You have to reset any variables that are changed during the PLAYING stage to their default value when you restart.

In setup() you declare vars at the beginning of game.

It is generally said to avoid calling setup(), as it isn't made for that (it initialize Processing stuff as well).
It is better, as said above, to make your init function to be called in setup() and in the reset state.
If you need to reset objects, just make fresh new instances for them!

I agree, you can just overwrite your old objects when you want to reset your game.

Arraylist you can empty with using new again or clear().

It just means don't use "new" before setup() where you declare your global vars,
just use "new" inside your reset function (called e.g. setupGame()) which you call from
setup() and when you want to reset the game.