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.
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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
