  the Funds'  Trustees/Directors  have
approved the following agreements,  subject to the completion of the Merger: (i)
a principal  underwriting  agreement  with  Evergreen  Funds  Distributor,  Inc.
("EFD") and each of the Funds;  (ii) a marketing  support  agreement between KID
and EFD with  respect  to each  Fund;  and (iii) a  subadministration  agreement
between  the Adviser and EFD with  respect to each Fund.  EFD is a  wholly-owned
subsidiary  of Furman Selz LLC. It is expected that on or about January 2, 1997,
Furman Selz LLC will  transfer  EFD, and its related  services,  to BISYS Group,
Inc.  ("BISYS")  (the  "Transfer").  The  Funds'  Trustees/Directors  have  also
approved,  subject to completion of the Transfer:  (i) a principal  underwriting
agreement  with EFD and each of the Funds;  (ii) a marketing  support  agreement
between  KID and EFD with  respect to each Fund;  and (iii) a  subadministration
agreement  between the Adviser and BISYS with respect to each Fund. The terms of
such agreements are substantially identical to the terms of the agreements to be
executed upon completion of the Merger.









         First  Union   National  Bank  of  North  Carolina  is  a  wholly-owned
subsidiary of First Union  Corporation.  Subject to a number of conditions being
met, it is  currently  anticipated  that the Merger will take place on or around
December 23, 1996.  Thereafter,  Keystone Investments,  Inc. is expected to be a
subsidiary of First Union National Bank of North Carolina.



September 13, 1996