To answer the second question first, yes it does, and it is really as bad as you might imagine. Without getting too technical, what happens it that when you partially discharge a NiCad battery, then recharge it again, a crystalline formation occurs in the battery at the depth of penetration where you started the charging process. This prevents the battery being discharged past this point next time you use it, and hence the battery looses its capacity to store energy over aperiod of time. To avoid the memory effect, you should completely flatten the battery before your recharge it. Avoid the temptation to give the battery an extra boost before you use it.
Some chargers also incorporate a discharger which facilitiates the flattening process.
These are useful because it is not always possible to completely drain a battery in the appliance in which it is used. NiCad batteries are supplied in an uncharged condition. The first time you charge new Ni-Cad batteries, you should make sure you give them a full charge, in accordance with the manufacturer's recommendations. Don't be tempted to try out you new toy before the batteries are properly charged, as undercharging will also promote memory effect. Take care not to leave NiCads in the charger for longer than the recommended charging period.