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Using DXFARC with the LAYERNAME BLOCKS ARCS option on a layer with blocks, the blocks do not convert. The $REST ALL option produces the same results.
The blocks were inserted in one layer but were created in another layer.
When you explode the blocks using the BLOCKS ARCS option, the line entities return back to the layer on which they were created. Thus, when DXFARC prompts you to enter the layer, you must include the layer where the blocks were created as well as the one where they were inserted.
The $REST ALL option does not convert blocks (see the documentation).