Let's say I have 3 class files: Main.class, A.class, B.class. Now A.class has some dependencies located in a JAR file called tools.jar i.e. A.java has some import statement referencing a class in tools.jar.
The class files are located at C:\Test and the tools.jar files is located at C:\Test\lib.
I generate the JAR file by going to C:\Test and do:
jar cvfm app.jar manifest.txt *.class lib/*.jar
The line in bold means: when app.jar will be run, it will look for additional classes in <same OS directory as itself>/lib/tools.jar.
It does not mean that it will look inside itself in the JAR directory /lib/tools.jar.