I think I see what the problem may be. The stator that you have is for the 1996 and later Mercury CDM ignition system that does not use a Switch Box. It is not compatible with the Switch Box and may damage it if started. As far as I can tell, the correct stator for your motor has the corresponding Blue & Blue/White and Red & Red/White wires.
NOTE: Not sure if this applies to you situation, but on the CDI WEB site in the installation instructions for their replacement Switch Box for the 40HP motor, there is a warning stating that if you apply 12 volts to the Red wire on the Switch Box, it will damage the Switch Box.
I can't seem to find a wiring diagram for the ignition system that uses the "Candy Bar" adapter. Does your Switch Box have a Red & Red/White wire?
I think that what may have happened is the previous owner may have been trying to convert the whole ignition system to the later model Mercury CDM type and stopped half way? Regardless I need to find the correct wiring diagram if you want to stay with the Switch Box ignition......or you can finish the conversion to the CDM type ignition system. The parts for the CDM ignition system is available at a reasonable cost if you look at the used parts on the auction sites. You also need the coils, wiring harness, trigger assy and mounting plate. I converted mine to the CDM style ignition system and have been very pleased with it, however, it does take some electrical knowledge/experience as far as adapting the wiring harness etc.
I think that you may have several issues here. Just need to take each problem one at a time. Man made problems (created by previous owners/mechanics) can be really challenging since things don't follow a logical path of failure. If you have some patience, I'm confident that you can get through them all. There are a lot of helpful folks on this Forum that can get you through your problems. Before you get too deep into this motor though, have you done a compression check?