Q: how to disable reset

Personally, I would take the iPhone back and give him a LG or Pantech flip phone.

You can also remove the data plan on that phone.

You can't really keep it from being reset and restored, that I know of.

Tell him that if he circumvents the restrictions you put on the phone you will take it away.

There's also another option, with iOS 7. The Activation Lock feature. The phone cannot be reset or restored without the password of the owner's Apple ID. If he tries to restore it the phone will be bricked, and will never work again (until you restore it with your Apple ID password).

Lawrence,

      Good catch. That's turned on automatically with Find my Phones turned on, correct?

Yes, it's automatic, and no way to disable it.

Have you tried using Guided Access?

http://support.apple.com/kb/HT5509