UNIX for Beginners Questions & Answers

I gave brief explanations as comments in the code.
The following are comprehensive ones:

while condition - do - done
is a loop. The condition is the read command that reads a line from the standard input (here: the pipe i.e. the output from the previous command); the exit status is 0 (true) if the read could read something, then the loop continues, trying to read the next line. Finally, if nothing can be read, the exit code is not 0 (false) and the loop ends.
The read fn command reads the line into the fn variable. By default it strips leading spaces from the input; this is prevented by temporary setting the environment variable IFS to nothing. Further, read by default does special treatment with \ characters in the input; this behavior is turned off with the -r option.
(Compare this loop with the other loop where condition is always true so it never ends.)

The fn2 variable is assigned a string that is a concatenation of ${fn%.TXT} and .LST. The first is the value from variable fn with a modifier. The % modifier strips the following pattern from the end. (Compare with an unmodified value ${fn} (that is in short $fn).)