Why was that Sephiroth fellow there?

[Big D]

Since Kadaj, Yazoo and Loz are all incomplete fragments of Sephiroth's spirit, it kinda makes sense for him to be reborn when Kadaj absorbed Jenova's cells. Spirit + flesh = person, after all. It's not made clear that the new trio are actually Sephiroth's spirit incarnate; it's hinted at, which I feel is a weakness of the film as it's easily overlooked or misunderstood. However, there's enough evidence from the dialogue and events to support it, not least of all that the trio are 'remnants" (i.e. leftover, remains) of Sephiroth, or avatars in the direct translation of the Japanese script. Of course, that falls kind of flat among western audiences, most of whom don't know the original meaning of 'avatar'.

...and him randomly mutating in the game

Nothing random about that at all. Mutation was always one of Jenova's powers - the ability to modify or completely transform living things. Sephiroth was gaining immense power in the game, and he changed to reflect that.

Does this mean that he will be coming back?

I don't think he will, at least not overtly. Sure he said he'll "never be a memory", but he also had a cocky look on his face when he pulled Cloud into that final spiritual battle in the original game. That happened after he'd already been beaten twice, but he still had a smile on his face until he got taken down for the last time. His final words in AC sounded pained yet belligerently defiant, rather than happy. Considering the secret ending of Dirge of Cerberus, and the revelations that are bound to come up in Crisis Core, I think it's fairly evident who the antagonist is going to be in the continuation/conclusion of FFVII...

*Edit*
In answer to the original question of the thread, "why was Sephiroth there"... AC is about wrapping up Cloud's story - the two main threads being the lingering guilt he feels about the harm he caused, which is primarily centered around Sephiroth and Aerith. It's about him being forced to confront and overcome his past so he can move on.
And on a less wanky note, it is indeed about fanservice. The original 'short film' draft of AC didn't include Sephiroth; he only showed up when they expanded it into a full-length movie. An essential part of the 'reunion' of the game's characters, and a key aspect of Cloud's story.