The muscle "tone" most people refer to is a misnomer and is usually the visual effect of a small degree of hypertrophy. Go to a rehab ward of a hospital and observe some car accident victims, you will see the result of hypertoned and hypotoned muscles.

Now, lets clear some things up about fat and muscle before I get onto helping the OP specifically. As fuscia has already done a fair job of explaining, muscle cells and fat cells are different. You have a pretty much fixed number of muscle cells, working out can increase the size] of these...Hypertrophy.

Fat cells on the other hand can undergo hyperplasia, an increase in the number of cells. When you stop exercising, you might experience atrophy of muscle, ie. shrinking of the cell size, with simultaneous hyperplasia of fat cells due this excess energy intake. This gives the illusion that muscle may have turned to fat. Instead, the excess energy has created extra fat cells which simply fill the space that larger muscle cells once occupied, fuelling the myth.

As fuscia also pointed out, this effect won't happen immediately, as the hypertophied muscle from exercise will help offset decreased energy requirements from not exercising. Hopefully that detail is sufficient.

I wouldn't normally double post, but I shall make an exception and write something about how to gain muscle for the OP, in a separate post. Might take some time, I'll try to be detailed.